Transcript Constraints to achieving the MDGs through domestic

Impact of the Crisis on the
MDGs in Latin America:
A Macro-Micro CGE Assessment
“mini” LINK meeting
St. Petersburg
4 June 2009
Rob Vos
United Nations
Was Latin America on track
towards the MDGs?
0
MDG1: Extreme poverty (% living
on less than $1 a day)
50
100
150
200
10
9
8
5
250
"off track"
87
MDG2: Primary education (net
enrolment rate)
97
100
100
"on track"
54
MDG4: Child mortality (under
five deaths per 1,000 live births)
probably "on
track"
31
21
18
187
192
195
MDG5: Maternal mortality (per
100,000 live births) \a
"off track"
47
68
MDG7: People using improved
sanitation (% of total)
1990
2005
Projection (linear) to 2015
Target 2015
77
"on track"
84
84
2
Some key questions
regarding MDG strategies
Before the crisis:
But trends differ greatly across countries
Are existing economic and social policies good
enough to reach the goals?
Need country-specific answers:
– What does it take to achieve the MDGs?
– Do we know how much it will cost and can we afford
achieving the goals?
– What policy options do we have in financing the MDG
strategy? What are the macroeconomic trade offs?
3
Some key questions
regarding MDG strategies
After the crisis:
How much more difficult will it be to achieve the
MDGs by 2015?
Will it cost more? How much?
To what extent would an MDG strategy be
countercyclical?
Are macroeconomic tradeoffs more difficult to
manage?
4
Crisis: a deep dive, but will
recovery be quick?
10%
8.5%
8%
6%
4%
2%
5.6%5.3%
5.2%
4.1%
4.0%
3.9%
2.6%
1.9%
1.7%
1.7%
1.2%
0.7%
0%
-2%
-0.7%
-0.9%
-0.5%
-1.0%
-0.8%
-1.9%
-4%
-4.3%
-6%
LAC
2004-2007
South America
2008
2009
Mexico and
Central America
2010 - baseline
Caribbean
2010 - pess
5
Also deceleration in the six
countries of study
8%
7.3%
6.2%
6%
5.3%
5.1%
5.0%
4.6%
4%
4.0%
4.0%
3.2%
2.5%
4.0%
3.0%
2.9%
2.2%
1.6%
2%
1.2%
1.0%
1.0%
0.5%
0%
-0.5%
-0.6%
-0.5%
-0.8%
-2%
-2.0%
-4%
Brazil
Bolivia
2004-2007
Chile
2008
Costa Rica
2009
Honduras
Nicaragua
2010 - baseline
6
METHODOLOGY
UN/DESA-UNDP-World Bank project
Modeling framework
MAMS: MAquette for MDG Simulations.
– Economy-wide (dynamic CGE) simulation model to analyze MDG
strategies in different countries.
– Dynamic MDG module
Sector analysis of MDG determinants and of
interventions needed to achieve MDGs in education,
health, water and sanitation
– Microeconomic analysis of determinants of access to schooling,
infant mortality, etc.
– Costing exercise, considering household behaviour
Microsimulation methodology
– Translate labour market outcomes of CGE simulations into impact
on poverty and income distribution at household level using micro
datasets
7
MAMS: Determinants of MDG
outcomes
Service
per capita
or student
Consumption per
capita
Wage
incentives
Public
infrastructure
Other
MDGs
2–Primary
schooling
X
X
X
X
4
4-Under-five
mortality
X
X
X
7a,7b
5-Maternal
mortality
X
X
X
7a,7b
7a-Water
X
X
X
7b-Sanitation
X
X
X
MDG
8
Macroeconomic influences on
cost estimates
 Synergies among MDGs: is achieving all
MDGs simultaneously cheaper than
pursuing them one by one?
 Complementary investment requirements,
especially in infrastructure
 Macro analysis: economy-wide effects
matter for the (relative) cost estimates
(labour costs and constraints, prices,
growth effects)
9
MDG simulations with CGE
BAU: projection without policy change
Continued pre-crisis trends
Crisis prolonged during 2009-2010 (gradual recovery
after)
MDG scenarios:
– Optimize to reach MDGs
Each MDG separately
Simultaneously
– Different financing strategies
Foreign aid, Foreign borrowing, Domestic
borrowing,Tax increases
10
Is LAC “on track” under pre-crisis
BAU?
MDG 1
MDG 2
MDG 4
Bolivia
Brazil
Chile
MDG 5
MDG 7a
MDG 7b
--









--


Costa Rica



Honduras
Nicaragua
Latin
American
Average

11
Impact crisis on MDGs 2 and 4
(crisis/pre-crisis BAU; 2015)
20%
Primary school
completion
15%
Child mortality
10%
5%
0%
-5%
-10%
Bolivia
Honduras
Nicaragua
Brazil
Chile
Costa Rica
12
Additional public spending needed
will be higher because of the crisis
Required additional social spending needed to meet MDGs 2, 4, 5 and 7
(% of GDP, per year 2010-15)
Honduras
Nicaragua
Bolivia
Brazil
Costa Rica
Chile
0.0
1.0
2.0
3.0
4.0
pre-crisis
5.0
6.0
crisis
7.0
8.0
9.0
13
MDG strategy would be countercyclical,
but insufficient for economic recovery
GDP growth per year
(%), 2010-2015
Costa Rica
Chile
Brazil
Honduras
Bolivia
Nicaragua
0.0
1.0
2.0
3.0
4.0
5.0
Crisis baseline
MDG strategy
MDG plus infrastructure
Gap to full recovery
6.0
14
Financing strategies and MDG
costing results
Additional spending requirements are
generally lower in the case of external
finance - through aid or foreign borrowing
– than in case of domestic resource
mobilization
Additional spending requirements are
higher in the case of domestic finance through borrowing or taxation - owing to
crowding out effects and consumption
compression
15
What are realistic financing options?
MDG costs in form of required additional public
spending is just one criterion for assessing
desirability of a financing strategy
Other criteria:
– Debt Sustainability
– Other macroeconomic trade-offs (e.g. Dutch disease
effects, crowding out of private investment, squeeze
of private consumption, labour constraints, poverty
outcomes)
– Institutional constraints and political economy
considerations
16
Rising public debt under MDG
strategy with foreign borrowing
(total public debt in 2015)
200
180
140
120
BAU-crisis
MDG-pre-crisis
MDG-crisis
100
80
60
40
20
ua
ar
ag
N
ic
on
du
ra
s
H
R
ic
a
ta
C
os
C
hi
le
ra
B
ol
iv
i
a
zi
l
0
B
Public debt (% GDP), 2015
160
17
Required tax increase under MDG
strategy with tax-financing
(increase income tax, % of GDP, avg 2010-2015)
Required increase in income tax (% GDP), average 2010-2015
12
10
8
6
MDG-pre-crisis
MDG-crisis
4
2
0
Bolivia
Brazil
Chile
Costa Rica
Honduras
Nicaragua
-2
18
LAC: “Feasible” financing options
Foreign aid
Bolivia
Tax increase

Tax increase
combined
with foreign
aid
Tax increase
combined with
foreign
borrowing
?
Brazil

Costa Rica

Honduras

?
Nicaragua

?
Chile
*

19
Conclusions and recommendations
Affordable: the cost of reaching MDGs is not
prohibitive though substantially increase because of crisis,
Tax and spend (revisited): analysis of
macroeconomic trade-offs suggest tax reform may still be
best strategy in most countries (though because of crisis
more will need to consider mixed financing strategies)
Efficiency increases in social
spending: MAMS assumes efficient spending on
MDG services to reach goals, but in practice space to
improve efficiency in public spending to create more fiscal
space
20
Conclusions and recommendations
Socially responsible
macroeconomic policies: broad
perspective on macro policies beyond stabilization
and inflation targeting: growth, adequate social
spending, employment growth and inter-temporal
objective of human development
Structural adjustment: need to
generate more productive employment and reduce
inequality: MDG strategy per se insufficient to
meet poverty reduction target
21
Caveats
Integrated modelling approach: never
perfect, but provides comprehensive and
consistent picture
– Better costing instrument than alternatives
– Improved identification of “on track” vs “off track”
– Link macroeconomic and social policies
Need to avoid its use as “black box”, but see
as instrument to help policy dialogue
22