Transcript Public Policies for Investiment in Human Capital: The Case of Chile

Public Policies for
Investiment in Human
Capital: The Case of Chile
1990-2000
Eduardo Aninat
former Finance Minister of Chile (1994-1999)
former Deputy Managing Director IMF
Draft Version
November, 2003
The Political Context for Economic
Policy Making in Chile of the
1990’s
Concertación Alliance came to power in 1990: One of the key issues
in its program platforms for the political agenda was centered
on the so-called “social debt” (inherited of Pinochet’s period.)
In part, the success of the strategy for rallying an important part of
the votes to favor the democratic coalition of Concertación was
based in a set of pledges, regarding the resolution, through
time, of such social issues in the new democracy of Chile.
There was a genuine fear that acting too boldly and too fast in this
area would generate all kinds of pressures in the system, risking
unbalanced macro economics and a subsequent hit on inflation
(still running at two digits) or on the rate of sustainable
economic growth and on external balances.
Structural Elements in Chile’s High
Rate of Economic Growth: A
Synthesis
•
Early and strictly time consistent option followed in favor of an
open-to-trade economic model:
– Lliberalizations done in the foreign trade regime in Chile around 19751979
– Consistent deepening and broadening during the late eighties and the
decade of the nineties (1990-2000)
•
Domestic institution building: Chile can be characterized as a
small, open economy country, which has generally been careful and
respectful for domestic economic institutions:
– Legality, constitutionality, and presentation and consolidation by the
Legislative Branch of Government and other institutions, has almost
generally been the norm
– The most salient part of this long haul of institutional build-up exists in
the social servicesw area, particularly on the education area.
The Political Economy of Public Social
Policies in Chile: Revealed Preferences
and Pressure Groups
• The deep recession experienced by Chile in 1982-84 coupled with
the very imperfect domestic policy responses (government of
Pinochet) had generated important losses in the standards of
living of the middle class and of the poor.
•
This created a cumulative backlog of unfulfilled demands from
many organized groups, clusters that were normally associated to
voters for the Concertación alliance.
• The government of Patricio Aylwin (1990-1993) had made one
important effort on redressing part of the decline, in both absolute
and relative levels, for expenditures directed to some key areas
of the social services.
• The well intended and reasonably well designed efforts by the
Aylwin’s administration in social matters were then considered clearly
not enough.
The Political Economy of Public Social
Policies in Chile: Revealed Preferences
and Pressure Groups
• The economic agenda of the second candidate of the Concertación,
Eduardo Frei, again had to include an extensive list of new social
programs and new reforms in the area of social services.
• Due to prior historical experiences, and from the sheer estimated
size of “social demands” arising, a kind of “ordenateur” was to be
searched (a mechanism or a special agenda, to put-in-line these
factors in a reasonably orderly and coherent way, one that would
not impinge negatively on macro equilibria.)
• After months of discussion inside the Cabinet, it was suggested by
the Ministries of Finance and Education to then President Frei, that
it was best to focus on an Education Reform process, and to
launch early in his period (1995 – 1996). These reform area could
act as the principal ordenateur.
The Political Economy of Public Social
Policies in Chile: Revealed Preferences
and Pressure Groups
In the table that follows next, we get a summary on first the big decline
between ninety seventy and nineteen ninety, and the subsequent recovery
and redressal in per capita public spending for education; the series is
compared with the evolution of average wage rates in the private sector.
Table: Per Capita Public Spending on
Education and Health
Year
1970
1980
1990
1994
1995
1996
1997
1998
1999
2000
Indexes: 1970 = 100
Average Wage
Per Capita
Rate (index)
Public
Spending on
Education
100
100
89.0
88.6
93.3
58.8
110.7
83.9
118.3
92.3
123.2
102.7
126.1
111.6
129.5
122.6
132.6
129.4
134.4
138.4
Own elaboration, based on: Instituto Nacional de
Estadísticas, INE, Cortázar R., Marshall J., Ffrench-Davis.
Educational Reform: The Story
of Contents of the Reform
• President Eduardo Frei Ruiz-Tagle indicated that his administration
would grant priority to improve the quality of education in
Chile.
• The National Commission of Modernization of Education
was born, integrated by 18 professionals and academics, coming
from diverse activities and having different political positions. Their
mission was updating a complete diagnosis of the educational
system, including its main deficiencies and limitations.
Educational Reform: The Story
of Contents of the Reform
According with the Education Reform proposed, it would be
fundamental to spend more time in learning, in order to
improve in human capital knowledge.
• Advantages for the extension of the school day were
evident:
– It would cause unquestionable education benefits
– Have positives social effects, specially supporting low
income families, in a context of parents (both heads of
households) increasingly working outside their homes.
– It would contribute to school management improvement
(professors could then concentrate their work preferably in
a single school establishment, helping thus to build
cohesion in the educative project of each.)
Educational Reform: The Story
of Contents of the Reform
• Different alternatives were examined for the transition
to an extended school schedule system. To enter
gradually, in to the new schedule of a “Complete
Journey spent at the School (JEC, in Spanish) was the
general pivotal case.
• Starting in 1997, Chilean Education Reform had evolved
to get its fundamental structure.
• The government of President Frei, at our explicit
proposal from the Treasury, aimed at financing the
core new expenditures involved in the Reform, via the
maintenance or consolidation of the Value Added
Tax (VAT) rate, at its then established value.
Educational Reform: The Story
of Contents of the Reform
PRIOR RESULTS OF THE COMPLETE JOURNEY
AT THE SCHOOL (JEC)
The increase in school journeys (JEC) will in fact mean that those
students who attend all of their basic education and secondary
schooling with this system attend two more years of classes.
This is very significant, compared with the situation of students
who did not reach the benefit of being part of the reform process.
In this way, the JEC changed the scheme towards a new more
intense modality. It implied that all the students go to classes
throughout the “full” school day. Educational work has more
effective time, so the reform could have (potentially, at least...) the
maximum desired effect.
The Financing of Social Policies in
Chile: A Public Finance Perspective
The implementation of more active social policies was
subordinated to an overarching commitment to
macroeconomic stability. These resources could in
principle come from three sources:
(i) Revenue growth derived from the expansion of the
economy
(ii)Re-allocation of budgetary resources from less priority
uses and towards the social sector
(iii) Expansion of available revenue mainly through added
taxation.
The Financing of Social Policies in
Chile: A Public Finance Perspective
If real social expenditure of the central government Gs (deflated by CPI) is:
Gs = Y · δ · α · β
Where: Y = real GDP (deflated by CPI)
δ = total government expenditure as a percent of GDP
α = percent of total expenditure that remains after interest payments
β = percent of total expenditure (after interest payments) that is allocated to
social programs
The percentage growth in real social expenditure can be approximated(ignoring
small residual cross terms) as:
Gˆ s  Yˆ  ˆ  ˆ  ˆ
The Financing of Social Policies in
Chile: A Public Finance Perspective
Applying the above formulation to the case of Chile, we get the
following financing results for 1993-2000:
Table 1: Decomposition of Sources of Growth in Real Social Expenditure
1993/94
1999/00
Percentage
Contribution
to
average
average
Change
Social
(1)
(2)
(1) – (2)
Growth (in percent)
Expenditure
Social expenditure as a
percentage of total noninterest expenditure
67
70
4
7
95
98
4
7
20
23
11
22
100
127
27
51
100
153
Total non-interest
expenditure as a
percentage of total
expenditure
Total expenditure as a
percentage of nominal
GDP
Real GDP Index
(deflated by CPI)
Real social expenditure
index (deflated by CPI)
53
1
100
1
Source: Author’s calculation based on data from the Ministry of Finance.
1/ Figures in these columns do not add to these totals because of residual terms not considered in
the decomposition, as explained.
A Simplified Analytical Model for
Analysis of Social Policies: A
Microeconomic Perspective on the
Education Reform and Its Effectiveness
Simple model of social welfare maximization:
Available civil servants can be allocated to service their
work hours only in two (generally complement) social
sectors, namely:
L (hours in education) or to
N (hours in the alternative social services sector.)
Graph 1: Gross Benefit
Function (Z)
The Graph depicts the equilibrium point for a planners maximization of hiring hoursteachers to the public system, given an exogenous wage rate represented by the slope of
the straight line drawn (Zo; Lo.)
The green curve presented in Graph 1 is the equivalent of the marginal productivity of
hours-teachers.
Graph 2: Net Benefits Function
Graph 2 is a representation of a slightly more complete case, where the red curve shows the
Net Benefits for Education System expansion, considering the “externality cost” on provision of
Other social expenditures, when civil servants hours can be allocated to any of both sectors.
This can also serve as representing the new optimum for the combined solution on two
desired social goods, confronting an exogenous W wage rate for hiring.
A Simplified Analytical Model for
Analysis of Social Policies: A
Microeconomic Perspective on the
Education Reform and Its Effectiveness
We are interested to check the decision making process for a social
planner that, represents society by acting in a given welfare State, and
wishes to maximize the social welfare function of society, in terms
of the optimum provision of education (Ê) and other social goods (ˆP),
subject to budgetary conditions (g) and given wage rates (w.)
Thus:
Z = F ( E ; P ), and accept
E= k * L, and
g=w*L+P
Conclusions: Lessons Learned
and Further Research Needed
•
Fiscal Policy choices: Looking back on what has been contributing to the
sustainability of high growth in Chile, and judging also the cases for small and
medium sized developing countries in Latin America, the Caribbean, Africa and
Asia, I clearly think that it is correct to opt for social services connected to
human capital formation, as one of the principal public choices for these
societies.
•
It is crucially important that the so-called “dividend growth” can be
increasingly geared to the public social services sectors (amongst them
education) in economies which not only have the task of improving their skills
base for equity reasons, but that have to deal with the challenges of
globalization, and with a “catch-up” to standards raised by the new world
scenario of the economics of knowledge.
Conclusions: Lessons Learned
and Further Research Needed
“As we look at modern budgets, we find substantial inclusion of items
that seem to be in the nature of private, rather than public, goods.
Why should this be the case? (...)
Certain goods, such as education (...) provide personal benefits to the
recipient, benefits that are rivals in consumption and not shared by
others. In addition, they also generate externalities that the
individual beneficiaries overlook. Supply forthcoming in response to
private demand will be suboptimal, and a public supplement is in
order. This may be provided by subsidizing private purchases or by
public provision.”
Richard Musgrave (Public Finance and Public Choice, 2000.)
Conclusions: Lessons Learned
and Further Research Needed
The recommendation is to avoid 2 extreme scenarios:
1. Sort of “cowboy-band-
wagoning” (old movie
type) behavior; when
technocrats, panicking by the
voices for more government
spending in social services and
others, they tend to replicate the
“lonely-cowboy’s syndrome”
(become isolated or secluded.)
2. The temptation for
gradual populism. This
one is a scenario where, in a
less visible and more complex
fashion, the voices and
actions of pressure groups
inside and outside the
government alliance start
attracting,
convincing
for
favor
many
of
the
technocrats
in
various
sophisticated ways.