1. Poverty Reduction and Growth: Virtuous and Vicious Circles Javier Santiso Chief Economist / Deputy Director Development Centre OCDE OECD-World Bank Conference Paris 23 October 2006

2. 2 Poverty Reduction and GrowthI Addressing Inequality Through EfficiencyII Fiscal and Democratic LegitimacyIII ConclusionsIV

3. 3 Poverty Reduction and Growth in Latin America World Bank Key Policy Messages  Latin America’s 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. 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. 5 … while other regions are accelerating their converge processes with richer economies CONVERGENCE PROCESS IN BRAZIL AND MEXICO WITH RESPECT TO OTHER EMERGING ECONOMIES Source: OECD Development Centre, 2006. Based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005 Note: Annual growth (%) calculated as the average annual rate for the last six decades. Deviation (%) at the beginning of each decade. 1950 1960 1970 1980 1990 1980 1950 1960 1970 2000/06 1990 2000/06 -4.0 -3.0 -2.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 -30-101030507090 GDP deviation (%) with respect to world average ($ 1990) GDP per capita Growth minus average world GDP per capita (% yearly). MexicoBrasil 1950 1960 1970 1980 1990 2000/06 1950 1960 1970 1980 2000/06 -4.0 -3.0 -2.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 -85-75-65-55-45 GDP Deviation (%) with respect to world average ($ 1990) GDP per capita Growth minus average world GDP per capita (% yearly). ChinaIndia

6. 6 Poverty Reduction and GrowthI Addressing Inequality Through EfficiencyII Fiscal and democratic legitimacyIII ConclusionsIV

7. 7 Income inequality continues to be a major challenge and disappointment in the region Inequality Indicators Source: World Development Indicators, 2006. Source: WIDER Database, 2006.

8. 8 In the OECD inequality is reduced through taxation and social spending, but not in Latin America Source: The World Bank. Gini – Market Income Gini –Disposable Income (after taxes and s. security) Note: Gini coefficient calculated before and after taxes and transfers, illustrating their low incidence on inequality levels, in contrast with other regions. 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 Latin AmericaEuropean UnionUnited StatesSpain 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 Latin AmericaEuropean UnionUnited StatesSpain

9. 9 There is some evidence that more taxes might lead to quality public goods Low quality High quality

10. 10 Strengthening fiscal effort might not be enough: Significant differences in Mexico/Brazil tax revenue Source: Eduardo Lora, Mauricio C á rdenas. “ La reforma de las instituciones fiscales en Am é rica Latina ”. Banco Interamericano de Desarrollo, Fedesarrollo, 2006. OECD, “ Recent tax Policy trends and reforms in OECD Countries ”, OECD. TAX REVENUE AS PERCENTAGE OF GDP 2005 0 5 10 15 20 25 30 35 40 OCDEBrazilSpainUSAColombiaChileArgentinaPeruMexicoVenezuela Percentage

11. 11 Is more better? Tax revenue in Brazil is higher than economies of similar income level Source: The World Bank, 2006. Note: x-axis corresponds to the logarithm of the GDP per capita in current US dollars. FISCAL BURDEN AND GDP PER CAPITA USA UK Spain Italy Germany France Uruguay Peru Nicaragua Mexico Honduras Colombia Brazil Bolivia Argentina 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 4.55.56.57.58.59.510.511.5 Log(GDP per capita in current US dollars) Fiscal Revenue (% GDP)

12. 12 Yet both Mexico and Brazil perform poorly in setting high health standards Health Indicators Source: OECD Development Centre, 2006. Based on: World Development Indicators, 2006. Note: Data from UNICEF and WHO adjusting by disease underreporting and classification errors.

13. 13 More or better? And both perform poorly in attaining educational standards Source: Based on PISA Report OCDE, 2003. Dinamarca Éslovaquia Alemania Percentage of Students on each performance level (Maths) Below level 1Level 2Level 3Level 4 Level 5 Level 6Level 1 Percentage of Students

14. 14 Performance is relatively poor even for the well-off Source: En base a Informe PISA, OECD, 2003

15. 15 More is not better: At similar levels of expenditure it is possible to perform better Source: En base a Informe PISA (OECD), 2003 SCHOOL PERFORMANCE AND EXPENDITURE - OECD Czech Republic Denmark Greece Irland Italy Korea Norway Portugal Spain Switzerland USA Austria Canada Finland France Germany Hungary Iceland Japan Mexico Netherlands Slovak Rep. Sweden 350 400 450 500 550 600 010 00020 00030 00040 00050 00060 00070 00080 00090 000 Accumulated expenditure per student primary and secondary school (US dollars) Performance in Mathematics

16. 16 Poverty Reduction and GrowthI Addressing Inequality Through EfficiencyII Fiscal and democratic legitimacyIII ConclusionsIV

17. 17 Efficiency of fiscal institutions is key BUDGETARY INSTITUTIONS AND FISCAL RESULTS 2000-2002 Nicaragua Bolivia Guatemala Venezuela Mexico Brazil Uruguay Paraguay Ecuador Argentina Peru Chile Colombia -0.05 -0.04 -0.03 -0.02 -0.01 0 0.01 0.02 0.03 0.04 0.05 0123456789 Primary results Government / GDP Budgetary Institutions Index (1-10)

18. 18 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. 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. 20 Ultimately we must realize that fiscal and democratic legitimacy go hand in hand Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Guatemala Venezuela Mexico Nicaragua Peru Paraguay El Salvador Uruguay 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.

21. 21 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.