Public Policies for Investiment in Human Capital: The Case of Chile 1990-2000

1
Public Policies for Investiment in Human Capital
The Case of Chile 1990-2000
Eduardo Aninat former Finance Minister of Chile
(1994-1999) former Deputy Managing Director IMF
Draft Version
November, 2003
2
The Political Context for Economic Policy Making
in Chile of the 1990s

• Concertación Alliance came to power in 1990 One
  of the key issues in its program platforms for
  the political agenda was centered on the
  so-called social debt (inherited of Pinochets
  period.)
• In part, the success of the strategy for rallying
  an important part of the votes to favor the
  democratic coalition of Concertación was based in
  a set of pledges, regarding the resolution,
  through time, of such social issues in the new
  democracy of Chile.
• There was a genuine fear that acting too boldly
  and too fast in this area would generate all
  kinds of pressures in the system, risking
  unbalanced macro economics and a subsequent hit
  on inflation (still running at two digits) or on
  the rate of sustainable economic growth and on
  external balances.

3
Structural Elements in Chiles High Rate of
Economic Growth A Synthesis

• Early and strictly time consistent option
  followed in favor of an open-to-trade economic
  model
• Lliberalizations done in the foreign trade regime
  in Chile around 1975- 1979
• Consistent deepening and broadening during the
  late eighties and the decade of the nineties
  (1990-2000)
• Domestic institution building Chile can be
  characterized as a small, open economy country,
  which has generally been careful and respectful
  for domestic economic institutions
• Legality, constitutionality, and presentation and
  consolidation by the Legislative Branch of
  Government and other institutions, has almost
  generally been the norm
• The most salient part of this long haul of
  institutional build-up exists in the social
  servicesw area, particularly on the education
  area.

4
The Political Economy of Public Social Policies
in Chile Revealed Preferences and Pressure Groups

• The deep recession experienced by Chile in
  1982-84 coupled with the very imperfect domestic
  policy responses (government of Pinochet) had
  generated important losses in the standards of
  living of the middle class and of the poor.
• This created a cumulative backlog of unfulfilled
  demands from many organized groups, clusters that
  were normally associated to voters for the
  Concertación alliance.
• The government of Patricio Aylwin (1990-1993) had
  made one important effort on redressing part of
  the decline, in both absolute and relative
  levels, for expenditures directed to some key
  areas of the social services.
• The well intended and reasonably well designed
  efforts by the Aylwins administration in social
  matters were then considered clearly not enough.

5
The Political Economy of Public Social Policies
in Chile Revealed Preferences and Pressure Groups

• The economic agenda of the second candidate of
  the Concertación, Eduardo Frei, again had to
  include an extensive list of new social programs
  and new reforms in the area of social services.
• Due to prior historical experiences, and from the
  sheer estimated size of social demands arising,
  a kind of ordenateur was to be searched (a
  mechanism or a special agenda, to put-in-line
  these factors in a reasonably orderly and
  coherent way, one that would not impinge
  negatively on macro equilibria.)
• After months of discussion inside the Cabinet, it
  was suggested by the Ministries of Finance and
  Education to then President Frei, that it was
  best to focus on an Education Reform process, and
  to launch early in his period (1995 1996).
  These reform area could act as the principal
  ordenateur.

6
The Political Economy of Public Social Policies
in Chile Revealed Preferences and Pressure Groups
In the table that follows next, we get a summary
on first the big decline between ninety seventy
and nineteen ninety, and the subsequent recovery
and redressal in per capita public spending for
education the series is compared with the
evolution of average wage rates in the private
sector.
7
Educational Reform The Story of Contents of the
Reform

• President Eduardo Frei Ruiz-Tagle indicated that
  his administration would grant priority to
  improve the quality of education in Chile.
• The National Commission of Modernization of
  Education was born, integrated by 18
  professionals and academics, coming from diverse
  activities and having different political
  positions. Their mission was updating a complete
  diagnosis of the educational system, including
  its main deficiencies and limitations.

8
Educational Reform The Story of Contents of the
Reform

• According with the Education Reform proposed, it
  would be fundamental to spend more time in
  learning, in order to improve in human capital
  knowledge.
• Advantages for the extension of the school day
  were evident
• It would cause unquestionable education benefits
• Have positives social effects, specially
  supporting low income families, in a context of
  parents (both heads of households) increasingly
  working outside their homes.
• It would contribute to school management
  improvement (professors could then concentrate
  their work preferably in a single school
  establishment, helping thus to build cohesion in
  the educative project of each.)

9
Educational Reform The Story of Contents of the
Reform

• Different alternatives were examined for the
  transition to an extended school schedule system.
  To enter gradually, in to the new schedule of a
  Complete Journey spent at the School (JEC, in
  Spanish) was the general pivotal case.
• Starting in 1997, Chilean Education Reform had
  evolved to get its fundamental structure.
• The government of President Frei, at our explicit
  proposal from the Treasury, aimed at financing
  the core new expenditures involved in the Reform,
  via the maintenance or consolidation of the Value
  Added Tax (VAT) rate, at its then established
  value.

10
Educational Reform The Story of Contents of the
Reform
PRIOR RESULTS OF THE COMPLETE JOURNEY AT THE
SCHOOL (JEC)
The increase in school journeys (JEC) will in
fact mean that those students who attend all of
their basic education and secondary schooling
with this system attend two more years of
classes. This is very significant, compared with
the situation of students who did not reach the
benefit of being part of the reform process. In
this way, the JEC changed the scheme towards a
new more intense modality. It implied that all
the students go to classes throughout the full
school day. Educational work has more effective
time, so the reform could have (potentially, at
least...) the maximum desired effect.
11
The Financing of Social Policies in Chile A
Public Finance Perspective

• The implementation of more active social policies
  was subordinated to an overarching commitment to
  macroeconomic stability. These resources could in
  principle come from three sources
• (i) Revenue growth derived from the expansion of
  the economy
• (ii)Re-allocation of budgetary resources from
  less priority uses and towards the social sector
• (iii) Expansion of available revenue mainly
  through added taxation.

12
The Financing of Social Policies in Chile A
Public Finance Perspective

• If real social expenditure of the central
  government Gs (deflated by CPI) is
• Gs Y d a ß
• Where Y real GDP (deflated by CPI)
• d total government expenditure as a percent
  of GDP
• a percent of total expenditure that remains
  after interest payments
• ß percent of total expenditure (after
  interest payments) that is allocated to social
  programs
• The percentage growth in real social expenditure
  can be approximated(ignoring small residual cross
  terms) as

13
The Financing of Social Policies in Chile A
Public Finance Perspective
Applying the above formulation to the case of
Chile, we get the following financing results for
1993-2000
14
A Simplified Analytical Model for Analysis of
Social Policies A Microeconomic Perspective on
the Education Reform and Its Effectiveness
Simple model of social welfare maximization Avai
lable civil servants can be allocated to service
their work hours only in two (generally
complement) social sectors, namely L (hours in
education) or to N (hours in the alternative
social services sector.)
15
Graph 1 Gross Benefit Function (Z)
The Graph depicts the equilibrium point for a
planners maximization of hiring hours-teachers to
the public system, given an exogenous wage rate
represented by the slope of the straight line
drawn (Zo Lo.) The green curve presented in
Graph 1 is the equivalent of the marginal
productivity of hours-teachers.
16
Graph 2 Net Benefits Function
Graph 2 is a representation of a slightly more
complete case, where the red curve shows the Net
Benefits for Education System expansion,
considering the externality cost on provision
of Other social expenditures, when civil servants
hours can be allocated to any of both
sectors. This can also serve as representing the
new optimum for the combined solution on two
desired social goods, confronting an exogenous W
wage rate for hiring.
17
A Simplified Analytical Model for Analysis of
Social Policies A Microeconomic Perspective on
the Education Reform and Its Effectiveness
We are interested to check the decision making
process for a social planner that, represents
society by acting in a given welfare State, and
wishes to maximize the social welfare function of
society, in terms of the optimum provision of
education (Ê) and other social goods (ˆP),
subject to budgetary conditions (g) and given
wage rates (w.) Thus Z F ( E P ), and
accept E k L, and g w L P
18
Conclusions Lessons Learned and Further Research
Needed

• Fiscal Policy choices Looking back on what has
  been contributing to the sustainability of high
  growth in Chile, and judging also the cases for
  small and medium sized developing countries in
  Latin America, the Caribbean, Africa and Asia, I
  clearly think that it is correct to opt for
  social services connected to human capital
  formation, as one of the principal public choices
  for these societies.
• It is crucially important that the so-called
  dividend growth can be increasingly geared to
  the public social services sectors (amongst them
  education) in economies which not only have the
  task of improving their skills base for equity
  reasons, but that have to deal with the
  challenges of globalization, and with a
  catch-up to standards raised by the new world
  scenario of the economics of knowledge.

19
Conclusions Lessons Learned and Further Research
Needed

• As we look at modern budgets, we find
  substantial inclusion of items that seem to be in
  the nature of private, rather than public, goods.
  Why should this be the case? (...)
• Certain goods, such as education (...) provide
  personal benefits to the recipient, benefits that
  are rivals in consumption and not shared by
  others. In addition, they also generate
  externalities that the individual beneficiaries
  overlook. Supply forthcoming in response to
  private demand will be suboptimal, and a public
  supplement is in order. This may be provided by
  subsidizing private purchases or by public
  provision.
• Richard Musgrave (Public Finance and Public
  Choice, 2000.)

20
Conclusions Lessons Learned and Further Research
Needed
The recommendation is to avoid 2 extreme
scenarios
2. The temptation for gradual populism. This one
is a scenario where, in a less visible and more
complex fashion, the voices and actions of
pressure groups inside and outside the government
alliance start attracting, convincing for favor
many of the technocrats in various sophisticated
ways.
1. Sort of cowboy-band-wagoning (old movie
type) behavior when technocrats, panicking by
the voices for more government spending in social
services and others, they tend to replicate the
lonely-cowboys syndrome (become isolated or
secluded.)