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Presentation by Peter Harrold, Indhira Santos and Emily Sinnott (World Bank) at Country workshop: "EU Balance-of-Payments assistance for Latvia: Foundations of Success" organized by the European Commission, Directorate General for Economic and Financial Affairs, and the Bank of Latvia. Brussels, March 1, 2012
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The Social Sectors from Crisis to Growth in Latvia
March 1, 2011 Peter Harrold, Indhira Santos and Emily Sinnott, The World Bank, Brussels
The World Bank
Overview 1. World Bank involvement in stabilization program 2. Demographic challenges and social spending during the
boom 3. What happened to education, health and social
protection during the crisis? 4. Remaining challenges 5. Lessons learned
2
World Bank participation in Latvia’s stabilization program
3
Latvia graduated from World Bank borrower status in 2007 Lending support Social sector reforms Emergency social safety net, including the public works program
(simtlatnieku programma) “Funds follow the student” education financing reform aimed at
increasing efficiency and quality given shrinking school-age population Protection of primary health care services during adjustment and
support of reforms aimed at substituting expensive inpatient services by outpatient and alternative care
Financial sector strengthening Small share of overall financing (EUR 400 ml), the focus was on
providing technical assistance for reform and crisis protection measures
BOOM
Demographic challenge: Decreasing and aging population
5
Dramatic fall in school-age children: 5-14 year
old population fell by 40% over 2000-2010
Declining population: Overall population fell by 5.6% in the past decade and is expected to fall by 19% over 2010-2060
Age-dependency ratio to increase substantially: Cohort of those aged 65 and over expected as a share of the working-age population projected to increase from 26% in 2000 to 66% by 2060
Effective retirement age was 59.3 in 2008 Source: World Bank staff calculations based on data from UN Population Division.
Social sector spending boomed in Latvia over 2004-2008
6 Source: World Bank staff calculations based on Eurostat data.
-10 0 10 20 30 40
Lithuania
Slovakia
Romania
Latvia
Estonia
Czech Republic
Poland
Hungary
Slovenia
Bulgaria
Real growth in social spending and social sector contribution (percent),
2004-2007
Education
Health
Social Protection
0 20 40 60 80
Romania
Bulgaria
Latvia
Hungary
Slovakia
Czech Republic
Estonia
Poland
Lithuania
Slovenia
Social Sectors as a share of total government expenditure
(percent), 2008
Health is responsible for nearly half this growth
But social protection—i.e. pensions—is the most important component
Increased health spending was driven by rising inpatient unit costs
Cost per inpatient episode and inpatient cases, 2005-2010
Source: World Bank staff, based on data from Ministry of Health and the State Compulsory State Agency News.
-
100,000
200,000
300,000
400,000
500,000
600,000
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009 2010 (est.)
Num
ber
of C
ases
Con
stan
t 200
3 La
ts
Cost per Inpatient Episode Inpatient Cases
0
20
40
60
80
100
120
140
Inpatient Secondary Oupatient
General Practitioner
Real change in expenditures
Change in volume (patients)
Response of the health system to budget increase (percent), 2005-2008
7
Despite spending increases, Latvia lagging in health outcomes
• 1970-1990: EU10 life expectancy stagnant and separated by only a few years (68 vs. 71).
• 1990-2009: Sudden increase in variance with Latvia, the other Baltics, Bulgaria, Romania worsening and the rest improving.
• By 2000 all began to improve; but persistent gap with pre-2004 EU members.
8
65
67
69
71
73
75
77
79
81
Life expectancy at birth, in years
EU pre-May 2004
Slovenia
Czech Republic
Croatia
Poland
Slovakia
Estonia
Hungary
Romania
Bulgaria
Latvia
Lithuania
Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011
… in particular due to circulatory system diseases and external causes
9 Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011
490503504507518520532537540545549563563572576577580587600612626644
745809
840865
915951959964965
161174143173125187194158173186150213169212217245218190217178232160357355424450421480548497605
611
605671
634632
711689
628685
5770 200 400 600 800 1000
Switzerland (2007)Italy (2008)
SpainIceland
France (2008)SwedenCyprusNorway
EU (15 Countries)LuxembourgNetherlands
AustriaUnited Kingdom
MaltaGermany
GreeceFinlandIreland
EU (27 Countries)PortugalSloveniaDenmark
Czech RepublicPolandEstonia
Slovak RepublicHungary
LatviaRomaniaLithuaniaBulgaria
Mortality Rates for Diseases All Causes and of the Circulatory System, 2009
All Causes
Diseases of the Circulatory System
All Causes with Circulatory Diseases Reduced to EU27 Average
Age-standardized rates per 100,000 population
Coronary heart disease explains a large part of the difference in mortality between Latvia and the average EU country. A high incidence of motor vehicle accidents deaths also contributes.
Matching Finland’s progress on cardiovascular disease between1990 and 2009 would bring Latvia closer to convergence.
Did Finbalt health indicators improve from 2006 to 2008? Focus on blood pressure screening
Health results • Generally, data show small
improvements for Latvia – as with comparators.
Blood Pressure Screening • Strokes and heart attacks account
for much of Latvia’s health deficit. • Serious shortfall in diagnosis and
treatment of high blood pressure. • High blood pressure more likely to
be diagnosed and treated in 2008, but still quite low, especially for men 45 and above.
• Use of medicine for high blood pressure, also improving, but still unusually low, especially for men 45-54.
10
0 10 20 30 40 50
Diagnosed or Treated for High Blood Pressure
Last Year
Diagnosed or Treated for High Blood Pressure
Last Year Age 45-54
Diagnosed or Treated for High Blood Pressure
Last Year Age 55-64
Percent
Latvia 2006 Men
Latvia 2008 Men
Lithuania 2006 Men
Estonia 2006 Men
Finland 2006 Men
0 10 20 30 40 50
Used Medicine for High Blood Pressure Last
Week
Used Medicine for High Blood Pressure Age 45-
54 Last Week
Used Medicine for High Blood Pressure Age 55-
64 Last Week
Percent
Latvia 2006 Men
Latvia 2008 Men
Lithuania 2006 Men
Estonia 2006 Men
Finland 2006 Men
Source: World Bank staff calculations, based on Finbalt.
Spending was not focused on the most vulnerable
11
0 2 4 6 8 10
Denmark Sweden Finland
Luxembourg United Kingdom
France Netherlands
Hungary Austria
Germany Belgium Ireland
Italy Greece Slovenia Slovakia
Spain Czech Republic
Romania Lithuania Portugal Croatia
Latvia Bulgaria Estonia Poland
perc
ent
of G
DP
Social assistance programs as a share of GDP small in Latvia compared to EU
countries, 2008
Old age assistance
Disability assistance
Family and child allowances
Housing assistance
Other (incl. income support)
Source: World Bank staff calculations based on OECD, Latvia SILC 2007, ESSPROS and World Bank Europe and Central Asia Social Protection Database.
Crisis
Social sector spending adjustment frontloaded
13
Frontloaded: Social sector spending cuts were large and important to overall 2009 adjustment: health and education cuts accounted for 61% of overall cuts,.
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
2008 2009 2010
Year-on-year change in millions of current Lats
Other
Social protection
Education
Health
Total government spending
Social protection spending increase in 2009: Earlier pension policy changes coming into effect played a large role. SP spending did not fall until 2010 and the cuts were only one-fifth of those in education and health over crisis .
Source: World Bank staff calculations, based on Eurostat and Latvian Ministry of Finance.
In health, spending shifted from inpatient to outpatient and GP care
Composition public health spending, 2008-2010
42 36 24
15 14
17
7 8
9
12 14
17
23 27 32
0%
20%
40%
60%
80%
100%
2008 2009 2010
Inpatient Care Secondary Outpatient General Practitioners Patient Pharmaceuticals
•Real health spending fell by 26%.
•Inpatient spending, the largest category, had the largest cuts, falling by 57%.
•Inpatient stays fell by 32%.
•Outpatient, emergency services, and services for children and mothers were prioritized.
•Health safety net introduced for the first time.
Source: World Bank staff, based on data from Ministry of Health 14
Stopped investing in buildings and started investing in people
Inpatient contracted hospitals and beds fell, 2008-2010
•Changed input-mix by reducing the number of hospitals with inpatient contracts by 50%. • When hospitals’ inpatient contract removed, Ministry finds that 30% of inpatient cases disappear.
•GP visits increased.
•Day care or day surgery patients also increased.
Source: World Bank staff, based on data from Ministry of Health.
78 72 39
0
100 Hospitals
17,001 15,121 11,920
0
20,000 Beds (end of the year)
749 669 575
0
1000
2008 2009 2010
Beds per 100,000
15
Large upfront reduction in education spending in Latvia
16
Per student financing was introduced in Latvia, assisting in the adjustment to over-capacity in the system resulting from a decreasing school-age population.
Latvia introduced across-the-board spending cuts (as did Estonia). Other countries had less sustained cuts across education categories.
-300
-250
-200
-150
-100
-50
0
50
100
150
200
Estonia Latvia Lithuania Hungary Romania
in p
erce
nt
Decomposition of Change in Education Sector Spending in 2009, decrease(-)/Increase(+)
Other
Compensation
Good and services
Capital
Source: World Bank staff, based on data from Ministry of Education and Science.
In education, many schools were closed and teacher workloads reduced
Contracted Schools and Teachers in Latvia, 2007/08-2010/11
Between 2007/8 and 2009/10: •Enrollment fell by 10%. •Reduction in the number of schools (and staff) was concentrated at the primary level (-21%). •Teaching workloads fell by 24%, so many teachers were able to keep their jobs but with reduced hours or lower hours counted towards pay.
In 2010/11: •Pace of adjustment slowed. •Enrollment fell by 4%, but only 1% of schools were closed and teacher workloads increased.
Source: World Bank staff, based on data from Ministry of Education and Science
958 948 846 830 0
2000 All Schools
516 508 409 400 0
1000 Primary Schools
63 63 63 63
0
100 Special Schools
31,960 32,331 24,210 27,884 0
50,000
2007/08 2008/09 2009/10 2010/11
Teacher Workloads
17
In contrast, targeted social assistance programs were enhanced over the crisis
18
0
20
40
60
80
100
120
140
160
180
200
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-
10
Nov
-10
Jan-
11
Needy People (thousands)
GMI beneficiaries (thousands)
Last resort social assistance programs increased: Guaranteed minimum income (GMI) beneficiaries peaked at 80 thousand (3.9% of population) in March 2011. Social assistance spending more than doubled over the crisis, but this is still made miniature by the increase in pension spending.
Source: World Bank staff, based on data from Ministry of Welfare.
Emergency social safety net introduced rapidly; protected by IMF-EC program
14
Latvia’s social assistance programs too small to protect households at the onset of the crisis
Government rolled out quickly an emergency social safety net (2009-2011) to protect those who lost their jobs as well as the poor: Eased unemployment insurance eligibility requirements and extended duration Expanded Guaranteed Minimum Income (GMI) Introduced an emergency public works/workplace with stipends program
(WWS, simtlatnieku programma) Covered transportation for students affected by school closures Maintained pre-primary education programs for 5- and 6-year olds Exempted needy households from health co-payments and subsidized
pharmaceuticals Improved access and use of alternatives to inpatient treatment for the poor Improved primary health care services and access
Cost was not large: 0.5-0.6% of GDP per annum WB supported and EC-IMF stabilization program protected temporary
measures by including an adjustor to fiscal targets to allow additional safety net spending if necessary
Emergency public works program (WWS) was well-targeted
20
Distribution of WWS beneficiary households
% of households that belong to
bottom two quintiles % of households belong to top
two quintiles Quintiles based on asset index Currently Participating 65 18 Currently on waiting list 59 24 WWS Completed 73 13
Quintiles based on predicted consumption Currently Participating 56 18 Currently on waiting list 50 18 WWS Completed 62 14 Quintiles based on predicted income Currently Participating 69 12 Currently on waiting list 70 13 WWS Completed 70 14 Note: The WWS survey covers only a part of population and thus it is not representative of population. To create quintiles, data from Household Budget Survey (HBS) 2009 is used. The quintile cut offs are derived from HBS. To create asset index in WWS, factor-loadings from HBS are used. Similarly a model is fitted using HBS based on common variables in WWS and HBS. The coefficients derived from HBS are used to predict consumption and income in WWS.
Source: Ferre, Azam and Ajwad (forthcoming).
Challenges
Limited further savings in education and health; old-age spending pressures
22
Need for further reallocation of resources in the education and health sectors as part of continued structural reforms, but strong arguments for increasing overall sector envelopes Adapt education sector to decline in student population Under 0.2% of
GDP over 2010-2020 ...could shift freed resources to other needs, e.g. early childhood
interventions or higher education Resources for poverty-targeted programs severely limited (safety net
spending cut in 2012 adjustment) Health challenge is to constrain spending pressures and reallocate
within sector to improve health outcomes Range of estimates for health pressures. 0.3-1% of GDP over 2010-2030
...brings us to the question of old-age spending Reforms reversible—particularly where there is scope to re-roll out
infrastructure (e.g. beds closed but hospital infrastructure remaining)
Pension age increase will bring initial, but not sustained, savings
23
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2010 2020 2030 2040 2050 2060
effect on pension scheme
effect on all social insurance
effect on consolidated gov. finances
pension deficit (subsidised by 2%)
Simulation of Projected Fiscal Savings from Proposed Retirement Age Increase (Percentage of GDP)
Source: World Bank staff projections.
Lessons Learned
Lessons learned
25
Prioritize and make trade-offs in social sector spending. In Latvia, this was facilitated by: Depth of crisis Social spending relatively low as a share of GDP, but large reform
gaps in education, health and social protection going into the crisis Reforms based on analysis of where efficiency gains were highest
Take rapid action where initial weaknesses in social protection systems exist
Pension reform proved really difficult even during crisis. Pension spending increased by 27% in real terms over 2008-2010 Large cuts in education and health were politically feasible,
whereas it was not possible to make pension reforms with a short-term fiscal impact.
Thank you!