Fiscal Policies for Inclusive Growth
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Transcript of Fiscal Policies for Inclusive Growth
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Fiscal Policies for Inclusive Growth
Abdoul Aziz Wane
IMFFiscal Affairs Department
SEMINAR ON GROWTH, TRANSFORMATION, AND JOB CREATION FEBRUARY 9-11, 2011, MAPUTO, MOZAMBIQUE
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Outline of the presentation
• Overview of income inequality and growth– Poverty reduction and income distribution– Overview of income inequality and growth
• Fiscal policy and income inequality– Fiscal policy and income distribution– Tax policies for inclusive growth– Expenditure policies for inclusive growth
• Social Safety Nets (SSN)– Conditional cash transfers programs
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Poverty, growth, and inequality
• Changes in poverty result from changes in Growth and Inequality
• Growth main driver of poverty reduction, but policies affecting income distribution can boost poverty reduction.
Absolute Poverty and Poverty Reduction
"Development strategy "
Distribution and Distributional changes
Aggregate income level and growth
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Poverty, growth, and inequality
• Inequality increased in many countries over recent years:
• But patterns are different:– Poverty increased in slow-growing advanced
countries – Poverty was reduced in fast growing LICs and
EMEs• But progress stalled recently (Mozambique)
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Change in Income Distribution for Selected Countries
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Poverty, growth, and inequality• Impact of growth on poverty reduction
established (Ravallion and Chen, 1997; Dollar and Kraay, 2002)
• But no consensus on link between growth and inequality
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Asia and Pacific Europe and Northern America Latin America
Middle East Sub-saharan Africa
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Long-term rate of change in real GDPGraphs by Region1
Inequality and Growth by Region
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Poverty, growth and inequalityMozambique: Rapid growth helped reduce poverty
• Yet, progress limited after 2002, including because of high inequality
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1996 2002 2008
Mozambique -- Poverty and Inequality (%) Growth rate : 8.8% (average 1996-2008)
Poverty Inequality
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Poverty, growth and inequality
• Mozambique : Inequality in Human Development Indicators is also high:– Use of safe water by poorest 60 percentage
points lower than for richest– Rate of completion of primary school 40
percentage points lower for the poorest than for the richest
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Under-5 mortality rate (per 1,000 live biths)
Skilled birth attendance (% of births)
Use of safe water (%) Completion of primary school (% of children enrolled, right axis)
Mozambique -- Difference between extremes quintiles (Q5-Q1)
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Poverty, growth, and inequality• High inequality can reduce growth (Tabellini,
1994 Alesina and Rodrik, 1994):– Credit market imperfections reduce investment
and growth in countries with high inequality (Piketty, 1993)• Poorest cannot borrow to invest (lack of
collateral, asymmetric information)• Poorest cannot send children to school• Poorest cannot invest in health
– Social conflict and political instability (Alesina and Perotti, 1996; Rodrik, 1998)
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Fiscal policy and income distribution
• Sound policies, debt relief, growth created conditions to address inequality and accelerate poverty reduction– Significant creation of fiscal space– Yet high and increasing inequality
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Mozambique -- Fiscal Space
Inequality (%) Debt to GDP ratio (%)
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Fiscal policy and income distribution
• Fiscal policies can help reduce income inequality and address bottlenecks to long-term growth provided:– Macroeconomic stability is maintained,
including low inflation and debt– Tax and transfer programs improve human
capital among poor segments of the population
• Under these conditions fiscal policy instruments can also accelerate poverty reduction
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Fiscal policy and income distribution
Some preliminary thoughts:• Tax and transfer programs
less effective in LICs & MICs than in industrial countries (Deninger and Squire, 1996)– Before-tax Gini : 0.38
(lower than advanced countries)
– After-tax Gini : 0.34 (higher than advanced countries)
• Important to look at tax and expenditure policies together
• Excessive tax rates can drive economic activity out of the formal sector or out of the economy
Emerging Markets -- Revenue increases and inequality
Source: IMF staff estimates. Data on Gini coefficients from WIDER database. Note: Positive values for a change in Gini coefficient denote an increase in income inequality.
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Revenue Increase (in percent of GDP)
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Tax policies for inclusive growth Tax policy and determinants of inequality
• A simple econometric estimation (Gupta et al., 2002):– Inequality declines as the ratio of direct to
indirect taxes increases• Direct taxes are more progressive than indirect
taxes
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Direct taxes as a share of total taxes (in percent)
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Direct taxes as a share of GDP (in percent)
Mozambique South Africa
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Tax policies for inclusive growth Tax exemptions and inequality
• Exemptions and reduced rates widespread in LICs, but are poor distributional device.– Better off spend more, and so derive greater
benefit (e.g., exemptions on food and gasoline)– Mobilizing revenue to finance progressive
spending superior to across-the-board tax exemptions
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Mozambique -- Benefits from Zero-Rating Foodstuffs relative to Income Share (%)
Share of subsidy Share of total income
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Tax policies for inclusive growth Possible lessons for Mozambique• Eliminate sector-specific incentives;• Eliminate tax holidays and CIT sector-specific rate
reductions, streamline exemptions (fuel, food, etc.)• Improve taxation of Megaprojects :
– remove remaining special incentives from the “Code of Fiscal benefits”
– ensure a comprehensive, independent economic modeling of new projects (investor outcomes, public revenues, spin-off economic benefits)
• Continue efforts to improve direct taxes: improve property taxation, including land (which is progressive), to finance local social spending
• Combat tax evasion
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Expenditure policies for inclusive growth• Spending better at redistribution than taxation.• Social spending: LT impact on human capital• Public wages: not right instrument to combat inequality• Well-targeted outlays on infrastructure and agricultural
can help
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Composition of Spending and Inequality
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Expenditure policies for inclusive growth
• Social spending in Mozambique is relatively low
• High wage bill, low revenue cut space for social spending
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Social Spending in Selected Countries Average 2000-2007 (share of GDP, %)
Education Health
Composition of spending matters
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Compensation of employees (% of total revenue)
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Expenditure policies for inclusive growth:
• Facts for Mozambique :– Rural poverty (56.9%) higher than urban poverty
(49.6%)– Rural poverty increased (1.6 ppt); urban poverty
declined (1.9 ppt) between 2003 and 2009• Agricultural spending can help reduce inequality if:
– consistent with fiscal sustainability and overall growth (does not crowd out other growth-enhancing outlays)
– targeted to low-productivity poor farmers (Dorward et al., 2008: large fertilizer subsidies went to less poor in Malawi)
– boosts productivity of poor farmers (fertilizers, machinery, conditionality)
– Does not crowd out demand for unsubsidized goods
Agricultural spending
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Expenditure policies for inclusive growth
• Social infrastructures (education, health) improve access to social services by poorest but need to be well-targeted and effective
• Economic infrastructures (transportation, energy, telecoms, etc…) improve productivity of vulnerable and reduce inequality
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Accumulation of Physical Capital and Inequality
Physical capital can help reduce inequality
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Expenditure policies for inclusive growthBenefit Incidence Analysis (BIA)
Some concepts and facts• Levels matter, but effectiveness of spending key• Well-targeted spending progressive. But,
progressive spending may not necessarily be well targeted (PSA).
• Targeting expenditure well is more challenging than making it progressive. – Education, health and transfer programs in
developing countries progressive, but not well-targeted
– Incidence of spending on education and health care often skewed toward the non-poor
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• Pro-poor benefit incidence associated with better education and health outcomes and wider health access.
• Targeted spending save fiscal resources, improve human capital of the poor (and the population in general)
Benefits of targeting
Expenditure policies for inclusive growthBIA
Education HealthAccess to Information and Communication
Radio (per 1,000 people) 0.48 0.9Telephone mainlines (per 1,000 people) 0.45 0.41
Education OutcomesSchool enrollment, tertiary (% of gross) 0.5 0.58Illiteracy rate, adult (% of people ages 15 and above) -0.46 -0.4
Health AccessBirths attended by health staff (% of total) 0.41 0.56Access to sanitation (% of population) 0.45 0.54Access to water (% of population) 0.57 0.59
Health OutcomesMalnutrition prevalence (% of children under 5) -0.56 -0.54Mortality rate, infant (per 1,000 live births) -0.47 -0.4Life expectancy at birth, total (years) 0.5 0.42
Source: Davoodi et al., 2010
Ratio of poorest to richest
Correlation between Benefit Incidence and Indicators of Access and Outcomes
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Expenditure policies for inclusive growthBIA –– Education• Primary education spending well-targeted in all
regions – but degree varies: Q5/Q1 > 4 in LatAm; only >1.2 in SSA
• Secondary education spending well-targeted in Asia and LatAm, but poorly targeted in SSA, MCD.
• Tertiary education mostly benefits richest in all regions
Developing Countries: Incidence of Education Spending
All Primary Secondary Tertiary
EducationTargeting 55 54 54 52
Good 22 42 23 0Poor 33 12 31 52
Incidence 31 37 26 11Progressive 31 37 26 6Regressive 0 0 0 5
(number of countries)
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Expenditure policies for inclusive growthBIA –– Health and Transfers• Health spending well targeted; varying degrees
– Asia and LatAm: Q1 gets 1½ and 3 times more than Q5, respectively; Poorly targeted in SSA and EMEs
• Transfers progressive, but poorly targeted.– Social security benefits (Chile, Costa Rica,
Uruguay)– Food subsidies well-targeted in Jamaica, Tunisia– PSA (Mozambique) progressive; not well
targeted
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Number of households that received some support from PSA in the last 12 months
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Expenditure policies for inclusive growthBIA –– Health and Transfers
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Mozambique -- Incidence of Public Health Spending • Extreme poor benefit little from public health spending
• Improved cost recovery from top quintiles can boost coverage of and access by the poor without increasing budgetary cost
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Social Safety Nets (SSN)• Non-contributory programs targeted to the
poor– Cash transfers, targeted or not, conditional or
not; – Food or other in-kind distribution; Public
workfare jobs– General price subsidies, e.g., for food or fuel– Fee waivers for essential services (health,
education)
Source: UNICEF, 2010
1/ Excluding pensions
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Mozambique1 -- Transfers to families (% of GDP)
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SSN: Three messages • Message 1: Can address poverty and
inequality– Safeguard human capital of the poor by:
• Protecting poor during economic downturn• Protecting poor from adverse impacts of
structural reforms• Message 2: Need to be financed
– Should be targeted to the needy to contain costs
– Deficit financing can have adverse effects on macro stability and thus worsen the situation of poor
• Message 3: Can improve long-term growth– If financed, and well-targeted toward human-
capital-increasing spending
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SSN: Can go beyond handouts
Effect Nature of Benefit Strength of Evidence
Protect Promote
Reduce poverty and inequality via redistribution
Enable households to invest–In children’s human capital–In their livelihoods
Help households to manage risks–Avoid irreversible losses–Allow higher risk/return activities
Provide governments:-- room to focus on structural reforms-- a spending line with high multiplier effect
Source: World Bank
They can also provide a countercyclical instrument (automatic stabilizer) if large enough and well-designed
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SSN: can help reduce inequality
ETHIOPIA
MADAGASCAR
MALAWI
SENEGAL
SOUTH AFRICA
CHINA
INDONESIA
MONGOLIA
PHILLIPINES
VIETNAM
ALBANIA
ARMENIA
AZERBAIJAN
BOSNIA AND HERZEGOVINA
BULGARIA
CROATIA
CZECH REPUBLIC
GEORGIA
KAZAKHSTAN
KYRGYZ REPUBLIC
LATVIA
MACEDONIA, FYR
MOLDOVAPOLAND
ROMANIA
RUSSIAN FEDERATION
TAJIKISTAN
TURKEY
UKRAINE
UZBEKISTAN
ARGENTINA
BOLIVIA
BRAZIL
CHILE
COLOMBIA
COSTA RICA
DOMINICAN REPUBLICEL SALVADOR
GUATEMALA
HONDURAS
JAMAICA
MEXICO
NICARAGUA
PANAMA
PARAGUAY
PERU
URUGUAY
VENEZUELA, RB
EGYPT, ARAB REP.
IRAN, ISLAMIC REP.
JORDAN
MOROCCOTUNISIA
YEMEN, REP.BANGLADESH
INDIA
PAKISTAN
SRI LANKA
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Social assistance expenditures, percent of GDP
Spending on Social Safety Net and Inequality
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SSN: Their appropriate size?
• “Critical minimum level of spending necessary for sustainable safety net system” (World Bank)– Should reflect fiscal situation in country.– What’s needed depends on effectiveness.– Depends on priorities for LT poverty reduction
Source: World Bank and UNESCO for Mozambique
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Social Assistance Spending (% of GDP)
Average Maximum Minimum Median
Conditional Cash Transfer (CCT) Programs
• Conceptual framework: Transfers conditioned on household behavior can make sense under some circumstances:
1. Economic justifications– Persistently misguided beliefs (parents can
believe that earnings do not respond to education level; Attanasio and Kaufmann, 2008)
– “Incomplete altruism” (parents can discount their children’s future earnings heavily; reduces incentives to invest in children’s education and health now)
– Externalities (especially when optimal private return lower than optimal social return)
2. Political economy justifications– Greater support for a program that asks
beneficiaries to do “something to help themselves”
CCT: Decidedly progressive…• CCTs have helped reduce poverty (Nicaragua: 7
percentage points; Colombia: 3 percentage points)
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Source: World Bank
CCT: Lasting impact on education and health
• CCT fostered substantial increases in health, education – especially among poor households
Source: World Bank
Mexico
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Honduras
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Bangladesh
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CCT: Lasting impact on education and health
• Because impacts concentrated among poorest, CCTs helped reduce “inequality of opportunities”
• Example: Nicaragua
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CCT: Administrative costs
• Cost of running CCT lower than other types of programs
Source: World Bank
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CASH AND NEAR CASH PROGRAMS (n=16)
CONDITIONAL CASH TRANSFER PROGRAMS (n=9)
FEE WAIVERS (n=5) FOOD-RELATED PROGRAMS (n=19)
PUBLIC WORKS (n=6)
Administrative Costs as a Share of Total Costs, by Program Type
Average Maximum Minimum Median
CCT: Challenges
1. Enhancing impact on long-term human capital outcomes (e.g. learning)
Integration with investments on quality… … And with other social interventions (e.g.
workfare)2. Preventing LT dependency on public assistance
and disincentives for labor force participation. Enforce conditionality. Establish clear, routine, entry and exit
mechanisms3. Putting in place administrative capacity
Upgrade information management systems Contain costs to reasonable levels Monitoring and evaluation of performance Expand gradually as administrative capacity
improves
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Main messages:1. Macro stability is key2. Raise revenue to finance good quality spending:
– Improve direct taxes;– Eliminate exemptions and tax holidays
3. Ensure allocation of spending consistent with LT goals
– Control wages; Improve social spending, agricultural and infrastructure
4. Ensure spending is well-targeted5. Develop a SSN to address high poverty and
inequality6. CCT to boost human capital and improve LT growth
Thank you!!