Nora Lustig Dept. of Economics and Stone Center, Tulane University Non-resident Fellow, Inter-American Dialogue

Commitment to Equity (CEQ):A Diagnostic and Ranking Tool of Latin American Governments’ Fiscal Policies

First Phase: Wrap-Up Workshop CIPR & Inter-American DialogueTulane University, New Orleans

October 27, 2010Revised Version: November 17, 2010

Nora LustigDept. of Economics and Stone Center, Tulane University

Non-resident Fellow, Inter-American Dialogue

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MORNING:• 9:00-11:45 Session 1: CEQ Diagnostics and Index: Background and Results in Three Pilot Countries:

Argentina, Mexico and PeruNora Lustig, Carola Pessino (via oovoo), John Scott and Miguel Jaramillo

• 10:15-10:30 Break

CONTENTS: Background of project and intellectual content & results of CEQ

1. What is the Commitment to Equity project?

2. CEQ Project: Background

3. Why a CEQ? Inequality, Poverty and Fiscal Policy in LA

4. CEQ Diagnostics: Description and Results Highlights for Pilot Studies: Argentina, Mexico and Peru

Presentations by Scott, Pessino and Jaramillo

5. CEQ Index: Description and Preliminary Results for Mexico and Peru 2

Outline of Workshop

Outline of Workshop12- 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, Maximo Rossi, Pablo Sauma (via oovoo or skype)

• 3:30-4:00 Wrap-upNora Lustig will lead off

CONTENTS:

6. Preparing the CEQ, Intellectual Outputs and Intellectual Property7. Taking Stock 8. Next Steps

Brief Presentations by Gray, Rossi and Sauma

9. Wrap-up3

1. What is CEQ?

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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

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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?

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What is the Commitment to Equity Project?

• The CEQ project has two components:

–CEQ Diagnostic: an assessment tool

–CEQ Index: a scorecard

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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

2. CEQ Project: Background

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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

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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)16

3. Why a CEQ? Inequality, Poverty and Fiscal Policy in LA

(Section 2 of Lustig’s paper)

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Latin America and Europe: Disposable Income (After Taxes and Transfers) and Market Income (Pre-Taxes and Transfers) Inequality

(Gini Coefficients) Source: Lopez and Perry (2007), p. 18.

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Europe after

taxes & transfers

Europe before taxes &

transfers

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

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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)

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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.

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The Redistributive Power of the State: Three Main Mechanisms

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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)

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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.

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Standards in CEQ: Two Policy Objectives

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Policy Objective 1: Supporting a minimum living standard has 4

elements1. poverty reduction: ensuring that everyone has a minimum

level of consumption2. 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.)

3. income smoothing: ensuring that a minimum level of consumption is achieved throughout an individual’s life-cycle (maternity/paternity leave and retirement, in particular)

4. building poor people’s human capital: ensuring that everyone has a minimum level of education and health. 31

Criteria in CEQ are 4

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Indicators for PO 1: Synthesis (Fig 3)

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Indicators for PO 2: Synthesis (Fig 4)

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CEQ Diagnostic: Summing Up• CEQ has two standards or policy objectives

1. Supporting a minimum standard of living2. 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) 35

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 expenditures36

Methodology to answer questions under PO 1: Resources and Equity

Definitions, Indicators and Data Requirementsp. 13 of Lustig

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Definition of Concepts

• Income: market, disposable, post-fiscal and final

• Government revenues

• Redistributive spending

• Poverty Gaps40

Definitions of Income: Market, Disposable, Post-Fiscal and Final Income

(Lustig, p. 20)

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Table 1. Definition of Income Concepts Market Income = ym Earned + Unearned Market Incomes (monetary

and non monetary) before government taxes and transfers of any sort

Disposable Income = yd Market Income plus direct monetary transfers minus direct taxes (including direct tax expenditures)

Post-fiscal Income = ypf Disposable Income plus indirect subsidies minus indirect taxes (including indirect tax expenditures)

Final Income = yf Post-fiscal Income plus in-kind transfers and minus in-kind taxes

Source: author’s elaboration based on various documents

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

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Fig 5: Redistributive vs Social Spending

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SOCIAL SPENDING

REDISTRIBUTIVE SPENDING

--Health --Education--Social Assistance

--Public Goods (couldbe included in Redist)--Social Security

--"Social" Producer Subsidies--Consumption Subsidies--Subsidized Portion of Social Security Pensions--"Social" Tax Expenditures

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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:1. Calculate total government revenues2. Calculate redistributive spending3. Calculate total requirements: add up all the pre-transfers gaps (details

next slides) 4. Calculate ratio of total requirements to a. government revenues and

b. government redistributive spendingÞ If ratios “substantially” lower than unity, means total fiscal and redistributive

space is ampleÞ If ratios close or above unity, government efforts in collecting resources

and/or allocating them for redistributive purposes are insufficient

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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

Estimating the Relevant Poverty Gaps: Definition of Variables

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z = income poverty line (US$2.50 and US$4 PPP a day, extreme and moderate, respectively) Education “poverty line:” Critical level of schooling is completion of 12 years of schooling. Poor is

defined as people whose disposable income yd is below the corresponding poverty line (US$2.50 and US$4 PPP a day).

Health “poverty line:” critical level of health coverage is universal health coverage of the poor. Poor is defined as people whose disposable income yd is below the corresponding poverty line (US$2.50 and US$4 PPP a day).

ŷ = “net” average income of the poor ((US$2.50 and US$4 PPP a day) Q = number of poor (US$2.50 and US$4 PPP a day) yd = disposable income of the poor: Market Income plus direct monetary transfers (targeted

transfers, workfare/ non-contributory unemployment compensation, non-contributory pensions, etc.) minus direct taxes (including direct tax expenditures) (see Table 2). Unless otherwise specified, it is assumed that the incomes reported in household surveys are net of direct taxes in the case of the poor. (US$2.50 and US$4 PPP a day)

Total RequirementsTotal (Pre-Transfers) Income Poverty Gaps

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Total Income Transfers Poverty Gap: TITG = (z - ŷT) QT, where ŷT is the average shortfall for the “income transfers poor” calculated as ŷT = Σ (ydi

– targeted cash transfer programsi)/ QT Total Unemployment Compensation Gap: TUG= (z - ŷl U) QU, where ŷl U is the average shortfall for the “unemployment compensation poor” calculated as ŷil U = Σ (ydil – workfare programs/ non-contributory unemployment benefitsi)/ Qu, for the unemployed and underemployed, where the subscript l, refers to labor income Total Pensions Gap: TPG= (z - ŷP) QP, where ŷP is the average shortfall for the “pension poor” calculated as ŷP = Σ (ydiP – minimum/non-contributory pensions for poor people 65 or olderi)/ QP

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

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Total Education Coverage Gap: TEG = [(Public spending on education by level/ students by level * Total (disposable income) poor population in schooling age by level) + Opportunity cost] Total Health Coverage Gap: THG = [Cost of Basic Health Insurance/ insured person * Number of (disposable income) Poor]

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

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Requirements to Close Pre-Transfers Total Income Poverty Gap: TRI = TITG + TUG + TPG Requirements to Close Pre-Transfers Total Human Capital Gap TRHK = TEG + THG Requirements to Close Pre-Transfers Total Overall Poverty Gap TR = TRI + TRHK

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Example: Mexico (Scott, 2010)• Must determine whether resources collected and allocated

to redistributive spending are sufficient to close all the pre-transfers gaps.

• Steps:1. Calculate total government revenues2. Calculate redistributive spending3. Calculate total requirements: add up all the pre-transfers gaps

(details next slides) 4. Calculate ratio of total requirements to a. government revenues

and b. government redistributive spendingÞ If ratios “substantially” lower than unity, means total fiscal and

redistributive space is ampleÞ If ratios close or above unity, government efforts in collecting resources

and/or allocating them for redistributive purposes are insufficient

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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

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Example: Mexico (Scott, 2010)(2009 Billion Mx$; z = US$4 a day)

• PO1 - RESOURCES1.Total Government Revenues = 2,824.70 2,824.702.Total Redistributive Spending = 1,699.10 1,699.103.Total Requirements to Close (Pre-Transfers) = TR = 240.1 460.2

1.Total Income Tranfers Gap = TITG = 48.2 81.52.Total Pension Gap = TPG = 15.1 40.03.Total Human Capital Gaps = TRHK = 159.4 309.44.Total Systemic Shock Gap = 17.4 29.4

4.Ratio of 3/1 (in %)= 8.5 16.35.Ratio of 3/2 (in %) = 14.1 27.1

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

Resources: measures whether government revenues and redistributive spending are potentially consistent with what would be required for supporting a minimum standard of living. R1. Does the government collect sufficient combined resources to:

R1.1 Close the total income poverty gap (transfer, unemployment and pension gaps combined? YES R1.2 Close the overall poverty gap (transfer, unemployment and pension gaps plus human capital gaps combined)? YES R1.3 Protect the poor from the impact of systemic shocks? YES

R2. Is redistributive spending potentially sufficient to:

R2.1 Close the total income poverty gap (transfer, unemployment and pension gaps combined? YES R2.2 Close the overall poverty gap (transfer, unemployment and pension gaps plus human capital gaps combined)? YES R2.3 Protect the poor from the impact of systemic shocks? YES

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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 everybodyiii. coverage among the pooriv. leakages to non-poor

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Equity: measures whether menu of programs and allocation of redistributive spending is actually consistent with supporting a minimum standard of living. E1. Is the menu of anti-poverty, insurance, income smoothing and human capital building programs targeted to the poor (including targeted price subsidies) adequate ? List them

a. Are there conditional or unconditional cash transfer programs? b. Are there programs for the unemployed poor (e.g., workfare programs)? c. Are there programs to protect poor households from the financial impact of illness,

disability or death? d. Are the poor covered by non-contributory health insurance? e. Are there programs to prevent people from falling into poverty during old age? f. Are there programs or policies specifically addressed to building human capital and

assets of the poor: • early childhood development for poor children? • pregnant and lactating poor women? • poor youth at risk? • increase school attendance of the poor (e.g., scholarships, CCTs)? • improve the poor’s nutrition and health (e.g., food coupons, subsidized basic

foodstuffs, nutritional supplements, etc.)? • improve the poor’s access to housing? • improve the poor’s access to energy (e.g., differential prices)?

improve the poor’s access to credit and private insurance? • empower the poor? • reduce social exclusion and discrimination? • achieve other socially desirable objectives?

g. Other programs E2. Is government spending on each of the following programs sufficient to eliminate the corresponding gaps?

a. flagship targeted cash transfers b. insurance for the unemployed or workfare c. non-contributory pension program d. of a, b and c combined e. education spending (supply of services and demand subsidies) f. non-contributory health insurance g. of d, e and f combined

E3. Do programs that compensate the poor from the costs of systemic shocks (natural disasters, economic crises, epidemics, rising food and fuel prices and policy reforms) exist? List them E.4 Is spending on these programs enough to eliminate the increase in extreme and total income poverty associated with systemic shocks?

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Equity: measures whether menu of programs and allocation of redistributive spending is actually consistent with supporting a minimum standard of living. (continued)

E5. What is the coverage rate for the extremely and total poor of the following programs?


E6. What proportion of total benefits in the following program reaches the extremely and moderately poor as well as the bottom 20 and top 20 percent of the population?


E 7. In the event that fiscal cuts must be made, are transfer programs and non-contributory unemployment insurance and pension programs targeted to the poor protected from cuts?

E 8. Are per capita benefits adjusted for changes in cost of living for the poor whenever necessary?

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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 everybodyiii. coverage among the pooriv. leakages to non-poor

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• Must determine whether resources allocated to the poor per relevant category are sufficient to close each and all the after-transfers gaps.

• Steps:1. Calculate government spending per relevant category2. Calculate additional requirements per category (details

next slides) 3. Calculate difference in spending per relevant category

minus additional requirements in relevant categoriesÞ If positive, government is spending sufficient resources in the

relevant category to potentially close the gapÞ If negative (or zero), government efforts in terms of how much it

is spending on the relevant gaps are insufficient

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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

Additional RequirementsAfter Transfers Income Poverty Gaps

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After-Transfers Income Transfers Poverty Gap: ITG = [GTP - TITG], where GTP is the actual government spending on transfers for the (disposable income) poor; it can be obtained directly from household surveys when questionnaires ask households for this information; otherwise it has to be imputed. After-Unemployment Benefits Unemployment Compensation Gap: UG = [GUP - TUG], where GUP is the actual government spending on unemployment benefits for the (disposable income) unemployed poor; it can be obtained directly from household surveys when questionnaires ask households for this information; otherwise it has to be imputed. After-non-contributory Pension Pensions Gap: PG = [GPP - TPG], where GPP is the actual government spending on pensions for the (disposable income) poor 65 or older; it can be obtained directly from household surveys when questionnaires ask households for this information; otherwise it has to be imputed.

Additional RequirementsAfter-Transfers Human Capital Gaps

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After-Education Transfers Education Coverage Gap: EG = [GEP - TEG], where GEP is the actual education spending on the (disposable income) poor by level + Demand-side subsidies by level going to the poor. GEP is calculated by multiplying the number of children in (disposable income) poor households attending school times the relevant cost (public spending) per student plus the actual demand-side subsidies given to (disposable income) poor households. After-Health Transfers Health Coverage Gap: HG = [GHP - THG], where GHP is the actual health spending on the (disposable income) poor. GHP is calculated by estimating the amount of free health-related goods and services received by the (disposable income) poor.

Total Additional Requirements (AR)Total (After-Transfers) Gaps

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Additional Requirements to Close After-Transfers Income Poverty Gap: ARI = ITG + UG + PG Additional Requirements to Close After-Transfers Human Capital Gap ARHK = EG + HG Additional Requirements to Close After-Transfers Overall Poverty Gap AR = ARI + ARHK

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PO1 - EQUITY (2009 MX$ in Millions (millones))1. Government spending on transfers for the poor 78,960 140,9072. Total income gap 80,732 150,836 3. Additional resources to close income gap (1 - 2) -1,772 -9,930

4. Government spending on human capital for the poor 111,365 217,5565. Total HK gap 159,413 309,430 6. Additional requirements to close the HK gap (4 - 5) -48,048 -91,874

TOTAL SHORTFALL -49,820 -101,803As a share of Government Revenues (in %) -1.8 -3.6As a share of Redistributive Spending (in %) -2.9 -6.0

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Equity: measures whether menu of programs and allocation of redistributive spending is actually consistent with supporting a minimum standard of living. E2. Is government spending on each of the following programs sufficient to eliminate the corresponding gaps?

a. flagship targeted cash transfers YES, IN THE ABSENCE OF SYSTEMIC SHOCKS

b. non-contributory pension program NO c. education spending (supply of services and demand subsidies)

NO d. non-contributory health insurance NO

E.4 Is spending on targeted programs enough to eliminate the increase in extreme and total income poverty associated with systemic shocks? NO

Calculating Systemic Shocks Poverty Gaps (econ crisis, nat disaster, policy reform,

etc.• Three different methods:

– Arg (frequency of economic crisis, average impact on GDP; impact on poverty calculated using a poverty/growth elasticity)

– Mx (“arithmetic” calculation of additional income poverty due to 2008-2009 recession)

– Pe (probability of facing shock by the poor and estimated income loss for the poor due to a shock using regression analysis)

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• R1. Does the government collect sufficient combined resources to:– R1.1 Close the total income poverty gap (transfer, unemployment

and pension gaps combined?– R1.2 Close the overall poverty gap (transfer, unemployment and

pension gaps plus human capital gaps combined)?

• ANSWER: in Argentina, Mexico and Peru, government revenues are more than sufficient to close the income (orange highlight) and overall poverty (green highlight) gaps

See Table 1 in next slide (it will also be available in hard copy)70

Example PO 1 Resources: Questions 1.1, 1.2

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PRELIMINARY TABLE 1: REQUIRED RESOURCES TO CLOSE THE OVERALL POVERTY AND INCOME GAPS AS A % OF TOTAL GOV REVENUES(This table summarizes the results corresponding to PO1, Resources, Question 1)

% OF GOV REVENUES% OF GDP GINI H $2.5 H $4 REV/GDP

EXT MOD EXT MOD (in %) (in %)(in %)ARGENTINA (2009) - GDP/CAP US$14413 34.2*Overall pov gap (before transfers excpt noncontrib pens) 6.8 14.2 2.1 4.5 0.47 10.4 20Overall Poverty Gap (before all transfers & after taxes) 9 17.2 2.8 5.4 14.7 25Transfers pov gap 2.21 5.33 0.69 1.67MEXICO (2008)- GDP/CAP US$14560 23.7Overall Poverty Gap (before all transfers & after taxes) 8.6 16.4 2 3.8 0.51 14.6 28Transfers pov gap 1.7 2.9 0.4 0.69NOTE: PERU IS NOT COMPARABLE (see 1. below) H $1.7H $3 H $1.7 H $3PERU (2009)- GDP/CAP US$8580 0.48 12.6 36 18.04Systemic Shock Poverty Gap na na na 0.17Education Spending Gap (as a % of soc spend) 28.1 na 5.1 naIncome pov gap (disp income) 3.4 na 0.62 naSOURCE: For Argentina, Pessino (2010), for Mexico, Scott (2010) and for Peru, Jaramillo (2010); otherwise specified.

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na= not available; yellow highlights "comparable"NOTES:1. In Peru, the gaps are calculated as additional resources (that is, to estimate pov gap one uses disp income instead of before transfers income) and social spending is used instead of redistributive spending. The education spendinggap was estimated as the resources required to subsidize the demand for education of all the high-school drop-outsyounger than 29 years old2. Extreme (moderate) poverty lines is 2.50 (4.0) PPP dollars a day; Peru used national poverty lines equal to U$1.7 and US$3 current dollars3. For definitions of redistributive spending see Lustig (2010).4. H are the headcount ratios.5. GDP/capita in PPP dollars using 2005 international prices; source World Bank, WDI6. EXT and MOD compares requirements for eliminating extreme and total poverty, respectively, vs revenues and redist spending 7. "After non-contributory pensions" is "before all transfers& after taxes" plus non-contributory pensions8. Government revenues for Argentina include federal and provincial revenues except for non-tax provincial revenues.

Results from three pilots: authors’ presentations (15 mins. each)

• Carola Pessino, Argentina– Tracking the impact on poverty and inequality

• John Scott, Mexico– Matrix of needs vs. available resources

• Miguel Jaramillo, Peru– Learning by doing

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CEQ: ArgentinaImpact of Fiscal Policies on

Poverty and Inequality

Carola PessinoUniversidad Torcuato di Tella

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Argentina: Impact of Monetary and In-kind Transfers on Headcount, Pov Gap and

Gini (Pessino, 2010)Table Poverty Rate and Gap and GINI calculated from EPH directly before and After monetary and in-kind Transfers

Argentina-1st Semester 2009

2.5 US$FGT0 14.7 10.2 8.9 2.2 1.0 1.0 0.7 5.4FGT1 8.5 4.8 3.8 0.9 0.4 0.4 0.3 1.8Absolute Change in FGT0 -4.5 -5.8 -12.5 -13.7 -13.7 -14 -9.3Relative Change in FGT0 -30.6% -39.5% -85.0% -93.2% -93.2% -95.2% -63.3%4 US$FGT0 24.9 20 18.9 7.4 4.0 3.9 2.7 15.7FGT1 12.8 8.7 7.6 2.3 1.1 1.0 0.8 5Absolute Change in FGT0 -4.9 -6 -17.5 -20.9 -21 -22.2 -9.2Relative Change in FGT0 -19.7% -24.1% -70.3% -83.9% -84.3% -89.2% -36.9%Gini coefficient 0.499 0.468 0.461 0.399 0.378 0.377 0.366 0.444RS= Absolute Change in Gini -0.031 -0.039 -0.100 -0.121 -0.122 -0.133 -0.055Percentage Change in Gini -6.2% -7.7% -20.0% -24.3% -24.4% -26.7% -11.0%

* With monetary transfers and Subsidy per Child (does not include Education, Health and Food)

With Subsidy per Child

Without in Kind Transfers*

Pre_moratorium Pensions

After Moratorium

After Monetary Transfers

After Education expenditure

After Health Expenditure

After Food Subsidy

CEQ MexicoEstimating the Poverty Gaps

John ScottCIDE and CONEVAL

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PO1: Resources Resources Needs

Poverty

line Million pesos Total Gap Poverty Gap (2008) HK Gap Social Security

Gap

All Age 65+ Age 5- Total Education

Gap Health

Gap Pension

Gap Shock Gap

Gap after transfers <2.5 52,235 34,388 13,660 4,187 <4 99,678 62,607 29,267 7,804 Gap before transfers <2.5 240,145 48,206 3,574 7,025 159,413 105,132 54,280 15,133 17,393

<4 460,266 81,451 5,450 11,766 309,430 197,341 112,089 39,998 29,388

Total Revenue <2.5 2,824,741 8.5% 1.7% 0.1% 0.2% 5.6% 3.7% 1.9% 0.5% 0.6%

<4 16.3% 2.9% 0.2% 0.4% 11.0% 7.0% 4.0% 1.4% 1.0% Redistributive Spending <2.5 1,699,091 14.1% 2.8% 0.2% 0.4% 9.4% 6.2% 3.2% 0.9% 1.0%

<4 27.1% 4.8% 0.3% 0.7% 18.2% 11.6% 6.6% 2.4% 1.7%

Social Spending <2.5 1,326,540 18.1% 3.6% 0.3% 0.5% 12.0% 7.9% 4.1% 1.1% 1.3%

<4 34.7% 6.1% 0.4% 0.9% 23.3% 14.9% 8.4% 3.0% 2.2% Targeted (anti-poverty, net of admin 10%)

<2.5 183,009 131.2% 26.3% 2.0% 3.8% 87.1% 57.4% 29.7% 8.3% 9.5%

<4 251.5% 44.5% 3.0% 6.4% 169.1% 107.8% 61.2% 21.9% 16.1%

Education <2.5 432,446 24.3% <4 45.6% Health <2.5 324,201 16.7% <4 34.6% Social Security: Old Age <2.5 338,483 1.1% 4.5% <4 1.6% 11.8%

PO1: Equity (resources reaching poor) Resources Needs

Poverty

line %

Share Million pesos Total Gap Poverty Gap (2008) HK Gap Social Security

Gap

All Age 65+ Age 5- Total Education

Gap Health

Gap Pension

Gap Shock Gap

Gap before transfers <2.5 240,145 48,206 3,574 7,025 159,413 105,132 54,280 15,133 <4 460,266 81,451 5,450 11,766 309,430 197,341 112,089 39,998 Redistributive Spending

<2.5 10.5% 177,610 135% 27% 2% 4% 90% 59% 31% 9% 10%

<4 21.1% 358,442 128% 23% 2% 3% 86% 55% 31% 11% 8%

Social Spending <2.5 12.5% 165,508 145% 29% 2% 4% 96% 64% 33% 9% 11%

<4 24.6% 326,229 141% 25% 2% 4% 95% 60% 34% 12% 9% Targeted (anti-poverty) <2.5 37.2% 68,014 353% 71% 5% 10% 234% 155% 80% 22% 26%

<4 59.4% 108,713 423% 75% 5% 11% 285% 182% 103% 37% 27%

Education <2.5 16.4% 70,744 149% <4 31.2% 134,734 146% Health <2.5 12.5% 40,620 134% <4 25.5% 82,822 135% Social Security: Old Age <2.5 3.2% 10,946 33% 138%

Measures of Tax Progressivity

Personal Income Tax VAT

Mexico Benchmark (Lora)

Mexico Benchmark (Lora)

Median Most

Progressive Median Most

Progressive Kakwani 0.32320 0.15600 0.33800 0.01460 -0.08900 0.07000 Change in Gini (Reynolds- Smolensky) -0.00960 -0.00006 -0.00200 -0.00080 0.00009 -0.00003

Change in Gini with revenue redistributed equally (Lora)

-0.02370 -0.01600 -0.03100 -0.02710 -0.02500 0.04000

Source: Mexico: SHCP 2009. LA: Eduardo Lora, 2007, “Trends and Outcomes of Tax Reform,” in The State of State Reform in Latin America (Table 6.8, p. 204).

Gráfica 3 Ingresos Tributarios como porcentaje del PIB

Fuente: CEPAL (2010), *Promedio para países del Caribe, excluye contribuciones a la seguridad social.

9.4 9.5

11.6

13.7 14.2 14.6 1515.9

16.5 16.517.4

18.4

20.921.7 21.7

23.1 23.3

26.3

30.6

35.5

0

5

10

15

20

25

30

35

40

CI Education

Brasil, 1997

México, 1992

Ecuador, 1999

Bolivia, 2002

Nicaragua, 2005

Honduras, 2004

R Dominicana, 1998

Guatemala, 2000

Jamaica, 2000

Paraguay, 1998

Perú, 2004

América Latina

Panamá, 2003

México, 2006

Colombia, 2003

Costa Rica, 2004

Argentina, 2003

Uruguay, 2003

Chile, 2006

-0.300 -0.250 -0.200 -0.150 -0.100 -0.050 - 0.050 0.100 0.150

Source: ECLAC 2007; Mexico: own estimations based on ENIGH 1992, 2006.

CI Health

Perú, 2004

Bolivia, 2002

México, 1996

México, 2006

Brasil, 1997

Guatemala, 2000

Argentina, 2003

Panamá, 2003

Nicaragua, 2005

Ecuador, 1999

Honduras, 2004

América Latina

El Salvador, 2002

Costa Rica, 2004

Colombia, 2003

Uruguay, 2003

Chile, 2006

-0.8 -0.6 -0.4 -0.2 0 0.2 0.4

Source: ECLAC 2007; Mexico: own estimations based on ENIGH 2006,

CI Pensions

Honduras, 2004Colombia, 2003

Guatemala, 2000Perú, 2004

Panamá, 2003Costa Rica, 2004

América LatinaMéxico, 2006

Brasil, 1997Ecuador, 1999

TurkeyUruguay, 2003

PortugalBolivia, 2002

PolandFranceAustria

ItalyLuxembourg

GreeceArgentina, 2003

GermanySpain

JapanHungary

Slovak RepublicUnited StatesBelgium

OECD-27Czech Republic

CanadaNetherlands

SwitzerlandSweden

United KingdomNorway

IrelandNew Zealand

FinlandAustralia

Denmark

-0.600 -0.400 -0.200 0.000 0.200 0.400 0.600 0.800Coeficientes de Concentración

Source: OECD 2008; ECLAC 2007; Mexico: own estimations based on ENIGH 2006.

Indices de Concentración para el gasto público redistributivo: 2008

Fuente: calculos del autor a partir de ENIGH 2008 , el “Modulo de Programas Sociales” levantado con la ENIGH 2006 (Sedesol), y bases administrativas de ASERCA.

OportunidadesIMSS-Oportunidades

Piso Firme (2006)PET (2006)

Seguro Popular Adultos mayores Fed

SSA CentrosDespensa DIF (2006)

Edu PrimariaSSA Hosp.

Edu PreescolarEdu Secundaria

Desayunos DIF (2006)Vivienda (Tu Casa) (2006)

Otros dirigidosCrédito Palabra (2006)

Liconsa (2006)Habitat (2006)

Edu Media SuperiorOpciones Productivas (2006)

Transferencias total Subsidio Electrico (2006)

Gasto Fiscal IVASubsidio para el empleo

Salud IMSSSubsidio Gas LP

Edu SuperiorPROCAMPO (tierras, 2006)Becas públicas (excl. Oport.)

Salud PEMEX, FAAdultos mayores DFSubsidio Gasolinas (IEPS)

Salud ISSSTEGini

Pensiones IMSSPensiones ISSSTE

Pensiones PEMEX, FA

-0.80 -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80

Subs. Agric (2006)

Regresivos (concentración en población de ingresos medios y altos)

Progresivos (concentración en población de ingresos bajos)

Aumentan desigualdad

Gráfica 6 Coeficientes de Concentración y gasto público por programa: 2008 (tamaño de burbujas proporcional a magnitud de gasto)


Opciones Productivas

PET

Vivienda (Tu Casa)

Habitat

Liconsa

Desayunos DIF

Adultos mayores DF

IMSS-Oportunidades

Becas públicas (excl. Oport.)

Adultos mayores Fed

Salud PEMEX, FA

PROCAMPO

Pensiones PEMEX, FA

Salud ISSSTE

Subsidio para el empleo

Seguro Popular

Oportunidades

Edu Preescolar

Subs. Agric.

Pensiones ISSSTE

Edu Superior

Pensiones IMSS

Electrico Residencial

Edu Media Superior

Salud SSA

Edu Secundaria

Salud IMSS

Subsidio Gasolinas (IEPS)

Edu Primaria

Gasto Fiscal IVA

-0.80

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

Regr

esiv

oPr

ogre

sivo

Gráfica 5 Participación del 20% más pobre de la población en el gasto público: 2008


IMSS-Oport. Oportunidades

Piso Firme (2006)PET (2006)

Adultos mayores FedSeguro Popular

Despensa DIF (2006)SSA Centros

Otros dirigidosEdu Primaria

SSA Hosp. Edu Preescolar

Vivienda (Tu Casa) (2006)Edu Secundaria

Desayunos DIF (2006)Opciones Productivas (2006)

Crédito Palabra (2006)Habitat (2006)Transferencias total

Edu Media SuperiorLiconsa (2006)

Subsidio ElectricoGasto Fiscal IVA

Subsidio Gas LPEdu SuperiorPROCAMPO (tierras, 2006)

Becas públicas (excl. Oport.)Subsidio Gasolinas (IEPS)

Salud IMSSSalud PEMEX, FA

Subsidio para el empleoIngresos pre transf

Adultos mayores DFSalud ISSSTE

Pensiones IMSSSubs Agric (2006)Pensiones ISSSTEPensiones PEMEX, FA

0% 10% 20% 30% 40% 50% 60% 70%

CEQ PeruAre fiscal resources enough to

protect the poor?:Vulnerability vis-á-vis idiosyncratic

shocks. The case of Peru

Miguel Jaramillo BaananteGRADE – CEQ Project

The problem• High vulnerability vis-á-vis natural disasters,

compared to other Latin American countries.

• In 2007, 30.1% of Peruvian households (38.3% of poor households) experienced an idiosyncratic shock (loss of employment, loss of family business, serious health problem, delinquency victim, natural disaster).

• Natural disasters account for 38.8% of these shocks, 62.3% for households below the poverty line.

Estimating fiscal cost of shocks

• ¿Does Peru’s state have the financial capacity to protect poor households from these shocks?

• Fiscal cost = (Pr(s)*Hp) *Ch,donde Pr(s) is the probability of having a shock, Hp is

the number of poor households, and Ch is cost per hh.

• We know Pr(s) and Hp from household survey.

• We need to estimate Ch.

Estimating impact of shocks on poor households

• Mincer equation with dummy that identifies shocked households and interaction of having received shock and being poor.

Results

• Households that experienced a shock observe income 11.1% below those not suffering a shock. An additional 24.8% impact is associated to poor households.

• Subtracting 35.9% from the annual income of poor households that faced a shock and multiplying by the number of poor households that faced a shock we arrive at a figure of 229’500,000 USD, or 0.17% of GDP, which compares to government revenue of 18% of GDP.

Conclusion

• It is financially feasible for the Peruvian state to finance protection of the poor vis-á-vis natural disasters.

5. CEQ Index

(section 6 of Lustig’s paper)

94

CEQ Index

• CEQ Index is a scorecard designed to rank countries on how they use their fiscal powers to advance social equity as defined by the policy objectives and indicators outlined above.

• It is not perceptions-based. As such, differs from the WEF’s Global Competitiveness Report, Transparency International’s Corruption Perceptions, etc.

95

CEQ Index: Description and Preliminary Results for Mexico and Peru

• Questionnaires were not exactly the same• During pilot studies

– Questionnaire has been evolving– Indicators have been fine-tuned

96

98

Effort Score Effort Score Effort Total Resources 4.9 Resources 3.3 Resources 4.1Equity 5.2 Equity 4.6 Equity 4.9Quality 5.1 Quality 5.3 Quality 5.2Accountability 5.7 Accountability 4.3 Accountability 5.0

Policy Objective #1 5.2


Overall4.8

NOTE: Overall scores are based on averages.

NOTE: All BLUE NUMBERS are the result of formulas that use the entries of other cells. Only the individual scores in the Policy Objective Score Cards are entry based.

Commitment to Equity Index: MEXICO by Policy Objective and Effort

Policy Objective #1 Policy Objective #2Support a minimum standard of living Reduce income inequality

Overall Scores

99

4.1

4.95.2 5.0 4.8

0.0

2.0

4.0

6.0

8.0

10.0

Resources Equity Quality Accountability Overall

Scor

es

Commitment to Equity Index: Mexico10 - Maximum5 - Average0 - Minimum

100

Effort Score Effort Score Effort TotalResources 5.5 Resources 3.9 Resources 4.7Equity 2.9 Equity 4.3 Equity 3.6Quality 5.2 Quality 6.5 Quality 5.9Accountability 5.0

Accountability 4.6

Accountability 4.8



Overall4.7

NOTE: All BLUE NUMBERS are the result of formulas that use the entries of other cells. Only the individual scores in the Policy Objective Score Cards are entry based.

NOTE: Overall scores are based on averages.

Commitment to Equity Index: PERU by Policy Objective and Effort

Policy Objective #1 Policy Objective #2Support a minimum standard

of living Reduce income inequality

Overall Scores

101

Pending

• Overall “grade” has little variation. Develop a “true” index (John Scott’s suggestions)

• Re-visit weights?

• Standardization method to compare results across countries

102

From numbers to qualitative categories

• In the pilot version of CEQ Index we used words such as “mediocre” for the average score– The average score was set up at 5 (variables were

re-scaled)• Terminology may not be suitable (“too

aggressive”)

• An alternative proposal: see next slide

103

104

CEQ QUALITATIVE CATEGORIES Nora Lustig’s Proposal

October 23, 2010

CEQ INDEX: QUALITATIVE CATEGORIES

SCORE CATEGORY

9 and 10 Outstanding Commitment

7 and 8 Strong Commitment

5 and 6 Average Commitment (Average for LA)

3 and 4 Weak Commitment

1 and 2 No Commitment

6. Intellectual Outputs, Process and Intellectual Property

105

CEQ Diagnostics and CEQ Index: Project Outputs

• Four key outputs:–CEQ Diagnostic at the country level–CEQ Index, country report–CEQ Index, regional report–Interactive website/s

• In addition, there are derived outputs such as academic publications, training manuals, etc. 106

CEQ Diagnostics and CEQ Index: Process

• CEQ Diagnostic is prepared by an expert in the fields of poverty, inequality and incidence analysis (sponsoring institutions will pay 2,500 dollars per study—at a minimum); author can hire whomever they choose to help

• Once CEQ Diagnostic is completed, the author convenes a CEQ National Committee integrated with experts in the fields of poverty and inequality, public finance, public economics, labor economics, evaluation of social programs and macro-economics

107


• Members of the Committee should not be government officials or work in an organization which may create conflict of interest

• Based on the CEQ Diagnostic, each member assigns scores to every question at the one digit level (that is, Resources: R1, R2, etc.); scores can go from 1 to 10 (see Table 3 for correspondence between numbers and qualitative categories) 108


• Scores will be determined by the “distance” between the actual indicator and a pre-defined goal (ideal).

• The pre-defined goal can be:– endogenous and absolute (for example, allocate

enough resources to eradicate extreme poverty, where the amount of resources will depend on the poverty rates in the country in question) or

– exogenous and relative when indicators are subject to benchmarking (that is, when the country’s performance is compared with international norms).

109

CEQ Diagnostics and CEQ Index: Intellectual Property Rights

• CEQ Diagnostics • Outputs are published as internal reports

and/or academic outputs under the name of the respective author(s) who preserve(s) the intellectual property right to use it for teaching, research or other activities

• HOWEVER:

110

CEQ Diagnostics and CEQ Index: Intellectual Property Rights

• Lustig as coordinator and CIPR retain the right to be the first to publish the Diagnostic and derived academic outputs in any language; if there are no publication plans or no such publication takes place, the author is free to publish it somewhere else; author must request permission in writing

• AND in any and all reports, publications, presentations, etc., role of CIPR and the Dialogue must be acknowledged as sponsoring institutions; authors (Nora Lustig and collaborators) must be acknowledged as author of the CEQ Diagnostic tool and Index. Nora will send language.

111

CEQ Diagnostics and CEQ Index: Project Outputs and Intellectual Property Rights

• CEQ Index reports: – Regional Report: published and disseminated as “institutional”

outputs (Dialogue and Tulane’s CIPR and national institution in the case of country reports and CIPR and Dialogue for the regional report)

– contributions of CEQ’s author (N. Lustig & collaborators), authors of country CEQ Diagnostics, members of the National Committees and members of the AB are explicitly acknowledged

– National Report: published and disseminated by local institutions. Role of CIPR and the Dialogue must be acknowledged as sponsoring institutions; Nora Lustig & collaborators must be acknowledged as author of the CEQ Diagnostic tool and Index. CEQ Steering Committee will provide appropriate language

112

7. Taking Stock of First Stage

114

Taking Stock of First Stage: CEQ Diagnostics

• Diagnostic exercise turned into a full-fledged research project that used primary sources of information such as household surveys and detailed government accounts. Research time is longer than was anticipated.

• Diagnostic tool has a much greater potential than initially anticipated. =>It serves its own purpose whether accompanied by the

scoring process or not115


In particular,• CEQ Diagnostics can be used by governments (executive

and legislative branches) to inform policy and the budget process

• Multilateral organizations could include it as part of their diagnostic toolkit to help governments identify strengths and weaknesses and orient their economic and sector work

• Diagnostic tool useful for teaching and advising undergraduate and graduate theses (Tulane’s experience)

• Diagnostic tool can be used as a training device for staff in finance and planning ministries

116


• Based on experience, diagnostic exercise will take around 9 months

• Peru, de facto, became the “test” case for CEQ Diagnostics and – led to substantial revisions of the diagnostic tool and the

method. – revealed the great limitations of relying on secondary

sources. => Peru’s results are not really comparable for this reason.

“Update” will require re-doing a large portion of the diagnostic 117

Taking Stock of First Stage: CEQ Index

• Scoring process: – Confirm if equal weights for each criterion and question is fine– Must choose a method to standardize across countries– Will country scores be reported before or after the standardization?– Must decide if initial scores are provided by author of CEQ Diagnostic or

everyone starts from a clean slate – Application of CEQ Index to Mexico and Peru shows that, with current

scoring and weighing methods, the (overall) index has little variation.• Dissemination:

– Must find language and format to convey results of CEQ Diagnostics and Index to the wider public (comments by Peter Bell in the Sol Linowitz Forum). However, it must preserve rigor and be used to educate the wider public

– Suggestions: CGD’s CDI & Dialogue’s ERC 118

8. Next Steps

119

Presentations by authors of Bolivia, Costa Rica and Uruguay

• George Gray Molina (Bolivia)

• Maximo Rossi (Uruguay)

• Pablo Sauma (Costa Rica) (via oovoo)

122

9. Wrap-up

123

Wrap-up : Summing Up Tasks 1. Lustig with Jaramillo, Pessino, Scott (in person and/or

electronically) will complete Diagnostic studies (previously called technical documents); prepare publishable versions; design of yearly update

=> PERU will repeat exercise using primary data2. Lustig with Grey Molina, Rossi and Sauma to set up

Diagnostic studies in Bol, CR and Uru. Questions: send to NL with copies to MMJ (Mariellen Jewers) & SG (Samantha Greenspun)

3. Lustig with MMJ and SG Handbook/Mindbook4. CIPR will present WEB proposal5. Dialogue will prepare proposal for dissemination

reports of CEQ Index6. Dialogue will prepare proposal for conference7. CIPR/Dialogue (Lustig) will convene AB

126

Documents

Nora Lustig Dept. of Economics and Stone Center, Tulane University Non-resident Fellow, Inter-American Dialogue