Fiscal and democratic
legitimacy in Latin America
Javier Santiso
Economista Jefe
Centro de Desarrollo de la OCDE
Agenda de Desarrollo Iberoamericana 2007
Barcelona
 27 October 2007 
2
1
Development and democracy
2
Fiscal policy: Quality and accountability
3
The fiscal transition
3
Never had there been so much
democracy in the continent
The 1980s represent a dramatic turn around for the region in terms of polity
Democracy
Autocracy
Source: OECD Development Centre, 2007. 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.
4
The region has left the 1980s behind and is
recuperating grown in GDP per capita terms
The 1980s were lost in terms of GDP per capita but not in terms of political reform
2000
1980
5000
GDP per capita (Maddison)
1990
1970
4000
1960
3000
1950
1940
1930
1910
1920
1890
1880
1900
2000
1860
1870
1000
1840
1850
1830
1820
0
-6
more autocracy
-4
-2
0
2
4
Democratic governance (Polity IV)
6
8
more democracy
Source: OECD Development Centre, 2007. Based on Angus Madison, Historical Statistics. The World Economy, Paris, OECD, 2003; and Polity
IV project. Data is average of available data.
5
Democracy is alive and well:
Elections are competitive affairs
Continuity
Change
Support
Margin
(% votes)
(% victory)
1st round
50
19
2nd round
51
9
Number of
countries
Share (%)
Continuity
8
44
Change
10
56
Source: OECD Development Centre, 2007. 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.
6
Growth has resumed … but it is still far from
other emerging economies
% GDP annual growth
China
India
Latin America
Source: OECD Development Centre based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006 and official press
release of the Presidency of Chile, 23 September 2007.
7
Latin American economies have been
loosing grown for some time
GDP per capita absolute terms
GDP per capita relative to US
Plebiscite in Chile,
1988
Source: OECD Development Centre, 2007. Based on Maddison (2003).
8
… while other regions are accelerating their
converge processes with richer economies
6.0
5.0
4.0
3.0
Mexico
Brazil
1970
2.0
1.0
0.0
-1.0
1950
1990
1990 1970
1960
1950
1960
-2.0
-3.0
2000/06
1980
2000/06
1980
-4.0
-30
-10
10
30
50
70
90
GDP per capita Growth minus average world GDP per
.
capita (% yearly)
GDP per capita Growth minus average world GDP per
.
capita (% yearly)
Convergence process in Brazil and Mexico compared with other emerging economies
6.0
5.0
1990
4.0
3.0
2.0
1980
1950
1980
1980
1950
-1.0
-2.0
2000/06
1970
1.0
0.0
2000/06
China
1970
1960
1960
India
-3.0
-4.0
-85
-75
-65
-55
-45
GDP Deviation (%) with respect to world average ($ 1990)
GDP deviation (%) with respect to world average ($ 1990)
Source: OECD Development Centre, 2007. 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.
The poorest segments of the population
have not joined into the prosperity
9
0
Q3
Q4
25
20
15
1992
2002
change
10
5
0
Q1
Q2
Q3
Q4
Q5
7
6
5
4
3
2
1
0
growth
15
5
0
Q2
Q3
Q4
Q5
80
OECD*
GDP per capita
by quintile
Developing Asia
2002
20
10
Q1
Q5
Thousands
Q2
1994
Thousands
10
GDP per capita
by quintile
Quintile annual growth
in GDP per capita
change
5
Q1
7
6
5
4
3
2
1
0
2003
Quintile annual growth
in GDP per capita
1993
Sub-Saharan Africa
25
60
1990
2000
growth
40
20
0
Q1
Q2
Q3
Q4
Thousands
15
7
6
5
4
3
2
1
0
GDP per capita
by quintile
Latin America
20
Quintile annual growth
in GDP per capita
25
7
6
5
4
3
2
1
0
-1
GDP per capita
by quintile
Quintile annual growth
in GDP per capita
Unlike other regions, growth in Latin America has left out the poor
Q5
Source: OECD Development Centre, 2007. Based on IMF , Globalization and Inequality, 2007. OECD* includes: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Singapore, Spain, Sweden, UK, US.
10
Poverty is falling but it still affects a large
portion of the population
% population in poverty
Millions of people in poverty
Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.
11
Improvements in inequality are modest or
absent
Gini coefficient (early 2005 or closest year)
Changes in inequality during the last decade
65%
deteriorations
Bolivia
Brazil
60%
Dominican, R.
55%
50%
45%
40%
40%
Paraguay
Ecuador
Venezuela
Panama
Argentina
Chile
Mexico
Nicaragua
Honduras
Colombia
Guatemala
Peru
El Salvador
improvements
Costa Rica
Uruguay
45%
50%
55%
Gini coefficient (early 1990s)
60%
Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.
65%
12
“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
Source: CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006 and official press release of the Presidency of Chile, 23 September 2007.
13
1
Development and democracy
2
Fiscal policy: Quality and accountability
3
The fiscal transition
14
Fiscal policy plays a very limited
redistributive role, especially taxation
(% change in inequality)
The effects of
taxes and transfers
Points of Gini change
Gini coefficient
Inequality before and after
taxes and transfers
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006)
15
There is no Latin curse:
Quality fiscal policy is not a matter of DNA
Gini coefficient
Inequality before and after taxes and transfers
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).
16
Fiscal reform has achieved fiscal discipline
Overall Balance 1990-2006p
Latin America average
Country forecast 2006
Source: OECD Development Centre, 2007. Based on ECLAC, Economic Survey of Latin America and the Caribbean, 2006-2007, June 2007.
17
Reform has succeeded in strengthening
fiscal institutions
The path of reform for fiscal institutions
Source: OECD Development Centre, 2007. 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 2005. The slope measures the number of reforms and their relative
importance.
18
But reform has failed to raise significantly
more revenue
Tax revenue (Central Government, % GDP, 2006p)
Source: OECD Development Centre, 2007. Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database.
19
Tax productivity has increased, but remains
low for income taxes due to widespread
loopholes and informality
Tax productivity
(rate/revenue)
Tax exemptions
(% GDP)
Shadow economy
(%GDP)
Source: OECD Development Centre, 2007. 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.
20
Revenue systems lean on commodities and
produces unpredictability
Revenues from non-renewable
as a share of total fiscal revenue
(1990-2005)
Coefficient of Variation
in fiscal revenues
(1990-2005)
Source: OECD Development Centre, 2007. Based on Jiménez, J. P. V. Tromben. “Fiscal policy and the commodities boom: the impact of higher prices for nonrenewables in Latin America and the Caribbean”. Cepal Review 90. December 2006.
21
The result is very limited political capital to
work with… fiscal legitimacy is low
% of citizens who trust
tax revenue is well spent
(2003-05)
Firms’ assessment of the
neutrality/composition of government
decisions/spending (2003-2006)
Fairer/
Wiser
Unfair/
Wasteful
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database.
Based on World Economic Forum, Global Competitiveness Report, 2003-2006.
22
1
Development and democracy
2
Fiscal policy: Quality and accountability
3
The fiscal transition
23
Fiscal legitimacy enhances democratic
governance
50
Costa Rica
45
(% satisfied with democracy)
Democratic performance
Uruguay
40
Venezuela
Nicaragua
35
Argentina
30
El Salvador
Chile
Brazil
Bolivia
25
Honduras
Panama
Ecuador
Colombia
Guatemala
20
Mexico
15
Peru
10
Paraguay
5
0
0
5
10
15
20
25
Fiscal legitimacy (% who trust taxes are well spent)
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003).
30
24
Fiscal legitimacy enhances democratic
governance
(% satisfied with democracy)
Democratic performance
50
Uruguay
Costa Rica
Uruguay
40
Honduras
El Salvador
Argentina
Chile
30
Nicaragua
Brazil
Bolivia
Panama
Ecuador
Colombia
20
Guatemala
Venezuela
Chile
Venezuela
El Salvador
Dominican
Republic
Honduras
Argentina
Paraguay
Mexico Colombia
Nicaragua
Guatemala
Panama Bolivia
Costa Rica
Ecuador
Brazil
Peru
Mexico
Peru
10
Paraguay
0
0
10
20
30
40
50
60
0
10
20
30
Fiscal legitimacy (% who trust taxes are well spent)
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005).
40
50
60
25
Social cohesion and fiscal legitimacy go
hand in hand
35
Chile
Uruguay
(% trust taxes well spent)
Fiscal legitimacy
30
Venezuela
El Salvador
Dominican
Republic
25
20
Honduras
Argentina
Nicaragua
Colombia
Brazil
Paraguay
Costa Rica
Panama
Bolivia
Mexico
Guatemala
15
10
Peru
Ecuador
5
0
0.4
0.45
0.5
0.55
0.6
0.65
Inequality (Gini coefficient 2000s)
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and ECLAC’s Panorama Social
0.7
26
It is not (only) a question of quantity but of
quality (efficiency)
Education Expenditures and Performance
600
Slovak Republic
Poland
500
(PISA 2003)
Mathematics Score
550
Norway
United States
Spain
450
Thailand
Uruguay
400
Mexico
Indonesia
Tunisia
Brazil
350
300
-
5,000
10,000
15,000
20,000
25,000
Annual expenditure on educational institutions per student (2001)
in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents
Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)
30,000
But equity matters as well:
Regressive fiscal policies damage legitimacy
Education
CHL
Health
Social Security
CHL
HDN
(% trusts taxes are well spent)
25
Fiscal legitimacy
27
SLV
NIC
NIC
BRA
BRA BRA
ARG
ARG
CRI
URG
ARG
CRI
URG PAR
COL
CRI
URG
BOL
BOL BOL
COL
GTMGTM
MEX MEXPER PER
ECU
COL
GTM
MEX
ECU
5
-0.3
-0.2
progressive
-0.1
0
0.1
0.2
0.3
0.4
Social expenditures are … (quasi-gini)
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social.
0.5
0.6
regressive
0.7
28
Social spending is regressive
Specially social security
Social Security
Health
Education
29.1
Total spending (=100)
and percentages
25
20.7
20
16.0
16.3
16.8
17.9
7.5
15
2.5
3.4
5.0
10
5.2
5.0
5.1
5.2
4.3
5
8.2
7.9
7.8
8.0
8.0
Poorest
quintile (q1)
q2
q3
q4
Richest
quintile (q5)
0
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social .
29
Policy dialogue and openness is key for
financial accountability
Sweden
50
France
Italy
Spain
Brazil
(2004 % GDP)
Tax Revenue
40
Turkey
30
Slovak Rep.
Argentina
Ireland
Uruguay
Switzerland
United States
Korea
Colombia
20
Nicaragua
Ecuador BoliviaPeru
Mexico
Venezuela
10
Costa Rica
Chile
Haiti
0
0
10
20
30
40
50
60
70
80
90
Freedom of the press
(Index: 0-30=Not free, 31-60=Partially free, 60-100 Free)
Source: OECD Development Centre, 2007. Based on Freedom House (2007) and ECLAC and OECD Revenue Statistics (2007).
100
30
The democratic transition has not resulted in
an overall transition in the media
Free
Venezuela
Chile
LatAm avge
LatAm avge
Partially
free
Not
free
Chile
Venezuela
1988 Chile’s plebiscite
Source: OECD Development Centre, 2007. Based on Freedom House (2007).
31
Relaying more on taxes to finance public
spending enhances fiscal legitimacy
35
Chile
Uruguay
(% trust taxes well spent)
Fiscal legitimacy
30
Venezuela
El Salvador
25
Dominican
Republic
Honduras
20
Argentina
Nicaragua
15
Colombia
Brazil
Costa Rica
Guatemala
Paraguay
Panama
Bolivia
Mexico
Ecuador
10
Peru
5
0
0
0.2
0.4
0.6
0.8
1
Relative price of government services
(share of taxes on total spending)
Source: OECD Development Centre, 2007. Based on ECLAC’s ILPES and Latinobarómetro (2003, 2005).
1.2
32
Fiscal policy is a powerful tool to promote
democratic participation
100
Uruguay
(2000-05 presidential elections)
Voter turnout
90
80
70
60
50
Venezuela
40
Argentina
Peru
Nicaragua
Brazil
Panama
Ecuador
Mexico
Dominican Rep.
Chile
Bolivia
El Salvador
Honduras
Costa Rica
Paraguay
Guatemala
Colombia
30
20
10
0
0
0.2
0.4
0.6
0.8
1
1.2
Relative price of government services
(share of taxes on total spending)
Source: OECD Development Centre, 2007. Based on ECLAC ILPES database and Payne et al. (2007) Democracies in Development Politics and Reform in Latin America International IDEA.
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
Javier Santiso
Economista Jefe
Centro de Desarrollo de la OCDE
Agenda de Desarrollo Iberoamericana 2007
Barcelona
 27 October 2007 