1. POVERTY REDUCTION IN THE XXI CENTURY Decentralized Poverty Reduction Strategies (The Bolivian Case) Alberto Leyton Sr. Public Sector Specialist Washington, June 2005

2. AGENDA 1.Country Background 2.Results in 15 years 3.1999-2000 Inflexion Point –Internal Crisis –External Opportunity 4.National Dialogue 2000 5.The Poverty Reduction Strategy 6.Lessons learned and conclusions

3. 1.COUNTRY BACKGROUND Pop: 8 Million (5% Brazil)Pop: 8 Million (5% Brazil) GDP: $8 Billion (1.5% Brazil)GDP: $8 Billion (1.5% Brazil) GDP Per capita: $1,000 (35% Brazil)GDP Per capita: $1,000 (35% Brazil) HDI: 0.658 / Ranking 174 (Brazil 79)HDI: 0.658 / Ranking 174 (Brazil 79) Stable democracy since 1982Stable democracy since 1982 Decentralized to local Government (314 municipalities) in 1994Decentralized to local Government (314 municipalities) in 1994 Particular issuesParticular issues –Drug trafficking / Informality –High external dependency (Foreign aid = 10% PIB)

4. 1.COUNTRY BACKGROUND Reforms Track Record 15 YEAR OF REFORMS (1985-2000) Leading country in: ECONOMIC REFORM Fiscal deficit control Fiscal deficit control Subsidies elimination Subsidies elimination Open markets Open markets Foreign investment Foreign investment Privatization / Capitalization Privatization / Capitalization Pensions reform Pensions reform Financial Sector reform Financial Sector reform GOVERNANCE REFORM Electoral system Electoral system FM and control systems FM and control systems Regulatory system Regulatory system Decentralization Decentralization Judicial Reform Judicial Reform Civil Service Reform Civil Service Reform Tax administration reform Tax administration reform

5. Social Protection / Social Investment Funds Sectoral Reforms Education Education Health Health Local Decentralization Non-conditional fiscal transfers (20% of revenues) Non-conditional fiscal transfers (20% of revenues) Institutional development at local level Institutional development at local level PRSP Debt relieve – HIPC Debt relieve – HIPC Poverty alleviation focus Poverty alleviation focus 1985 - 1994 1991 - 2000 1994 - 2000 1998 - 2000 1.COUNTRY BACKGROUND Social Policy

6. 2. RESULTS IN 15 YEARS Economic volatility

7. 98.6% 95.3% 90.9% 66.3% 39.0% 53.1% 85.5% 58.6% 70.9% 20% 40% 60% 80% 100% 197619922001 Poverty incidence (0.21) (0.93) (0.48) (1.33) (0.84) (1.52) Rural Urban Total 2. RESULTS IN 15 YEARS Poverty Reduction

8. 2. RESULTS IN 15 YEARS Public Investment Decentralized Public InvestmentDecentralized Public Investment 35% (1994)  64% (2000) Municipal Public InvestmentMunicipal Public Investment 5% (1994)  36% (2000) Public Investment in social sectorsPublic Investment in social sectors 21% (1994)  50% (2000) Public investment in richer regionsPublic investment in richer regions 62% (1994)  49% (2000)

9. Economic stability with modest growthEconomic stability with modest growth Improvements in social indicatorsImprovements in social indicators Political stability with potential governance conflictPolitical stability with potential governance conflictBut... Insufficient growing rate to impact poverty (1% per capita: 70 years to duplicate)Insufficient growing rate to impact poverty (1% per capita: 70 years to duplicate) Growing sources based on foreign investment: very volatileGrowing sources based on foreign investment: very volatile Poverty incidence still very high and higher in rural areasPoverty incidence still very high and higher in rural areas Weak institutions and perception of corruption and misrepresentationWeak institutions and perception of corruption and misrepresentation 2. RESULTS IN 15 YEARS

10. 3. 1999-2000 INFLEXION POINT Internal Crisis Regional economic crisisRegional economic crisis Coca crops eradicationCoca crops eradication Fiscal crisis due to pensions reformFiscal crisis due to pensions reform Banking system contractionBanking system contraction Foreign investment contractionForeign investment contraction Hydrocarbons international pricesHydrocarbons international prices Commodities (Agriculture / Mining) international pricesCommodities (Agriculture / Mining) international prices 12% GDP contraction + political crisis and social unrest

11. Changes in IDIsChanges in IDIs –PRSP / PRGF –Debt relief: HIPC I and II –Harmonization of foreign aid Access to markets in developed countries: FTAsAccess to markets in developed countries: FTAs  Debt service (HIPC)  Debt service (HIPC) Sustainability = ---------------------  Exports (Markets)  Exports (Markets) 3. 1999-2000 INFLEXION POINT External Opportunity

12. 4. NATIONAL DIALOGUE 2000 Objectives and organization National consultation to prepare PRSPNational consultation to prepare PRSP Local focus based on ongoing decentralization process: Municipality as the central player to combat povertyLocal focus based on ongoing decentralization process: Municipality as the central player to combat poverty Jubilee 2000 momentumJubilee 2000 momentum Four basic questions:Four basic questions: –Who are the poor? –Which are the priority actions to reduce poverty? –How to distribute and who should administer HIPC funds? –Who should control the correct use of poverty reduction funds? Participative bottom-up process from local to national levelsParticipative bottom-up process from local to national levels –9 Municipal Tables w/ 1256 part. (Mayor/VP Council/CV/woman) –9 Regional Tables w/ 935 part. (regional organizations) –1 National Table (Local and regional rep. / Gov. / Congress)

13. Agreements on:Agreements on: –Target groups: Indigenous –Priority areas: Production and basic services –HIPC funds to municipalities –Criteria for progressive distribution of funds –Social control mechanism 3 months of broad discussion on poverty within public agenda3 months of broad discussion on poverty within public agenda Specific commitments from the Government and CongressSpecific commitments from the Government and Congress Deepening of the decentralization processDeepening of the decentralization process Alternative vehicle to social conflictAlternative vehicle to social conflict Risks: High expectationsRisks: High expectations 4. NATIONAL DIALOGUE 2000 Results

14. After Economic / Political / Anti-Narcotics reforms..... make fight against poverty the main thrust of future public policies Long-term and sustainable principles:Long-term and sustainable principles: –PARTICIPATION for poverty reduction policies design (Ownership) –DECENTRALIZATION of social and productive services close to the beneficiaries –PROGRESSIVE resource allocation criteria (more $$ for poor) –SOCIAL CONTROL by beneficiaries / civil society to ensure effectiveness and impact –INSTITUTIONAL strengthening at all levels of government Adjustable instrumentsAdjustable instruments –PRSP –National Dialogue Law 5. THE POVERTY REDUCTION STRATEGY Principles and Instruments

15. Shared poverty diagnosisShared poverty diagnosis –Unemployment / Sub-employment –Low quality in social services provision (education & health) –Low level of productivity –Lack of property rights –Social exclusion Strategic actionsStrategic actions –Increase Opportunities (Productive infrastructure & technology) –Enhance Capabilities (Education / health / services) –Reduce vulnerability (Security and Social Protection) –Promote Social Integration Two structural conditionsTwo structural conditions –Decentralized & corruption-free institutional framework –Stable macroeconomic framework 5. THE POVERTY REDUCTION STRATEGY Principles and Instruments

16. Cost & FinancingCost & Financing –Within PRGF constraints –10% of GDP of Public Investment per year –Financed with: Increased tax collection / Private participation / Foreign aid / HIPC II Impact indicators (15 years)Impact indicators (15 years) –Reduce poverty by 1/3 –Reduce extreme poverty by 50% –Increase life-expectancy from 62 to 69 years –Increase basic education coverage from 51% to 67% Impact Results Intermediate(Short-term) 5 7 40 5. THE POVERTY REDUCTION STRATEGY Costs and Impacts

17. Institutionalize social Participation through National / Local Dialogues (every 3 years)Institutionalize social Participation through National / Local Dialogues (every 3 years) Deepen down Decentralization by increasing transfers for poverty reductionDeepen down Decentralization by increasing transfers for poverty reduction Establish Progressive resource allocation criteria for poverty reduction fundsEstablish Progressive resource allocation criteria for poverty reduction funds Operationalize Social Control MechanismOperationalize Social Control Mechanism 5. THE POVERTY REDUCTION STRATEGY National Dialogue Law

18. 5. THE POVERTY REDUCTION STRATEGY National Dialogue Law Resources allocation formula (HIPC and Social Funds):Resources allocation formula (HIPC and Social Funds): Population recalculation w/ poverty criteriaPopulation recalculation w/ poverty criteria 30% 70% By population & poverty Equal by Department Municipalities By population & poverty Non poor “Umbral” poor Moderate poor Indigents Marginal X (-1) X (0) X (1) X (2) X (3) “New” Population for each municipality 5% 16% 14% 34% 31%

19. 5. THE POVERTY REDUCTION STRATEGY National Dialogue Law

20. 5. THE POVERTY REDUCTION STRATEGY National Dialogue Law 11% 45% 121% ( ) = IDH Ranking from 1 to 314

21. 6. LESSONS LEARNED AND CONCLUSIONS 15 years of successful reforms in Bolivia w/ positive results: Economic and stability partial institutional development15 years of successful reforms in Bolivia w/ positive results: Economic and stability partial institutional development Economic Stability / Growth does not imply poverty reductionEconomic Stability / Growth does not imply poverty reduction Institutional weaknesses (corruption) and uneven power distribution threat political stabilityInstitutional weaknesses (corruption) and uneven power distribution threat political stability Economic crisis increases public frustration and questions efficacy of reform programEconomic crisis increases public frustration and questions efficacy of reform program Public policies need to focus more in reducing poverty and strengthening institutional frameworkPublic policies need to focus more in reducing poverty and strengthening institutional framework Four principles for PRSPs: Participation / Decentralization / Progressivity / Social ControlFour principles for PRSPs: Participation / Decentralization / Progressivity / Social Control Long-term process needs ownership and empowerment: Dialogue and consensus are necessary to manage expectations and reduce frustrationLong-term process needs ownership and empowerment: Dialogue and consensus are necessary to manage expectations and reduce frustration