Nora Lustig Dept. of Economics and Stone Center, Tulane University

1. Commitment to Equity (CEQ):A Diagnostic and Ranking Tool of Latin American Governments’ Fiscal PoliciesFirst Phase: Wrap-Up Workshop CIPR & Inter-American DialogueTulane University, New OrleansOctober 27, 2010Revised Version: November 17, 2010 Nora Lustig Dept. of Economics and Stone Center, Tulane University Non-resident Fellow, Inter-American Dialogue

2. Outline of Workshop MORNING: • 9:00-11:45 Session 1: CEQ Diagnostics and Index: Background and Results in Three Pilot Countries: Argentina, Mexico and Peru Nora Lustig, CarolaPessino (via oovoo), John Scott and Miguel Jaramillo • 10:15-10:30 Break CONTENTS: Background of project and intellectual content & results of CEQ • What is the Commitment to Equity project? • CEQ Project: Background • Why a CEQ? Inequality, Poverty and Fiscal Policy in LA • CEQ Diagnostics: Description and Results Highlights for Pilot Studies: Argentina, Mexico and Peru Presentations by Scott, Pessino and Jaramillo • CEQ Index: Description and Preliminary Results for Mexico and Peru

3. Outline of Workshop 12- 1:30 --LUNCH: BROWN BAG (NORA’S COLLEAGUES FROM ECON DEPT WILL ATTEND; INCLUDING JIM ALM, EXPERT ON PUBLIC FINANCE) AFTERNOON: • 1:30-1:45 Break   • 1:45-3:30 Session 3: Taking Stock, Next Steps and Next Round of CEQ: Bolivia, Costa Rica and Uruguay Nora Lustig, George Gray Molina, MaximoRossi, Pablo Sauma (viaoovooorskype)  • 3:30-4:00 Wrap-up Nora Lustig will lead off CONTENTS:  • Preparing the CEQ, Intellectual Outputs and Intellectual Property • Taking Stock • Next Steps Brief Presentations by Gray, Rossi and Sauma 9. Wrap-up

4. 1. What is CEQ?

5. What is the Commitment to Equity Project? The CEQ project’s main purpose is to design and implement diagnostic and ranking tools to: • quantify, assess, compare, and publicize the extent to which Latin American governments use fiscal policies to reduce poverty and inequality • in ways that are broadly consistent with macroeconomic stability and growth

6. What is the Commitment to Equity Project? Basic Questions: • Do governments collect and allocate sufficient resources to substantially reduce poverty and human capital gaps and protect the poor from income fluctuations? • Do taxes and public spending patterns reduce inequality and by how much? • Are policies efficient and can spending be maintained? • Is information to monitor outcomes readily available and reliable, and is evaluation carried out?

7. What is the Commitment to Equity Project? • The CEQ project has two components: • CEQ Diagnostic: an assessment tool • CEQ Index: a scorecard

8. 1. What is the Commitment to Equity Project? • Focuses on government efforts rather than outcomes • Different from/complement to HDI , MDG Monitoring Reports and Equality of Opportunity Index at WB, for example • Based on “hard” data and not perceptions • Different from Transparency’s Corruption Index • Relies on primary sources of information and research • Different from PREAL’s Education Report Card • CEQ more analytical than other exercises (e.g., Pew’s GPP). More similar to public expenditure reviews, incidence analysis, or Jeff Sach’s needs assessments

9. 2. CEQ Project: Background

10. Background: Implementation of First Phase – Pilot Studies • Served to refine and adapt the questionnaire and indicators • Demonstrated that relying on secondary sources alone does not work (experience from Peru) • Demonstrated that diagnostic exercise takes several months of preparation and requires a highly skilled professional with expertise in poverty, incidence analysis and public finance • Demonstrated importance of homogenizing language and methods: CEQ needs a handbook/mindbook

11. Background: Implementation of First Phase – Pilot Studies • Served to identify unresolved issues with the CEQ Diagnostic & Index: • how best to estimate required resources in the face of idiosyncratic and adverse shocks: • Unemployment poverty gap (Carola’s method) • Increase in poverty due to systemic shocks (econ crisis, natural disasters, policy reforms, etc.); three studies used different methods • What is the “benchmark” to establish an ideal goal for the reduction of inequality? • For now we used regression analysis to compare country with international norm • Standardization of indicators & scores across countries when information is different (due to lack of data, for ex)

12. 3. Why a CEQ? Inequality, Poverty and Fiscal Policy in LA (Section 2 of Lustig’s paper)

13. Europe after taxes & transfers Europe before taxes & transfers

14. Why a CEQ? Fiscal Policy in LA: Little Redistribution • Before direct taxes and monetary transfers Gini is 13 percent higher than the European average while disposable income Gini is 60 percent higher • Adding in-kind transfers (spending on education and health), the redistributive impact is larger but still limited. • Incidence analysis finds a fairly flat distribution of social spending across income quintiles in Latin America

15. 4. CEQ Diagnostics: Description and Main Results for Pilot Studies: Argentina, Mexico and Peru (Section 3 of Lustig’s paper and Diagnostics for Argentina, Mexico and Peru)

16. What is CEQ Diagnostics? • CEQ Diagnostic is an assessment tool to quantify and evaluate how aligned fiscal policies are with two principal policy objectives: • supporting a minimum living standard and • reducing income inequality.

17. The Redistributive Power of the State: Three Main Mechanisms

18. Policy Instruments Covered • Monetary transfers • Subsidies to consumption goods and (some) producer subsidies (e.g., agriculture) • In-kind transfers through the fully or partially subsidized provision of goods and services particularly in the area of education and health • Taxes on income, consumption and assets (including tax expenditures)

19. CEQ Diagnostic: What form does it take? • CEQ Diagnostics’is a questionnaire whose theoretical underpinning can be found in: • economics of the welfare state and • criteria-based approach. • Indicators derived from standard poverty and inequality analysis, fiscal incidence analysis and public finance • Experimenting with approaches to generate indicators in areas not well developed in the literature (e.g., estimate resources required due close poverty gaps caused by systemic or idiosyncratic shocks) • It uses static incidence analysis; it does not include behavioral responses or general equilibrium effects.

21. Standards in CEQ: Two Policy Objectives

22. Policy Objective 1: Supporting a minimum living standard has 4 elements • poverty reduction: ensuring that everyone has a minimum level of consumption • insurance: preventing individuals from falling (or falling further) below the minimum level of consumption due to adverse shocks, both idiosyncratic (unemployment, illness, bad harvests, etc.) and systemic (economic crises, natural disasters, spikes in food prices, etc.) • income smoothing:ensuring that a minimum level of consumption is achieved throughout an individual’s life-cycle (maternity/paternity leave and retirement, in particular) • building poor people’s human capital: ensuring that everyone has a minimum level of education and health.

23. Criteria in CEQ are 4

24. Indicators for PO 1: Synthesis (Fig 3)

25. Indicators for PO 2: Synthesis (Fig 4)

26. CEQ Diagnostic: Summing Up • CEQ has two standards or policy objectives 1. Supporting a minimum standard of living 2. Reducing inequality • First policy objective has four sub-standards: everyone has a minimum level of (1) consumption and (2) human capital (3) throughout the life-cycle and (4) in the face of adverse shocks • CEQ has four criteria: resources, equity, quality & accountability • CEQ has 71 indicators; 32 quantitative (Resources and Equity sections of questionnaire) and 39 “qualitative” (Quality and Accountability sections). Thirty one indicators require poverty, inequality and incidence analysis from a household survey (preferably, an income-expenditure survey)

27. CEQ Diagnostic: Summing Up • Primary data requirements: household survey (income expenditure surveys preferred) and detailed public sector accounts. => Incidence of government revenues and expenditures analysis • Calculate market, disposable, post-fiscal and final income (described below) • Imputation methods for in-kind income (health and education services provided by government free or quasi free) • Estimation of impact of indirect taxes (including tax expenditures) and subsidies requires consumption data at the household level • Government Revenues and Redistributive Spending • Calculate poverty gaps • Calculate progressiveness of revenues and expenditures

28. Methodology to answer questions under PO 1: Resources and Equity Definitions, Indicators and Data Requirements p. 13 of Lustig

29. Definition of Concepts • Income: market, disposable, post-fiscal and final • Government revenues • Redistributive spending • Poverty Gaps

30. Definitions of Income: Market, Disposable, Post-Fiscal and Final Income (Lustig, p. 20)

31. Definition of Government Revenue • Includes the total budgetary income of the federal government: • tax and non-tax revenue • plus income generated by direct budgetary controlled entities or public enterprises • In countries where revenue collected at the provincial or state level is important, the total will include the revenues obtained by governments at the subnational level

32. Fig 5: Redistributive vs Social Spending

33. Indicators for Policy Objective 1: RESOURCES : • Must determine whether resources collected and allocated to redistributive spending are sufficient to close all the pre-transfers gaps. • Steps: • Calculate total government revenues • Calculate redistributive spending • Calculate total requirements: add up all the pre-transfers gaps (details next slides) • Calculate ratio of total requirements to a. government revenues and b. government redistributive spending • If ratios “substantially” lower than unity, means total fiscal and redistributive space is ample • If ratios close or above unity, government efforts in collecting resources and/or allocating them for redistributive purposes are insufficient

34. Indicators for Policy Objective 1: RESOURCES : Pre-Transfers Gaps TOTAL INCOME POVERTY GAPS (pre-Transfers) • Total Income Transfers Poverty Gap • Total Pensions Gap • Total Unemployment Compensation Gap • Total Systemic Shock Gap (economic crisis, rising food prices, natural disasters, epidemics) TOTAL OPPORTUNITY GAPS (pre-Transfers) TOTAL HUMAN CAPITAL GAPS (pre-Transfers) • Total Education Coverage Gap • Total Health Coverage Gap TOTAL INFRASTRUCTURE GAPS (pre-Transfers) • Total Drinkable Water Gap • Total Electricity Gap • Total Sewerage Gap • Total Access to Markets Gap • Total Housing Gap

35. Estimating the Relevant Poverty Gaps: Definition of Variables

36. Total RequirementsTotal (Pre-Transfers) Income Poverty Gaps

37. Total Requirements (cont)Total (Pre-Transfers) Human Capital Gaps

38. Total (Pre-Transfers) Requirements (TR)Total (Pre-Transfers) Gaps

39. Example: Mexico (Scott, 2010) • Must determine whether resources collected and allocated to redistributive spending are sufficient to close all the pre-transfers gaps. • Steps: • Calculate total government revenues • Calculate redistributive spending • Calculate total requirements: add up all the pre-transfers gaps (details next slides) • Calculate ratio of total requirements to a. government revenues and b. government redistributive spending • If ratios “substantially” lower than unity, means total fiscal and redistributive space is ample • If ratios close or above unity, government efforts in collecting resources and/or allocating them for redistributive purposes are insufficient

40. Example: Mexico (Scott, 2010)Indicators for Policy Objective 1: RESOURCES : Pre-Transfers Gaps TOTAL INCOME POVERTY GAPS (pre-Transfers) • Total Income Transfers Poverty Gap • Total Pensions Gap • Total Unemployment Compensation Gap • Total Systemic Shock Gap (economic crisis, rising food prices, natural disasters, epidemics) TOTAL OPPORTUNITY GAPS (pre-Transfers) TOTAL HUMAN CAPITAL GAPS (pre-Transfers) • Total Education Coverage Gap • Total Health Coverage Gap TOTAL INFRASTRUCTURE GAPS (pre-Transfers) • Total Drinkable Water Gap • Total Electricity Gap • Total Sewerage Gap • Total Access to Markets Gap • Total Housing Gap

41. Example: Mexico (Scott, 2010)(2009 Billion Mx$; z = US$4 a day) • PO1 - RESOURCES

42. Example: Mexico (Scott, 2010)PO 1 - RESOURCES

43. Indicators for Policy Objective 1 EQUITY Remember that EQUITY measures whether: i. existing programs are adequate ii. allocation of redistributive spending is consistent with supporting a minimum standard of living for everybody iii. coverage among the poor iv. leakages to non-poor

46. Indicators for Policy Objective 1 EQUITY Remember that EQUITY measures whether: i. existing programs are adequate ii. allocation of redistributive spending is consistent with supporting a minimum standard of living for everybody iii. coverage among the poor iv. leakages to non-poor

47. Indicators for Policy Objective 1 EQUITY • Must determine whether resources allocated to the poor per relevant category are sufficient to close each and all the after-transfers gaps. • Steps: • Calculate government spending per relevant category • Calculate additional requirements per category (details next slides) • Calculate difference in spending per relevant category minus additional requirements in relevant categories • If positive, government is spending sufficient resources in the relevant category to potentially close the gap • If negative (or zero), government efforts in terms of how much it is spending on the relevant gaps are insufficient

48. Indicators for Policy Objective 1: EQUITY INCOME POVERTY GAPS • Income Transfers Poverty Gap • Pensions Gap • Unemployment Compensation Gap • Systemic Shock Gap (economic crisis, rising food prices, natural disasters, epidemics) OPPORTUNITY GAPS: HUMAN CAPITAL GAPS • Education Coverage Gap • Health Coverage Gap INFRASTRUCTURE GAPS • Drinkable water • Electricity • Sewerage • Access to markets

49. Additional RequirementsAfter Transfers Income Poverty Gaps

50. Additional RequirementsAfter-Transfers Human Capital Gaps