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Increased consensus on economic reform
As a region, Latin America today has a lower per capita income than in 1980, and since 1988 it has declined even further. This aggregate picture masks important differences across countries. In some countries, such as Mexico, Chile, Colombia, Costa Rica, and Venezuela, growth is starting to recover as a result of reform programmes started several years ago. In others, output is still depressed as governments struggle to restore macroeconomic stability and carry out the necessary institutional changes to improve fiscal finances. This category includes the largest countries in the region-Argentina and Brazil. In other countries the reform programme is more incipient but not less difficult. After many years of economic collapse due to mismanagement and civil strife, Peru and many Central American countries are now putting in place decisive programmes of adjustment.
Independent of the stage of a country's adjustment, we find today a widespread consensus on the agenda for reform. This has become clear from the programmes of the many new and democratically elected governments that have taken office in Latin America since the late 1980s. Many of the new leaders come from varying political persuasions.
First, resumption of growth will have to be based on expanded domestic savings and a sharp increase in economic efficiency. Latin America can no longer count on the large amounts of external flows of the 1970s. Domestic savings and direct foreign investment will be the main sources of money. Foreign exchange will remain scarce and will have to be generated and substituted efficiently and without waste. Artificially low exchange rates and artificially priced imports cannot be sustained. Nor will countries be able to restrict exports in order to keep down the prices of these commodities to domestic consumers. Reform programmes will increase the prices of foods to the extent that their import was originally subsidized or their export prohibited. By the same token, they will also increase output and employment in the agriculture sector and in export industries.
Second, the state must be streamlined. During the 1970s and early 1980s the public sector increased sharply in size and scope. Financed by external borrowing, it increased by at least a third; in Peru it doubled. A large part of the borrowed funds were used to expand and create new public enterprises and to expand public employment in provinces and municipalities. In some countries the money was used to subsidize inefficient industries in the private sector. The industrial promotion laws of Argentina, where specific industries and provinces are exempt from the value-added tax, cost the budget around 2% of gross domestic production (GDP). The Compra Argentina ("buy Argentinian") law, whereby the state had to procure supplies from Argentinian firms rather than from less expensive foreign suppliers, cost another 2% of GDP.
Public expenditures contracted during the 1980s, as foreign loans to governments were reduced and citizens were unwilling to lend to the public sector. Money creation remained a main source of financing, but only at a significant cost in terms of inflation and instability. As governments attempt to stabilize their economies, this source of financing is also being cut. Government deficits must be sharply reduced by efficiently and equitably increasing public revenues and cutting low-priority expenditures.
Another point of agreement is that the focus and priorities of the state must be redefined. Concern is increasing in Latin America that the state should first concentrate on avoiding the further deterioration of public infrastructure, environment, and human capital. Public enterprises producing standard goods and services and public banks should be managed by the private sector. They should not be a burden on public finances. 'Prestige" projects or projects based on national-security notions cannot be justified any more. Social services catering to high-income groups and the middle classes should be priced properly. Fuel for automobile consumption, telephones. and higher education can no longer be subsidized.
To reallocate resources to health, nutrition. and education for the vulnerable groups by cutting subsidies to the middle class is not easy. It takes time to transfer public enterprises to the private sector and reduce excessive employment in the rest of the public sector. Parts of the private sector are also reluctant to give up tax concessions or subsidies to their inputs. The process takes time. decisive leadership. and determination. Multilateral aid institutions can support the process, provide technical assistance and finance, and act as a catalyst for donors. but the hard choices will have to be made by governments themselves.
There is not necessarily a trade-off, however. between the goals of the adjustment programme and protecting the purchasing power of the most vulnerable groups, particularly in Latin America. Most adjustment programmes call for three types of policies: (a) reduction in aggregate expenditures to the extent that external borrowing possibilities are curtailed, and also reductions in public-sector deficits to the extent that citizens do not want to hold any more domestic currency or domestic debt: (b) reforms to improve the efficiency of resource use and reallocate resources to activities of higher productivity. which usually include trade reforms. unification of exchange rates, and decontrol of prices and interest rates; and (c) reallocations of government expenditures and functions.
Actions in the first two areas are fundamental to restore stability and restructure the economy. In the short run many vulnerable groups may gain, for example, those associated with agriculture and export sectors. Some may be hurt, particularly those living in urban areas and employed by sectors that tend to contract in the short run, such as construction. The best way to protect the purchasing power of these groups is not by modifying or slowing down these basic reforms. (Obviously additional concessional external credit helps to the extent that it does not add to countries' foreign debt.) The appropriate mechanism is through sharp reallocations of public expenditures to sustain the purchasing power of such groups and. in addition, to provide them with key social services. This has a particularly high potential for success in Latin America.
In Latin America the bottom 20% of the population receives around 4% of the GDP. Public-sector expenditures account for between one-fourth and one-third of the GDP. Thus modest reallocation of these expenditures can significantly increase the disposable income of these groups. In many countries there also is significant room to increase taxation by improving tax collection and eliminating loopholes and exemptions Cost recovery in services provided to middle- and high-income classes is also very important.
These actions can be fully consistent with the recommendations. There is significant room to expand expenditures and programmes to the most vulnerable groups while reducing public-sector deficits. and to implement the structural reforms necessary to improve the efficiency of the economy.
Releasing resources for the most vulnerable
Evidence is increasing that with amounts equal to 1% of the GDP a typical country in Latin America (with a per capita income above US$ 1,000) can finance a good targeted food programme. This evidence is being gathered by a continuing study at the World Bank, which compares the experience of 70 food and nutrition programmes in 17 Latin American countries .
Preliminary findings suggest that a good school feeding programme can be implemented at a cost between US$25 and US$50 per student per year. Direct supplementary feeding programmes can be implemented at a cost of US$100 per child per year. Using the US$100 figure, one could have a programme aimed at 10% of the population costing 1% of the GDP if the country has a US$1,000 per capita income. If the per capita income is US$2,000, the cost will be 0.5% of the GDP. These are not large amounts relatively to the resources that can be obtained by restructuring the public sector and improving the tax system. These have become important activities for the World Bank. In other words, the Bank is supporting countries in releasing resources that can be used in these programmes if they so wish.
The Bank has been actively supporting tax reforms in several countries, such as Mexico, Jamaica, Argentina, Venezuela, Uruguay, and El Salvador. It has done extensive work in designing tax reform in Brazil. In both Argentina and Brazil eliminating tax exemptions and loopholes and improving tax collection could generate between 2% and 3% of the GDP. In Jamaica the Bank is supporting the implementation of a general consumption tax that would exclude foods. In Uruguay and El Salvador adjustment operations are also supporting important changes in the tax system and its enforceability.
On the expenditures side, the Bank has supported the restructuring and private management of public enterprises and public banks. which will reduce the historical drain of these institutions on public finances. This has become important in Mexico. Argentina. Venezuela, and Uruguay.
Public expenditure reviews are a routine activity of the Bank in every country. Particular emphasis is given to assessing the rationale of subsidies and investment projects. Underpricing of electricity in Colombia has been a major drain on public finances. All studies provide the basis for reallocating inefficient and unequitable subsidies toward targeted subsidies supporting food programmes and social services for the very poor.
Equally important are the reallocations that can take place within the social sector. Social-sector expenditure reviews have been undertaken for Venezuela. Costa Rica, Brazil. Colombia, and Bolivia: others are in progress in Honduras, the Dominican Republic, and Ecuador. All point to the important reallocation that could take place by increasing user fees for services that cater to higher-income groups and transferring those funds to programmes targeted at lower-income groups. A large part of education subsidies goes to higher education. On average, about 50% goes to the wealthiest 20% of the population, a group that could easily pay the full cost. In Brazil, because of the high share spent by the public sector in urban/curative health, 40% of health subsidies benefit the richest 20% . Cost recovery is not only equitable; it will also be efficient.
The Bank supports the potential to reallocate resources towards targeted social programmes through actions ranging from the most macro to the most micro level. It supports macro adjustment by avoiding too much reduction in the country's aggregate expenditure. It does this through its own total lending and by being an honest broker between countries and their commercial creditors. It has assisted countries in limiting the servicing of external debt by their ability to pay and the requirements to restore growth . At the more micro level it helps reallocate resources within the social sector. Once these resources are released, it is important to ensure that they are channelled to targeted social programmes. The Bank assists this process through dialogue and adjustment operations as well as through project lending.
Supporting food and nutrition programmes through adjustment operations
Adjustment operations are loans that disburse against a country's imports and are tranched according to a timetable of actions mutually agreed on between the country and the World Bank. It is only recently that they have been used to incorporate agreements on reforms and resource reallocations to targeted food programmes.
The advantage of using these operations is that a country's own important resources can be reallocated to food programmes. The amount of these foods can be significantly larger than those that could be provided directly by the Bank in project operations. This is particularly true in relatively better-off countries with large public sectors, where modest percentage changes in public funds reallocated can result in significant absolute amounts of resources. The disadvantage of using these operations is their quick-disbursing nature. Reallocations to social programmes may take place faster than the capability of the country's delivery system to use the funds efficiently. The latter takes more time because it may require strong institutional changes. There is no point in allocating an extra 1% of the GDP to deliver food through rural health clinics if the clinics are not accessible and do not have trained personnel. In other words, agreements on resource reallocations achieved in adjustment operations usually must be accompanied by specific projects aimed at strengthening institutional delivery.
During the past three years. food and nutrition objectives have been explicitly integrated into several adjustment operations and programmes of assistance. They include a structural adjustment loan (SAL) in Venezuela, an agricultural-sector loan in Mexico, and a more recent SAL in El Salvador. Such a loan is being planned for Costa Rica, and additional loans are expected to carry such agreements in the future. A very important Bank operation in Jamaica is the Social Sector Resource Development Program, which is a mixture between an adjustment and a project operation. It focuses on broad policy reforms in the social sector, particularly on targeting issues, while disbursing against a fairly small part of the overall social-sector investment programme.
The Venezuela structural adjustment loan
The Venezuela SAL, approved by the board of the World Bank in June 1989, supported a comprehensive programme of reform of the incoming administration, including the unification of exchange rates and the reduction of significant subsidies to the inputs into agriculture and agro-industries such as fertilizers and inputs into the cattle and poultry industries. These subsidies were deemed to be not only inefficient but also inequitable. They heavily subsidized the consumption of meat across the overall population.
The SAL supported a programme aimed at replacing general subsidies by targeted subsidies to the most vulnerable groups, directly financed by the budget, in six areas: grants (cash and food vouchers) to school-age and preschool children to be provided through schools in low-income neighbourhoods; feeding programmes for school-age children through schools in low-income neighbourhoods; nutrition and health care for pregnant women and infants in low-income areas; improved nutrition for preschool children through an expanded day-care system; housing improvements in the barrios; and provision of improved public services in the barrios such as water, sanitation, and power.
TABLE 1. Budgets for food and nutrition programmes (millions of US dollars) Venezuela
|Cash grants to families with vulnerable children||54||215||246|
|Milk vouchers programme||-||26||92|
|Mother-child care programme||-||29||95|
|Voucher for cereals programme||-||-||90|
|Day care programme||10||25||51|
Table 1 shows the increase in the funding to these targeted programmes. Venezuela has increased resources to these programmes nine-fold in US-dollar values. By 1991 more than US$574 million will be devoted to these programmes, over 1% of the GDP. The number of beneficiaries has also increased sharply. The number of cash grants will increase from 1.0 million to 2.5 million between 1989 and 1991, and the number of beneficiaries receiving food from the mother-child care programme will reach 2 million by December 1991.
The Bank also plans to support present efforts through specific projects aimed at improving the delivery of existing programmes. A social development project will assist the government in improving the efficiency and distribution of targeted nutrition assistance. By 1995 the proposed project would increase health and nutrition service coverage from about 200,000 to 420,000 pregnant women, from about 80,000 to 360,000 postnatal women, from 245,000 to 640,000 infants under two years of age, and from 370,000 to 916,000 children between two and six years of age. Toward project completion, about 50% of pregnant and lactating women would have access to primary health care and nutrition services, including prenatal and postnatal care, food distribution, nutrition counselling, and health education.
The second Mexico agricultural-sector loan
To protect the real income of consumers and promote domestic food production, Mexico has had a programme of subsidizing the consumption and sometimes the production of particular foodstuffs (AGSAL). Because in the past many of these subsidies were untargeted, they have resulted in large fiscal outlays, and some of the neediest groups have not benefited from the policy. The government of Mexico is now in the process of transferring these subsidies to more targeted programmes. By 1989 more than one-third of the US$1.4 billion devoted to food subsidies was used for targeted programmes such as the Tortibonos, the Liconsa milk programme in urban areas, the Diconsa rural stores programme, and the food distribution undertaken by the National Welfare Institute for high-risk populations. On the basis of an extensive joint study on food consumption and the evaluation of existing programmes, the loan will support implementation of a comprehensive strategy in this area, with particular emphasis on rural areas.
The Tortibonos and milk programmes have been able to protect poor urban households. The rural poor, however, do not usually buy tortillas, and it is too costly and cumbersome to distribute liquid milk in rural areas. The main programmes aimed at the rural poor are the Conasupo rural country stores and the maize flour subsidy, a semitargeted programme that benefits basically those who buy maize rather than grow it.
The new strategy being supported by AGSAL is to improve the targeting of programmes by gradually using the health system as the mechanism to identify the groups at risk, specifically through monitoring pregnant and lactating mothers and the nutrition status of small children, particularly those under five years of age. These will be the priority groups in the reallocation of resources.
In the short run, the feasibility of using the health system as the main vehicle for nutrition interventions will be tested in two ways. First, the present PASSPA model of providing health care will be used to extend the delivery of basic health and nutrition assistance to 13 million uninsured individuals in Oaxaca, Chiapas, Hidalgo, Guerrero, and the Federal District, especially undernourished pregnant and nursing women and children under age five. Second, a pilot project will test the capability of the health system to provide expanded nutrition and basic health care programmes in the poor rural areas of Nuevo León, Tamaulipas, San Luis Potosí, and Mexico. The pilot project will cover 45,000 families.
Based on these two experiences and on evaluation of all continuing programmes, the government of Mexico will develop an action plan for 1992-1994 to expand the coverage of such interventions and to reallocate funds to the most effective ones. In that way a major improvement in the food consumption and nutrition of the poor can be achieved at a fiscally acceptable cost.
The El Salvador structural adjustment loan
Social indicators in El Salvador continue to rank among the lowest in Latin America. Malnutrition among school-age children, for instance, is between 50% and 75% in the poorest departments of the country, and iron-deficiency anaemia, an indication of maternal malnutrition, affects about 40% of pregnant women. Sectoral analyses indicate that the enormous drop in budgetary resources for the social sectors that occurred in the late 1980s has resulted in the progressive deterioration of health, nutrition, and education services.
The government has begun a comprehensive economic stabilization and structural adjustment programme while providing a safety net for the most vulnerable groups in the society. The structural adjustment loan includes an agreement to put in place a targeted nutrition assistance programme and to increase the share of government expenditures for health and education.
To improve the nutrition status of the most vulnerable groups, particularly children under 12 years old and lactating mothers, the government identified the target populations to receive assistance and will first introduce a pilot programme jointly with the World Food Programme. The government prepared a pilot project to distribute nutritionally fortified cookies to schoolchildren that began at the beginning of the school year in March 1991. At a second stage, the government will expand the programme, specifically the distribution of the fortified cookies to schoolchildren, the introduction of infant foods through health posts, and the initiation of a pilot project to distribute food coupons to the most vulnerable groups.
A companion social-sector rehabilitation project (in fiscal year 1992) will ensure that nutrition, health, and education resources are used effectively. The principal objectives are to assist the government in restructuring and strengthening the ministries of Health and Education and the social-sector department of the Ministry of Planning. The project will also assist the government in developing a nutrition component as part of a basic health care package that will include a nutrition surveillance system, improvement in training programmes, and expansion and improvement of child growth-monitoring programmes.
The third Costa Rica structural adjustment loan
Costa Rica is one of the more advanced countries in Latin America in adjustment. It has gone through important deregulations in its price and trade regime, and is gradually recovering growth. Its public sector, however, needs additional reforms to consolidate and clarify the role of different agencies, improve the budgetary process, and reduce the fiscal burden of the social security system.
On the social side, Costa Rica is well known for its advances. Nutrition indicators are among the best in Latin America. Nevertheless, there are still important differences in these indicators across counties (cantones), and a significant portion of nutrition and food programmes benefit groups with no malnutrition. A large fraction of expenditures goes to school feeding programmes with little targeting, whereas those better targeted, such as those delivered by nutrition centres to reduce severe malnutrition, receive a small share of resources. In addition, a large portion of the cost of school feeding programmes is spent on personnel costs.
The SAL III, currently being prepared, will support public-sector reforms to be undertaken by the new government and also a plan of action to improve the efficiency of existing nutrition programmes and improve its targeting. The possibility of a food-stamp programme for the most vulnerable families is being explored with the technical assistance of the Regional Office for Technical Assistance. In addition, ways to improve the efficiency of the school lunch programmes are being studied, including subcontracting the services to mothers in the community, micro-enterprises, and cooperatives. The coordination of programmes will be improved through the creation of a national registrar of beneficiaries.
The Jamaica social sectors development project
Among countries of comparable income per capita, Jamaica has ranked high in conventional indicators of social development. However, economic decline in the 1970s, followed by a period of economic adjustment in the 1980s, resulted in significant economic hardship for important segments of the population. In an effort to cushion the effect of the 1986 devaluation, the government established general food subsidies of up to 29% of the price of 11 imported items. By late 1987 the government of Jamaica was acutely aware of the need to improve the programme's targeting, quality, and coverage.
The Bank was requested to assist in the design of a human resources development programme (HRDP) and to take the lead in securing further external financing at favourable terms. The HRDP, which covered broad social-sector investment and policy reform was presented to potential donors at a special meeting in June 1988, and additional external financing for health, nutrition, and education activities was successfully secured.
An important result of this process was the rationalization of food and nutrition policies in Jamaica, comprising general food subsidies, food stamps, and school feeding programmes. As nutrition aid is increased for carefully targeted beneficiaries while general food subsidies are phased out, the overall cost is being kept under control. Eligibility criteria have been tightened and made more transparent, targeting of benefits has improved, and programme administration and service delivery have been streamlined.
In 1987 about 80% of the US$25 million was spent on the purchase and resale of imported wheat flour and corn meal. The benefits from this programme, which was not targeted, were regressive. The poorest quintile of the Jamaican population received about half the direct consumption benefits per person per year received by the richest quintile. Under the Bank's social sectors development project, which supports the HRDP, the government of Jamaica agreed to phase out general food subsidies completely over two years. Under this agreement there will be no subsidy transfers made as of fiscal year 1991/92.
The food stamp programme provides bimonthly allotments of J$60 (equivalent to US$7.50) worth of food stamps applicable to the purchase of corn meal, rice, and dried skim milk. Eligible beneficiaries include pregnant and lactating women and children under five who receive health care at public health clinics, the elderly poor, very poor families, and persons already enrolled in one of the other welfare programmes. The programme is thus well targeted and progressive. Under agreements reached with the Bank, the amount has been tripled since 1988. In addition, the government has removed unqualified recipients from the rosters, reducing the number of targeted beneficiaries from 400,000 to about 300,000. As of 31 December 1990 about 200,00 beneficiaries were being reached. The government has recently taken steps to improve the distribution mechanism, and it is expected that about 300,000 will be reached during 1990.
TABLE 2. Comparison of targeted and general subsidies Jamaica, 1988 (percentages)
|General subsidy||Targeted subsidya|
|Cost as share of government expenditureb||1.6|
|Proportion of transfer to:|
|Transfer as share of expenditure per recipient|
|Proportion of households covered|
Source: Jamaica Statistical Institute and World Bank
a. Food stamps.
b. Does not include administrative costs
Under the Bank's social sectors development project, school feeding programmes have been progressively targeted towards poorer schools, and coverage of the bun and milk programme (financed with assistance from the World Food Programme and USAID) has broadened from about 170,000 students in 1988 to about 280,000 students at present. Another 132,000 students continue to be covered under the traditional programme in which food is cooked and distributed at the schools.
Table 2 summarizes the distributive effect of general and targeted food subsidies in Jamaica. Transferring resources to the food-stamp programme increases sharply the subsidy received by the lowest income groups in the population.
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