Going for Growth and Development Paris, May 2008 Javier Santiso Director, OECD Development Centre

2 1 Growth and Development 3 The fiscal transition 2 Fiscal policy: Quality and accountability

3 Latin America has left the 1980s behind, recuperating growth in GDP per capita terms Source: OECD Development Centre, Based on Angus Madison, Historical Statistics. The World Economy, Paris, OECD, 2003; and Polity IV project. Data is average of available data. The 1980s were lost in terms of GDP per capita but not in terms of political reform

Peru symbolizes the complex relationship between growth, development and democracy Growth in average consumption per capita, (household survey) 1 st round vote share of APRA (García’s party) minus vote share of U PP (Humala’s party) Source: OECD Development Centre, Based on Instituto Peruano de Economía, Perspectivas de la economía peruana, Oct and Jurado Nacional de Elecciones, Elección Presidencial y Congresal, 2006, Resultados. Humala’s party received more votes than García’s in the three fastest growing regions of the country

*Water, electricity, telephone, Source: Household survey, Enaho 2005 Percentage of the population with two or more basic services, 2005* Electoral results first round presidential elections – 2006 Source: Peru’s Electoral office Others APRA (García) UPP – PNP (Humala) Less than 50% Between 50% and 75% 75% or more Source: OECD Development Centre, Based on Instituto Peruano de Economia, Perspectivas de la economía peruana, Oct Poverty and politics are closely linked in the case of Peru

6 Source: OECD Development Centre, Based on IMF, Globalization and Inequality, OECD* includes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Singapore, Spain, Sweden, UK, US. The poorest segments of the population have not participated in the prosperity Q1Q2Q3Q4Q5 Latin America change Unlike other regions, growth in Latin America has left out the poor GDP per capita by quintile Quintile annual growth in GDP per capita

7 Source: OECD Development Centre, Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina % population in poverty Poverty is falling but it still affects a large portion of the population Millions of people in poverty

8 Source: OECD Development Centre, Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina Improvements in inequality are modest or absent deteriorations improvements Changes in inequality during the last decade

9 1 Development and democracy 3 The fiscal transition 2 Fiscal policy: Quality and accountability

10 Source: OECD Development Centre, Based on data by Goñi, López, and Servén (2006) Fiscal policy plays a very limited redistributive role, especially taxation Gini coefficient Inequality before and after taxes and transfers Points of Gini change (% change in inequality) The effects of taxes and transfers

11 Source: OECD Development Centre, Based on data by Goñi, López, and Servén (2006). Gini coefficient There is no Latin curse: Quality fiscal policy is not a matter of DNA Inequality before and after taxes and transfers

12 Source: OECD Development Centre, Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database. But reform has failed to raise significantly more revenue Tax revenue (Central Government, % GDP, 2006)

13 % of citizens who trust tax revenue is well spent ( ) Source: OECD Development Centre, Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, The result is very limited political capital to work with… fiscal legitimacy is low Firms’ assessment of the neutrality/composition of government decisions/spending ( ) Fairer/ Wiser Unfair/ Wasteful

14 1 Development and democracy 3 The fiscal transition 2 Fiscal policy: Quality and accountability

15 Source: OECD Development Centre, Based on Latinobarómetro (2003). Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela Fiscal legitimacy (% who trust taxes are well spent) Democratic performance (% satisfied with democracy) Fiscal legitimacy enhances democratic governance

16 Source: OECD Development Centre, Based on PISA (2003) and OECD Education at a Glance (2005) It is not (only) a question of quantity but of quality (efficiency)

17 Source: OECD Development Centre, Based on Latinobarómetro (2003) and ECLAC’s Panorama Social. And equity: Regressive fiscal policies damage legitimacy

18 Source: OECD Development Centre, Based on Latinobarómetro (2003) and ECLAC’s Panorama Social. Social spending is regressive, especially social security

19 Source: OECD Development Centre, Based on Freedom House (2007) and ECLAC and OECD Revenue Statistics (2007). Policy dialogue and openness is key for financial accountability

20 Source: OECD Development Centre, Based on ECLAC ILPES database and Payne et al. (2007) Democracies in Development - Politics and Reform in Latin America International IDEA. Fiscal policy is a powerful tool to promote democratic participation Relative price of government services (share of taxes on total spending) Voter turnout ( presidential elections)

21 Conclusions  Democracy puts fiscal policy at the heart of the relationship between the state and its citizens  Building broad consensus is paramount to success in the implementation of fiscal reforms  Local think-tanks can play a crucial role in fostering constructive dialogue on policy options, if they are financially independent  It not a technical but rather a political issue

Going for Growth and Development Paris, May 2008 Javier Santiso Director, OECD Development Centre