Fiscal and democratic legitimacy in Latin America

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

3. Never has there been so much democracy on 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 growth in terms of GDP per capita The 1980s were lost in terms of GDP per capita but not in terms of political reform 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. Continuity Change Democracy is alive and well: Elections are competitive affairs Source: OECD Development Centre, 2007. Based on Daniel Zovatto “Balance Electoral Latinoamericano”, in Malamud, Isbell, and Téjedor (eds.) Anuario Iberoamerciano, 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 behind other emerging economies % GDP annual growth China Latin America India 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 ground 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 convergence processes with richer economies Convergence process in Brazil and Mexico compared with other emerging economies 6.0 6.0 5.0 5.0 1990 4.0 4.0 Mexico Brazil 2000/06 1980 3.0 1970 3.0 1950 1980 2.0 2000/06 2.0 1.0 1970 capita (% yearly) . 1.0 1950 GDP per capita Growth minus average world GDP per 1970 1990 capita (% yearly) . GDP per capita Growth minus average world GDP per 1980 1960 1990 0.0 0.0 1950 1950 -1.0 1960 China India -1.0 1970 1960 -2.0 1960 -2.0 1980 2000/06 -3.0 -3.0 2000/06 1980 -4.0 -4.0 -85 -75 -65 -55 -45 -30 -10 10 30 50 70 90 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.

9. The poorest segments of the population have not shared in the prosperity Unlike other regions, growth in Latin America has left out the poor 25 7 Latin America 20 6 5 15 4 1993 2003 change 10 3 Quintile annual growth in GDP per capita GDP per capita by quintile 2 Quintile annual growth in GDP per capita GDP per capita by quintile 5 1 0 0 - 1 Q 1 Q2 Q3 Q4 Q5 Quintile annual growth in GDP per capita GDP per capita by quintile GDP per capita by quintile Quintile annual growth in GDP per capita 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 part 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 Changes in inequality during the last decade deteriorations improvements Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.

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 3 The fiscal transition 2 Fiscal policy: Quality and accountability

14. Fiscal policy plays a very limited redistributive role, especially taxation Inequality before and after taxes and transfers The effects of taxes and transfers Gini coefficient Points of Gini change (% change in inequality) 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 Inequality before and after taxes and transfers Gini coefficient Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).

16. Fiscal reform has achieved fiscal discipline Overall Balance 1990-2006 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, 2006) 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. The reliance of revenue systems on commodities 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 non-renewables 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 Developmentanddemocracy 3 The fiscal transition 2 Fiscal policy: Quality and accountability

23. Fiscal legitimacy enhances democratic governance 50 Costa Rica 45 Uruguay 40 Venezuela Honduras Nicaragua 35 Chile Argentina El Salvador 30 Brazil Bolivia Democratic performance (% satisfied with democracy) 25 Panama Ecuador Colombia Guatemala 20 Mexico 15 Peru 10 Paraguay 5 0 0 5 10 15 20 25 30 Fiscal legitimacy (% who trust taxes are well spent) Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003).

24. Social cohesion and fiscal legitimacy go hand in hand Fiscal legitimacy (% trust taxes well spent) Inequality (Gini coefficient 2000s) Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and ECLAC’s Panorama Social

25. It is not (only) a question of quantity but of quality (efficiency) Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)

26. But equity matters as well: Regressive fiscal policies damage legitimacy Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social.

27. Social spending is regressive, especially social security Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social .

28. Sweden 50 France Italy 40 Spain Brazil Turkey Switzerland Slovak Rep. 30 Tax Revenue Ireland (2004 % GDP) Argentina Uruguay United States Korea Colombia 20 Costa Rica Chile Nicaragua Peru Ecuador Bolivia Venezuela Mexico 10 Haiti 0 0 10 20 30 40 50 60 70 80 90 100 Media quality and independence (Index: 0-30=Not free, 31-60=Partially free, 60-100 Free) Policy dialogue and openness is key for financial accountability Source: OECD Development Centre, 2007. Based on Freedom House (2007) and ECLAC and OECD Revenue Statistics (2007).

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

30. Relying more on taxes to finance public spending enhances fiscal legitimacy Fiscal legitimacy (% trust taxes well spent) 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).

31. Fiscal policy is a powerful tool to promote democratic participation Voter turnout (2000-05 presidential elections) 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.

32. 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 on financial independence • It is not a technical but rather a political issue

33. 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

34. 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 