Fiscal and democratic legitimacy in Latin America 27 October 2007 Javier Santiso Economista Jefe Centro de Desarrollo de la OCDE Agenda de Desarrollo Iberoamericana 2007 Barcelona

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

3 Never had there been so much democracy in the continent Source: OECD Development Centre, Based on Polity IV project. Note: Polity2 score shown, average of available data for Latin America. Poilty2 is the sum of two indicators democracy (0 to10) and autocracy (0 to -10 ). These indicators focus on institutionalized aspects of the polity, i.e. de jure. Democracy is conceived as three essential, interdependent elements. One is the presence of institutions and procedures through which citizens can express effective preferences about alternative policies and leaders. Second is the existence of institutionalized constraints on the exercise of power by the executive. Third is the guarantee of civil liberties to all citizens in their daily lives and in acts of political participation. The autocracy index focuses on how restricted political participation is; whether chief executives are chosen in a regularized process of selection within the political elite, and once in office they exercise power with few institutional constraints; and whether they exercise a high degree of defectiveness over social and economic activity. The 1980s represent a dramatic turn around for the region in terms of polity Democracy Autocracy

4 The region has left the 1980s behind and is recuperating grown 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

5 Democracy is alive and well: Elections are competitive affairs Source: OECD Development Centre, Based on Daniel Zovatto Balance Electoral de América Latina 2005 /2006, in Latinobarómetro, Executive Report 2006, Political Database of the Americas and Wikipedia (when based on official results). Note: Support is the share of votes of the election winner and margin is the difference with the second highest recipient of votes. Continuity Change Support (% votes) Margin (% victory) 1st round5019 2nd round519 Number of countries Share (%) Continuity844 Change1056

6 Source: OECD Development Centre based on CEPALSTAT y ECLACs Panorama Social de América Latina 2006 and official press release of the Presidency of Chile, 23 September % GDP annual growth Growth has resumed … but it is still far from other emerging economies China India Latin America

7 Latin American economies have been loosing grown for some time Source: OECD Development Centre, Based on Maddison (2003). GDP per capita absolute termsGDP per capita relative to US Plebiscite in Chile, 1988

8 … while other regions are accelerating their converge processes with richer economies Source: OECD Development Centre, Based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, Note: Annual growth (%) calculated as the average annual rate for the last six decades. Deviation (%) at the beginning of each decade / / GDP deviation (%) with respect to world average ($ 1990) GDP per capita Growth minus average world GDP per capita (% yearly). MexicoBrazil / / GDP Deviation (%) with respect to world average ($ 1990) GDP per capita Growth minus average world GDP per capita (% yearly). ChinaIndia Convergence process in Brazil and Mexico compared with other emerging economies

9 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 joined into 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

10 Source: OECD Development Centre, Based on CEPALSTAT y ECLACs 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

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

12 Source: CEPALSTAT y ECLACs Panorama Social de América Latina 2006 and official press release of the Presidency of Chile, 23 September There is no mature and constructive democracy when equity and social justice are not tackled …our democracies have not been efficient … they have not managed to rapidly improve the living condition of the people, especially of those in most need, and the political consequences are visible today. President Michelle Bachelet at the European Union - Latin America Forum on Social Cohesion

13 1 Development and democracy 3 The fiscal transition 2 Fiscal policy: Quality and accountability

14 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

15 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

16 Overall Balance p Latin America averageCountry forecast 2006 Source: OECD Development Centre, Based on ECLAC, Economic Survey of Latin America and the Caribbean, , June Fiscal reform has achieved fiscal discipline

17 Source: OECD Development Centre, Based on Filc and Scartascini (2007), Budgetary Institutions in Lora, The State of State Reform in Latin America, IADB and Stanford University Press Note: To construct the figure, the reforms were weighted in accordance with their relevance and direction and were normalized between 0 and 1. So, each curve shows the transition of the institutions from their initial situation in 1990 to their situation in The slope measures the number of reforms and their relative importance. The path of reform for fiscal institutions Reform has succeeded in strengthening fiscal institutions

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

19 Source: OECD Development Centre, Based on data by Goñi, López, and Servén (2006) for tax productivity, Lora (2007) for tax exemptions (original source: Gómez-Sabaini) and Schneider and Enste (2005) for shadow economy. Tax productivity has increased, but remains low for income taxes due to widespread loopholes and informality Tax productivity (rate/revenue) Shadow economy (%GDP) Tax exemptions (% GDP)

20 Source: OECD Development Centre, Based on Jiménez, J. P. V. Tromben. Fiscal policy and the commodities boom: the impact of higher prices for non- renewables in Latin America and the Caribbean. Cepal Review 90. December Revenues from non-renewable as a share of total fiscal revenue ( ) Coefficient of Variation in fiscal revenues ( ) Revenue systems lean on commodities and produces unpredictability

21 % 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

22 1 Development and democracy 3 The fiscal transition 2 Fiscal policy: Quality and accountability

23 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

24 Source: OECD Development Centre, Based on Latinobarómetro (2003, 2005). Fiscal legitimacy enhances democratic governance Fiscal legitimacy (% who trust taxes are well spent) Democratic performance (% satisfied with democracy)

25 Source: OECD Development Centre, Based on Latinobarómetro (2003, 2005) and ECLACs Panorama Social Social cohesion and fiscal legitimacy go hand in hand Inequality (Gini coefficient 2000s) Fiscal legitimacy (% trust taxes well spent)

26 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)

27 Source: OECD Development Centre, Based on Latinobarómetro (2003) and ECLACs Panorama Social. But equity matters as well: Regressive fiscal policies damage legitimacy

28 Source: OECD Development Centre, Based on Latinobarómetro (2003) and ECLACs Panorama Social. Social spending is regressive Specially social security

29 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

30 Source: OECD Development Centre, Based on Freedom House (2007). Venezuela Chile LatAm avge Not free Partially free Free 1988 Chiles plebiscite The democratic transition has not resulted in an overall transition in the media

31 Source: OECD Development Centre, Based on ECLACs ILPES and Latinobarómetro (2003, 2005). Relaying more on taxes to finance public spending enhances fiscal legitimacy Relative price of government services (share of taxes on total spending) Fiscal legitimacy (% trust taxes well spent)

32 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)

33 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 over policy options, if they can count with financial independence It not a technical but rather a political issue

34 Follow ups Latin American Economic Outlook 2009 Policy Dialogue event OECD-Club de Madrid sponsored policy dialogues Current and past Ministers of Finance Best practices, mutual learning

Fiscal and democratic legitimacy in Latin America 27 October 2007 Javier Santiso Economista Jefe Centro de Desarrollo de la OCDE Agenda de Desarrollo Iberoamericana 2007 Barcelona