RECOVERY WITH A RECOVERY WITH A HUMAN FACEHUMAN FACE

Isabel Ortiz, Associate Director, Policy and Practice, UNICEFIsabel Ortiz, Associate Director, Policy and Practice, UNICEF

FROM STRUCTURAL ADJUSTMENT TO HUMAN DEVELOPMENT FROM STRUCTURAL ADJUSTMENT TO HUMAN DEVELOPMENT A Conference in Honour of Sir Richard Jolly A Conference in Honour of Sir Richard Jolly

Institute of Development Studies, Sussex, 18 Nov 2011Institute of Development Studies, Sussex, 18 Nov 2011

Global Income Distribution and Children/Youth in 2007in PPP constant 2005 international dollars

Source: Ortiz and Cummins (UNICEF 2011)

Distribution of World Income: The financial crisis comes on top of an existing social crisis

Historical Perspective: Income Inequality Increasing

Year Gini

1820 43.0

1850 53.2

1870 56.0

1913 61.0

1929 61.6

1950 64.0

1960 63.5

1980 65.7

2002 70.7Source: Milanovic (2009) World Bank

Source: Ortiz and Cummins (2011) UNICEF

Poorest and Richest Quintiles in the World 2007, in PPP constant 2005 dollars

Source: Ortiz and Cummins (2011) based on World Bank (2011), UNU-WIDER (2008) and Eurostat (2011)

Poorest Richest

Country Quintile GDP per capita Population Country Quintile

GDP per capita Population

Dem. Rep. of Congo 1 77 12,504,557 Luxembourg 5 136,936 95,999 Liberia 1 113 725,457 Singapore 5 121,781 917,720 Dem. Rep. of Congo 2 129 12,504,557 United States 5 109,373 60,316,000 Haiti 1 132 1,944,017 Luxembourg 4 84,096 95,999 Burundi 1 156 1,567,596 Norway 5 81,739 941,831 Niger 1 175 2,827,937 Ireland 5 80,832 871,386 Central African Rep. 1 178 851,481 Switzerland 5 73,248 1,510,223 Lesotho 1 191 406,335 Canada 5 72,032 6,595,200 Dem. Rep. of Congo 3 193 12,504,557 Seychelles 5 70,113 17,006 Liberia 2 199 725,457 Netherlands 5 69,311 3,276,339

Crisis: Transmission Channels Employment and Income Wage cuts, reduction in

benefits Decreased demand for

migrant workers Lower Remittances Returns from pension

funds

Prices Basic food Agricultural inputs Essential drugs Fuel

Assets and Credit Loss of savings due to

bank failures Loss of savings as a

coping mechanism Home foreclosures Lack of access to credit

Government Spending and Utilization of Social Services

Education

Health

Social protection

Employment programmes

Aid Levels - ODA

MDGs at Risk

Inequality Further Increased by Global Crisis

Inequality Further Increased by Global Crisis (II) Food Prices

Source: Ortiz, Chai and Cummins (2011) UNICEF

Source: ILO 2010

Inequality Further Increased by Global Crisis (III) Youth Employment

Public Expenditures - Phase I of Crisis – ExpansionSocial Protection in Fiscal Stimulus Plans 2009

Phase II 2010 - Governments Contracting Public Expenditures

Projected Change in Government Spending, 2011-12 avg. over 2008-09 avg as % GDP

Source: Ortiz. Chai and Cummins, 2011: Austerity Threatens Children, UNICEF, based on IMF data

Projected Total Government Spending Trends by Region, 2010-12

Phase II 2010- Excessive contraction/Cutting expenditures

below pre-crisis levels

Projected Change in Government Spending, 2011-12 avg. over 2005-07 avg. (% GDP)

Source: Ortiz. Chai and Cummins, 2011: Austerity Threatens Children, UNICEF, based on IMF data

Adjustment Measures and their Potential Risk

to the Poor • Contraction of public expenditures• Wage bill – Including salaries of teachers, health and social workers• Eliminating subsidies (eg food, fuel)• Social protection:

– Targeting (reducing coverage) – Rationalizing/reducing benefits

• While social protection expanded during the crisis - now contractionA social protection floor needed to achieve the MDGs and as a mechanism for future crisis.

Selected Issues in MICs and LICs (2010-11) Wage Bill Cuts or Caps

Reduce or Eliminate Subsidies

Further Target SafetyNets

Old-Age Pension Reform

Increase Consumption Taxes

Algeria Antigua and Barbuda Belarus Belize Benin Bosnia and Herzegovina Botswana Bulgaria Burkina Faso Burundi Cambodia Chad Chile Costa Rica Côte d'Ivoire Djibouti Fiji Gabon Grenada Guinea-Bis. Haiti Honduras India Jamaica Jordan Kazakhstan Kiribati Lebanon Lithuania

Macedonia Maldives Marshall Islands Micronesia Moldova Montenegro Mozambique Nicaragua Nigeria Palau Romania Samoa Serbia Solomon Is South Africa St. Kitts and Nevis St. Lucia Swaziland Tajikistan Tanzania Timor-Leste Tonga Tunisia Tuvalu Ukraine Vanuatu Yemen

Algeria Angola Belarus Bolivia Burkina Faso Burundi Cameroon Cape Verde Central African Republic Congo, Dem. Rep. of Dominican Republic Egypt El Salvador Fiji Gabon Ghana Grenada Guinea-Bissau Haiti Honduras India Indonesia Iran Iraq Jordan Kiribati Kosovo

Lesotho Liberia Macedonia Malaysia Maldives Mali Mauritius Mexico Mozambique Nepal Nicaragua Nigeria Pakistan Palau Philippines Romania Serbia Sierra Leone St. Kitts and Nevis Sudan Suriname Tanzania Thailand Timor-Leste Togo Tunisia Tuvalu Ukraine Yemen

Algeria Antigua and Barbuda Belarus Bolivia Bosnia and Herzegovina Bulgaria Cambodia Dominica Egypt El Salvador Fiji Grenada India Indonesia Jordan Kazakhstan Lebanon Malaysia Mauritania Mauritius Moldova Mongolia Mozambique Nepal Nicaragua Paraguay Peru Philippines Romania Russia St. Kitts and Nevis Sudan Timor-Leste Tunisia

Albania Antigua and Barbuda Belarus Belize Benin Bosnia and Herzegovina Bulgaria Egypt Guyana Honduras India Jamaica Jordan Lebanon Lithuania Mali Mexico Micronesia Montenegro Nicaragua Romania Russia Serbia St. Kitts and Nevis St. Lucia Tunisia Turkey Ukraine

Antigua and Barbuda Armenia Belize Bhutan Botswana Colombia Costa Rica Djibouti Dominican Republic Egypt Ethiopia Fiji Gambia Ghana Guatemala Guinea-Bissau Guyana India Iran Jamaica Jordan Kenya Kiribati Kyrgyz Republic Liberia Lithuania Malaysia Mali

Mexico Micronesia Moldova Montenegro Nicaragua Pakistan Panama Romania Russia Seychelles Sri Lanka St. Kitts and Nevis St. Lucia Sudan Suriname Swaziland Tanzania Thailand Togo Tunisia Turkey Uruguay Vanuatu Vietnam Yemen

Source: Ortiz. Chai and Cummins (UNICEF 2011)

Further Targeting: Moldova - Beneficiaries under the New Social Assistance

System (in thousands of persons)

It is often argued that social and economic investments that benefit children and poor households are not affordable, or that government expenditure cuts are inevitable during adjustment periods

=> but there are alternatives, even in the poorest countries

Main options:

•Re-allocating public expenditures•Increasing tax revenues•Lobbying for increased aid and transfers•Fighting illicit financial flows•Tapping into fiscal and foreign exchange reserves•Borrowing and restructuring existing debt•Adopting a more accommodative macroeconomic framework (eg tolerance to some inflation, fiscal deficit)

FISCAL SPACE FOR CHILDREN EXISTS

EVEN IN THE POOREST COUNTRIES

Government Spending and Revenue Choices vary Widely Total Government Expenditures (% GDP)

Selected Countries, 2011

Fiscal Space for Children: Re-allocating Public ExpendituresMilitary and Health Spending in Selected Developing Countries, 2006-09

(countries with no major armed conflict since 2000)

Source: Ortiz. Chai and Cummins, 2011: Identifying Fiscal Space, UNICEF

Fiscal Space for Children: Increasing Tax Revenues

Source: Ortiz. Chai and Cummins, 2011: Identifying Fiscal Space, UNICEF

• Income taxes • Property and inheritance taxes • Corporate taxes, including the financial sector• Tariffs (imports/exports) • Consumption/sales taxes, tolls

Tariff Rates by Country Income Groupings, 1996-2009 (in %)

Mongolia: Copper exports

financing child

benefit

Fiscal Space for Children: Increasing Tax Revenues (II)

Source: Ortiz. Chai and Cummins, 2011: Identifying Fiscal Space, UNICEF

High income inequality should make governments move away from indirect taxation (eg. consumption/sales taxes)

Developing Countries that Lowered Individual and Corporate Income Tax Rates for the Top Income Brackets, 2009*

Individual Income Tax Corporate Income Tax

Bulgaria Albania Ghana Romania Colombia Bangladesh India Russian Federation Egypt Bosnia & Herzegovina Indonesia Serbia Indonesia Bulgaria Kazakhstan South Africa Kazakhstan China Kenya Swaziland Lithuania Colombia Macedonia Thailand Malaysia Costa Rica Malaysia Tunisia Mauritius Côte D’Ivoire Mauritius Uganda Mexico Dem. Rep. of Congo Mexico Venezuela Pakistan Dominican Republic Papua New Guinea Papua New Guinea Ethiopia Peru Viet Nam Fiji Philippines

Source: Ortiz and Cummins (2011) UNICEF

Global Inequality = Strong Justification of Transfers and Aid• North-South Transfers (ODA)• South-South Transfers• Avoid South-North Transfers

Fiscal Space for Children:Increased Aid

• Limited volume, at about 0.3% of GNI donors • Issues such as concentration of aid, utlization

Use of ODA in Sub-Saharan Africa, 1999-2005

Source: IMF (2007)

Fiscal Space for Children: Use of ReservesSovereign Wealth Funds (SWFs) based on Fiscal Reserves in Selected Developing Countries, June 2011

Country Fund Name Assets* Inception OriginRussia National Welfare Fund 142.5 2008 OilLibya Libyan Investment Authority 70.0 2006 OilAlgeria Revenue Regulation Fund 56.7 2000 OilKazakhstan Kazakhstan National Fund 38.6 2000 OilMalaysia Khazanah Nasional 36.8 1993 Non-CommodityAzerbaijan State Oil Fund 30.2 1999 OilIran Oil Stabilisation Fund 23.0 1999 OilChile Social and Economic Stabilization Fund 21.8 1985 CopperBrazil Sovereign Fund of Brazil 11.3 2008 Non-CommodityBotswana Pula Fund 6.9 1994 Diamonds and MineralsTimor-Leste Timor-Leste Petroleum Fund 6.3 2005 Oil and GasMexico Oil Revenues Stabilization Fund of Mexico 6.0 2000 OilVenezuela FEM 0.8 1998 OilVietnam State Capital Investment Corporation 0.5 2006 Non-CommodityKiribati Revenue Equalization Reserve Fund 0.4 1956 PhosphatesIndonesia Government Investment Unit 0.3 2006 Non-CommodityMauritania National Fund for Hydrocarbon Reserves 0.3 2006 Oil and Gas

Total 452.4

• Reserve accumulation as self-insurance• Rule of thumb – 3 month of imports + short term debt

Foreign Exchange Reserve Adequacy by Developing Region, 2011

Fiscal Space for Children: Use of Central Bank Reserves

Country Reserves in months of

imports

Short-term debt as % of reserves

Country Reserves in months of

imports

Short-term debt as % of reserves

Algeria 51.3 1.0 Lebanon 26.4 7.9 Angola 15.1 19.3 Madagascar 4.8 23.0 Azerbaijan 8.6 15.1 Malaysia 6.7 24.5 Bolivia 13.4 6.5 Mongolia 6.6 5.4 Brazil 17.9 16.7 Morocco 6.6 9.2 Burundi 5.0 2.3 Nigeria 8.2 7.7 Cambodia 5.2 8.1 Pakistan 4.9 10.8 Cameroon 8.2 0.6 Paraguay 4.5 19.5 China 20.4 9.8 Peru 15.2 14.2 Colombia 6.9 16.4 Philippines 10.3 9.1 Cote d'Ivoire 4.5 3.0 Rep. of Congo 16.7 5.6 Egypt 8.1 7.3 Russia 17.7 7.0 Gabon 7.6 5.4 Thailand 8.8 20.1 Guatemala 5.1 23.6 Uganda 10.4 7.9 India 7.9 15.1 Uruguay 8.5 14.0 Jordan 8.7 9.5 Yemen 6.9 6.3 Kyrgyz Republic 11.9 5.1

Fiscal Space for children: Avoiding South-North Transfers

Developing Region 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Africa 2.9 1.6 -13.7 -16.4 -4.2 -16.1 -34.5 -76.4 -108.3 -100.9 -99.1 2.9 -35.3

Sub-Saharan Africa* 11.5 7.9 2.3 6.4 4.4 5.3 3.5 -0.6 -10.5 -9.1 -4.8 27.3 14.6

East and South Asia -129.8 -139.8 -122.8 -120.8 -149.2 -175.6 -183.4 -265.7 -385.7 -529.8 -481.3 -427.5 -352.9

Western Asia 34.5 2.7 -35.3 -29.7 -23.2 -46.7 -76.3 -143.7 -175.6 -144.0 -222.5 -48.4 -112.7

Latin America 41.5 7.4 -4.2 2.5 -33.6 -64.3 -85.4 -111.4 -138.0 -106.4 -73.5 -72.1 -56.1

All Developing Economies

-41.0 -128.0 -194.0 -164.4 -210.2 -302.7 -379.5 -597.2 -807.8 -881.1 -876.4 -545.1 -557.0

Net Transfer of Financial Resources to Developing Economies, 1998-2010

(in billions of US dollars)

Illicit Financial Flows (IFF) versus Official Development Assistance (ODA), 2000-09*(in billions of current US$)

Fiscal Space for Children: Borrowing and Debt Restructuring

BorrowingSome developing countries show potential capacity to engage in further borrowing, both domestically and externally•Loans, either from commercial or development banks or funds•Issuing government securities, such as bonds

Debt restructuringSome developing countries need to reduce existing levels of debt or debt service.

Fiscal Space for Children: Debt Restructuring

Five main options available to governments to restructure sovereign debt: •Re-negotiating debt – More than 60 countries since 1990s•Achieving debt relief/forgiveness - HIPC•Debt swaps/conversions – More than 50 countries since 1980s•Repudiating debt – Iraq, Iceland•Defaulting – more than 20 coutries since 1999, including Argentina and Russia

Important – concept of illegitimate debt: responsibility not only debtors, but also creditorsNeed for an international debt work-out mechanism

Fiscal Space for Children: Accommodating Macroeconomic Framework – Fiscal Policy

Fiscal Space for Children: Accommodating Macroeconomic Framework – Fiscal Policy

Country

(A) Fiscal balance,

including grants (% of GDP)

(B) Health expenditures

(2007-09 avg.)

(C) 2% real increase of deficit (in % of health budget)*

(D) Under-5 mortality

rate, 2009 (per 1,000 live births) % of GDP % budget

Eritrea -16.2 1.3 3.2 25.8 55 Lesotho -14.5 4.9 8.2 5.9 84 Cape Verde -11.8 3.2 10.4 7.4 28 Swaziland -9.0 3.7 9.3 4.8 73 São Tomé and Príncipe -7.4 3.1 13.2 4.8 78 Congo, Dem. Rep. -7.1 3.8 16.1 3.7 128 Uganda -6.8 1.6 10.6 8.7 128 Mozambique -6.7 3.7 12.6 3.6 142 Tanzania -6.5 3.5 18.2 3.7 108 Senegal -5.7 3.1 11.8 3.6 93 South Africa -5.7 3.4 10.2 3.4 62 Kenya -5.4 1.5 5.9 7.0 84 Burkina Faso -4.3 3.7 15.8 2.3 166 Sierra Leone -4.0 0.9 4.2 9.3 192 Guinea -3.9 0.8 4.3 10.4 142 Cote d'Ivoire -3.9 0.9 4.5 8.5 119 Mali -3.0 2.7 10.5 2.2 191 Togo -2.6 1.5 7.8 3.4 98 Ethiopia -2.5 2.3 11.9 2.2 104 Guinea-Bissau -1.9 1.6 4.0 2.4 193

Fiscal Deficits and Health Spending in Sub-Saharan Africa FY2011

Fiscal Space for Children: Accommodating Macroeconomic Framework – Monetary Policy

Author(s)

Inflation Threshold (%)

Academic Papers

Fischer (1993) 15-30 Bruno (1995) 20 Barro (1996) 10-20 Bruno and Easterly (1998) 40 Gylfason and Herbertsson (2001) 10-20 Rousseau and Watchel (2002) 13-25 Burdekin et al. (2004) 3 Gillman et al. (2004) 10 Sepehri and Moshiri (2004) 5-15 Pollin and Zhu (2006) 14-16 Li (2006) 14 Vaona and Schiavo (2007) 12 US GAO (2009) 5-12 Bick (2010) 12 Kremer et al. (2011) 17

IMF Papers

Sarel (1996) 8 Ghosh and Phillips (1998) >5 Kochar and Coorey (1999) 5 Khan and Senhadji (2001) 11-12 Selassie et al. (2006) 5 Espinoza et al. (2010) 10 Blanchard et al. (2010) 4

Safe Inflation Thresholds for Developing Countries

Economic decisions have important distributional impacts on children and households

The social impacts must be brought to the attention of Finance Ministers, decision-makers and civil society

A set of alternative policy options for social and economic recovery can be discussed in national dialogues

THANK YOU THANK YOU

iortiz@unicef.orgiortiz@unicef.org