Transcript No Slide Title

Towards Effective Social Insurance in
Latin America: The Importance of
Countercyclical Fiscal Policy
Miguel Braun
Director of Fiscal Policy, CIPPEC
Countercyclical social policy is
necessary to protect the poor in a
volatile, crisis-prone region
• Latin American economies are more volatile
and suffer deeper crises than industrial
countries
• The poor and middle income brackets are
probably hurt more than in industrial countries
(eg: informal jobs, limited access to credit)
• In this context, governments should provide
social insurance through adequate employment
programs and safety nets.
However, fiscal adjustment during
downturns places a limit on
countercyclical social policy in
Latin America
An extreme case: Argentina 2001/2002:
GDP fell by 11%, the poverty rate
jumped from 35% to 57% and
unemployment reached 22%. At the
same time, public spending fell by 28%
in real terms.
Total and Social Spending in Argentina
1997-2003 (millions of 1997 pesos)
60,000
50,000
40,000
Total
Spending
30,000
20,000
Social
Spending
10,000
Targeted
Social
Spending
0
1997
1998
1999
2000
2001
2002
2003
The result is that social spending
is actually procyclical in Latin
America
Cyclical correlation of social and total spending
0.50
0.40
0.30
0.20
Social spending
Total spending
0.10
0.00
Latin America
-0.10
-0.20
OECD
Social spending is less procyclical
than total spending in most LAC
countries
Cyclical correlation of social and total spending in Latin
America
0.9
0.8
0.7
Total spending
0.6
0.5
0.4
0.3
0.2
0.1
45o
0
-0.4
-0.2
-0.1
0
0.2
-0.2
Social spending
0.4
0.6
0.8
The goal: to maintain real social
spending per poor person during
recessions
The challenges:
• Limit the impact of downturns on poverty
• Reduce the need for fiscal adjustment
during crises
• Protect social spending (especially
targeted programs) within the budget
The causes of procyclical fiscal
policy in Latin America
 Low proportion of automatic stabilizers
in the budget
 Political and institutional constraints on
saving resources during good times
 High volatility
 Borrowing constraints during recessions
The toolkit to reduce procyclicality
of fiscal policy
Policy Objective
Increase
automatic
stabilizers
Domestic policy
IFIs
Unemployment Transparency
insurance
and
accountability
Improve savings
Fiscal rules
Countercyclical
during good times
lending
Stabilization
funds
Improve
GDP indexed
Contingent
creditworthiness bonds
credit lines
during bad times
The proposal
• Work towards increasing the role of automatic
stabilizers in the budget. This will require
“brilliant fiscal management”, including
increased transparency and accountability.
• Deep, country-specific analysis to design
credible and enforceable fiscal rules, improve
sub-national transfers.
• IFIs should concentrate on making lending
more countercyclical, and possibly contingent
on increases in poverty/unemployment.