Poverty Reduction and Growth: Virtuous and Vicious Circles

1
Poverty Reduction and GrowthVirtuous and
Vicious Circles

• Javier Santiso
• Chief Economist / Deputy Director
• Development Centre OCDE

OECD-World Bank Conference Paris ? 23
October 2006
2
Poverty Reduction and Growth
I
Addressing Inequality Through Efficiency
II
Fiscal and Democratic Legitimacy
III
Conclusions
IV
3
Poverty Reduction and Growth in Latin
AmericaWorld Bank Key Policy Messages

• Latin Americas twin disappointments of low
  growth and persistent inequality and poverty have
  travelled hand in hand a long way
• Without growth there is no poverty reduction, but
  poverty itself may hinder growth (e.g. it hinders
  access to credit and education)
• Virtuous and vicious circles are possible
• What is pro-poor growth? A pace and a pattern of
  growth that enhances the ability of poor people
  to participate in, contribute to and benefit from
  growth (DAC/POVNET)
• The fiscal challenge
• Converting the state into an agent that promotes
  equality of opportunities and practices efficient
  redistribution is, perhaps, the most critical
  challenge Latin America faces in implementing
  better policies that simultaneously stimulates
  growth and reduce inequality and poverty

4
Latin America is not closing the gap with richer
countries, its growth is disappointing
Source based on Angus Maddison, Historical
Statistics. The World Economy, Paris, OECD, 2003.
Source International Financial Statistics, IMF,
2006.
5
while other regions are accelerating their
converge processes with richer economies
6.0
6.0
5.0
5.0
1990
4.0
4.0
Mexico
Brasil
2000/06
1980
3.0
1970
3.0
1950
1980
2.0
2000/06
2.0
1970
1.0
capita ( yearly) .
1.0
1950
1970
GDP per capita Growth minus average world GDP
per
1990
capita ( yearly) .
GDP per capita Growth minus average world GDP
per
1980
1960
1990
0.0
0.0
1950
1950
-1.0
1960
China
India
-1.0
1970
1960
-2.0
-2.0
1960
1980
2000/06
-3.0
-3.0
2000/06
1980
-4.0
-4.0
-85
-75
-65
-55
-45
-30
-10
10
30
50
70
90
GDP Deviation () with respect to world average
( 1990)
GDP deviation () with respect to world average
( 1990)
Note Annual growth () calculated as the
average annual rate for the last six decades.
Deviation () at the beginning of each decade.
Source OECD Development Centre, 2006. Based on
Groningen Growth and Development Centre and The
Conference Board, Total Economy Database, 2005
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Poverty Reduction and Growth
I
Addressing Inequality Through Efficiency
II
Fiscal and democratic legitimacy
III
Conclusions
IV
7
Income inequality continues to be a major
challenge and disappointment in the region
Inequality Indicators
Source WIDER Database, 2006.
Source World Development Indicators, 2006.
8
In the OECD inequality is reduced through
taxation and social spending, but not in Latin
America
Gini Market Income
Gini Disposable Income (after taxes and s.
security)
0.60
0.60
0.55
0.55
0.50
0.50
0.45
0.45
0.40
0.40
0.35
0.35
0.30
0.30
0.25
0.25
0.20
0.20
Latin America
European Union
United States
Spain
Latin America
European Union
United States
Spain
Note Gini coefficient calculated before and
after taxes and transfers, illustrating their
low incidence on inequality levels, in contrast
with other regions.
Source The World Bank.
9
There is some evidence that more taxes might lead
to quality public goods
High quality
Low quality
10
Strengthening fiscal effort might not be enough
Significant differences in Mexico/Brazil tax
revenue
TAX REVENUE AS PERCENTAGE OF GDP 2005
40
35
30
25
20
Percentage
15
10
5
0
OCDE
Brazil
Spain
USA
Colombia
Chile
Argentina
Peru
Mexico
Venezuela
Source Eduardo Lora, Mauricio Cárdenas. La
reforma de las instituciones fiscales en América
Latina. Banco Interamericano de Desarrollo,
Fedesarrollo, 2006. OECD, Recent tax Policy
trends and reforms in OECD Countries, OECD.
11
Is more better? Tax revenue in Brazil is higher
than economies of similar income level
FISCAL BURDEN AND GDP PER CAPITA
0.45
Italy
France
0.40
Brazil
UK
0.35
Spain
Germany
Uruguay
0.30
0.25
Fiscal Revenue ( GDP)
Nicaragua
USA
Honduras
0.20
Peru
Mexico
Bolivia
Colombia
0.15
Argentina
0.10
0.05
0.00
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
Log(GDP per capita in current US dollars)
Note x-axis corresponds to the logarithm of the
GDP per capita in current US dollars.
Source The World Bank, 2006.
12
Yet both Mexico and Brazil perform poorly in
setting high health standards
Health Indicators
Note Data from UNICEF and WHO adjusting by
disease underreporting and classification errors.
Source OECD Development Centre, 2006. Based on
World Development Indicators, 2006.
13
More or better? And both perform poorly in
attaining educational standards
Percentage of Students on each performance level
(Maths)
Below level 1
Level 2
Level 3
Level 4
Level 6
Level 1
Level 5
Percentage of Students
Alemania
Éslovaquia
Dinamarca
Source Based on PISA Report OCDE, 2003.
14
Performance is relatively poor even for the
well-off
Source En base a Informe PISA, OECD, 2003
15
More is not better At similar levels of
expenditure it is possible to perform better
Source En base a Informe PISA (OECD), 2003
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Poverty Reduction and Growth
I
Addressing Inequality Through Efficiency
II
Fiscal and democratic legitimacy
III
Conclusions
IV
17
Efficiency of fiscal institutions is key
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A strong civil society improves tax collection
Source Civil society index is from the Glasius,
Marlies, Mary Kaldor and Helmut Anheier (eds.)
Global Civil Society Yearbook 2002 Global Civil
Society 2002 tax revenue is from World
Development Indicators, average 2000s, World
Bank.
19
Because incentives and civil society involvement
improve the quality of fiscal institutions
Source C. Santiso. Auditing for accountability?
Political economy of government auditing and
budget oversight in emerging economies. Johns
Hopkins University, 2006.
20
Ultimately we must realize that fiscal and
democratic legitimacy go hand in hand
Brazil
Bolivia
Uruguay
Argentina
Mexico
Chile
Peru
Venezuela
Costa Rica
Nicaragua
Colombia
Paraguay
Dominican Republic
Guatemala
El Salvador
Source Lora (2006) El Futuro de los Pactos
Fiscales en América Latina mimeo IADB. Paper
presented at the Economic Forum of the
Iberoamerican Summit held in Barcelona 6-7
October 2006.
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Conclusions

• The problem does not lie on increasing taxes, but
  on improving the quality of social expenditure.
• For this, fiscal institutionality needs to be
  enhanced, and incentives should be created to
  improve civil surveillance.
• A pressing challenge consists on measuring and
  treating fiscal violence.