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A governance approach in Latin America

Ana Bellver and Nick ManningPublic Sector and Governance Group

Latin America

February, 2008

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1. LAC has a distinctive governance environment

• Low spend, low engagement, low trust

• Citizens and firms avoid contact with the state and have little trust in its competence

• Governments find it difficult to raise revenues

• Corruption is not a separate public concern:

Inefficiency in public service delivery and regressive spending policies are perceived to be equally important outcomes of poor governance.

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11 1214

19 19

2427 28 28

31

35 3639

41 43 44 44

53

31

4339

0

10

20

30

40

50

60

Ecu

ador

Per

u

Nic

arag

ua

Bol

ivia

Gua

tem

ala

Mex

ico

Pan

ama

Hon

dura

s

Cos

ta R

ica

Par

agua

y

El

Sal

vado

r

Uru

guay

Bra

zil

Col

ombi

a

Dom

inic

an R

ep.

Arg

enti

na

Ven

ezue

la

Chi

le

Lat

in A

mer

ica

EU

15

EU

27

Source: Latinobarómetro, 2003-2005; Eurobarometer 62, (2005).

With rather less trust…

Trust in Government in Latin American and Europe (2003-2005)

4Source: (World Economic Forum: 2004-2006)

From businesses as well

Firms’ assessment of the neutrality/composition of Latin America government decisions/spending (Average 2004-2006)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Bol

ivia

Hon

dura

s

Nic

arag

ua

Ecu

ador

Gua

tem

ala

Para

guay

El S

alva

dor

Peru

Ven

ezue

la

Col

ombi

a

Pana

ma

Dom

inic

an R

epub

lic

Bra

zil

Cos

ta R

ica

Uru

guay

Mex

ico

Chi

le

Arg

entin

a

Lat

in A

mer

ica

EU

15

OE

CD

Favoritism in decisions Wastefulness of spending

5

1618 17

13

10

13 13

15

12

20

13

15

36

20

25

12

19

26

18

36

40

0

5

10

15

20

25

30

35

40

45

Low Tax Revenues Revenues as a Percentage of GDP (2004)

Source: (OECD: 2008)

6

And distinctively low expenditures

Average General Government Expenditure as Percent of GDP per Income Group and Latin America and Caribbean (LAC) region

27.24 26.0129.17

34.7837.64

32.47

43.28

Low Middle Income (LAC) Upper Middle Income(LAC)

Low Income Low Middle Income(except LAC)

Upper Middle Income(except LAC)

High Income - Non OECD High Income - OECD

GG

E/G

DP

(%

)

Source: International Monetary Fund, Government Financial Statistics (2008).

7

49

57 56

5147

50 52

42 4347 45

52

4648

5254

4946

48 50

3128

35

29

3431

0

10

20

30

40

50

60

Per

u

Colo

mbia

Bra

zil

Mex

ico

Chil

e

Arg

enti

na

Lat

in A

mer

ica

Ave. Fra

nce

Ger

man

y

Spai

n

Sw

eden

Unit

ed K

ingdom

EU

15 A

ve.

Inequality before taxes and transfers Inequality after taxes and transfers Source: (OECD: 2008)

Reasons for public skepticism…

Inequality in Latin America and Europe before and after taxes and transfers (Gini Coefficients)

8Note: Data are the simple average of nine countries: Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Mexico and Uruguay. Source: (OECD: 2008) drawing on (ECLAC: 2005)

And for distrust in government…

Distribution of Social Spending across Income Levels: Average of Selected Countries in Latin America

8.2 7.9 7.8 8.0 8.0

5.2 5.0 5.1 5.2 4.3

2.5 3.45.0

7.5

16.8

0

5

10

15

20

25

30

35

Poorest quintile (q1) q2 q3 q4 Richest quintile (q5)

Tot

al s

pen

din

g (=

100)

an

d p

erce

nta

ges

Education Health Social Security

16.0 16.3

17.9

20.7

29.1

9Source: (Ferranti and Ody: 2005)

As evidenced by disengagement from services…

Deficits and surpluses in mean years of schooling compared to levels predicted by per capita GDP

10Source: (Schneider: September 2006)

and disengagement from the formal economy

Estimates of the Shadow Economy in Latin America

(in % of official GDP)

0%

10%

20%

30%

40%

50%

60%

70%

80%

OECD average

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2. The challenge for the Bank in LAC

• Bank must prove itself, particularly challenging since GAC is an area in which there is little certainty or best practice

• Some real successes in the region on macro and fiduciary issues

• Persistent failures in improving the merit-basis/due process in the public sector

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This requires a distinctively positive LAC approach

Improving public trust in government

Adopting discrete, pragmatic and innovative approaches

Building government confidence that the Bank understand their countries’ political constraints

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3. How?

• By theme: Increasing transparency and efficiency in fiscal expenditures and

PFM

Enhancing focus on strengthening regulatory frameworks, and capacity and independence of oversight bodies

Enhancing sector governance by focusing on issues of performance and reducing inefficiency in the provision of services

• By country type: Lower Middle Income Countries:

o Confidence building at the agency level

o Space for confidence building dialogue

Upper Middle Income Countries:

o Building confidence in sectors and in watchdog bodies

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Theme 1: Working on Transparency & Efficiency

• SEPA: system of enhanced transparency in government contracts (Region-wide, with IDB)

• OECD procurement benchmarking: Systematic roll-out of programmatic support (Peru, Mexico)

• Tax reforms: e.g. Guatemala – (collection rate increased by 3% of GDP over 5 years; taxation superintendence now viewed as one of most trusted institutions in Guatemala)

• Local government support: transparency in municipal finances and participatory planning & budgeting (Costa Rica)

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Theme 2: Working on Regulatory Frameworks & Oversight Institutions

• Supreme Audit Institutions: Systematic support, e.g. Honduras (strengthening capacity for CSO participation in SAI audits); Peru (supporting capacity to oversee the implementation of PPP); regional SAI body OLACEFS (improving capacity to combat corruption)

• Assessing competition in the roads sector: Framework approach to help improve sector governance (Bolivia)

• Judicial appointment and performance evaluations systems in Colombia, Honduras (resulting in increased judicial independence, higher standards of accountability)

• Electricity sector: Database of regulatory characteristics (covering 54 agencies)

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Theme 3: Working on Performance & Efficiency in Service Delivery

• Monitoring results in education and nutrition: accompanied by extensive media dissemination campaign (Peru RECURSO AAA)

• Workshops on investigative journalism

• Addressing citizen-state interface: Strengthening the capacity of local councils to monitor and evaluate social policies; setting up user friendly portal to disseminate M&E results (Uruguay)

• Systematic governance analyses in key sectors: Developing entry points in education, rural, water (Paraguay)

• Strengthening access to information offices in line ministries (Honduras)

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Country Group: Lower Middle Income countries

• Building confidence at the agency level

Strengthening Accountability in Social Service Delivery in Central America (Laura Rawlings)

primary objective is to provide information on improvements in the efficiency and quality of basic social services

supporting the development of five Sectoral Governance Analyses (Honduras- health, Honduras-education, Guatemala- health, Guatemala-education, El Salvador-education)

"deconstructing" alternative service delivery models to find elements from the alternative models to export to the traditional models to strengthen performance and results

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Lower Middle Income countries

• Space for confidence-building dialogue (1)

Policy Dialogue and Consensus in El Salvador (Alberto Leyton)

helped the Bank to engage in policy discussions in the country by supporting civic groups and independent analysts - helping them play the role of informed brokers and help bridging positions among political parties on fiscal related issues during the political campaign.

effective - not only in facilitating a broad discussion on sensitive issues in the context of the international financial crisis, but also in helping the Bank to reactivate and reengage in lending activities by partially removing pre-existing political gridlock in Congress.

activity continues until June 2009 - other sensitive topics will also be brought to the public debate during the campaign process in order to build consensus that will help the next administration implement new policies and programs

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Lower Middle Income countries

• Space for confidence-building dialogue (2)

Honduras: Unblocking governance reforms and stregthening public acccountability (Ana Bellver)

Coalition established between access to information commissioners in Honduras and Mexico and civil society representatives - instrumental in setting up a coalition between these two groups in support of the implementation of the access to information law

Focus on transparency of the budget process in Honduras and regional comparisons, agree on measures to make it more transparent, and facilitate social monitoring of pro-poor spending.

Wworkshops on transparency and accountability at the school level for communities and parent associations and the development of a social monitoring methodology for education budgets.

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Country group: Upper Middle Income countries

• Building confidence in sectors & in watchdog bodies (1)

Argentina: Social Service Delivery and Federal Fiscal Relationship in Argentina: The case of Buenos Aires (Emily Sinnott)

analysis of social service delivery in Buenos Aires Province to strengthen understanding of the impact of changing fiscal federalism arrangements in Argentina on service delivery in the social sectors and to create a dialogue between main stakeholders (federal and provincial governments, unions, academic experts and civil society)

looked at political economy considerations and key institutional processes that affect public social spending and policy-making in the province of Buenos Aires

DFID resources allowed the Bank to fund a study and comprehensive dialogue on the political economy process that is essential to any understanding of the fiscal accounts of the Province of Buenos Aires.

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Upper Middle Income countries

• Building confidence in sectors & in watchdog bodies (2)

Installing Basic Mgt.Capacity in Choco, Colombia (Edgardo Mosqueira)

supporting the strengthening of public management systems in Choco – a chronically weak department.

will also contribute to the measures being prepared by the Central Government to improve the delivery of key services in Choco

objective is to build public confidence in the Departamental Government of Choco.

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Upper Middle Income countries

• Building confidence in sectors & in watchdog bodies (3)

Social Accountability in Public Services in Mexico (Roby Senderowitsch)

supported the creation of a Social Accountability Center at the national level - the main objective of the Center is to build up technical capacities in the NGOs to make them effective in their social accountability role.

NGOs that work on social accountability can now work on different sectors with more rigorous analyses.

The Center has been launched and it was presented in a public event on November 19, 2008.

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4. Working on oversight institutions

• The case of Honduras Supreme Audit Institution - Tribunal Superior de Cuentas

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The puzzle

• Check and balance institutions in fragile institutional environments are usually born with design flaws which makes them vulnerable to political pressure.

• As they fulfill their mandate more efficiently, influence from the three branches of government and/or vested interest might jeopardize efforts to strengthen their capacity and independence.

• Need to gather support from peers (INTOSAI, OLASEF) and citizens.

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The Honduran case

• Tribunal Superior de Cuentas was created in 2003 by law as the regulatory body of the National Oversight System.

• Headed by a collegial body of three Magistrates (from the three main political parties).

• Duration of the term: 5 years, counter cyclical.• The TSC now reviews Government financial statements

and submits an annual report to Congress. Coverage of audits is steadily improving but quality remains poor.

• Five-year institutional strengthening plan, supported by the Bank, USAID and other external partners, focuses on professionalization of TSC.

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Bringing together institutional control and social control: a win- win

• Institutional control bodies have the mandate but very often lack the capacity to fulfill that mandate, reach every institution, and follow-up on recommendations.

• Social control bodies are on the ground, have in-depth knowledge about the daily management of the institutions but lack capacity and the official mandate to exert control.

• With a clear understanding of each ones’ roles and responsibilities they can strengthen each other, and build trust in the SAI.

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Audits with social participation- Results of the pilot audits

• 8 pilots in different regions: 2 education centers (university and secondary center), 2 regional hospitals, 2 municipalities, and 2 development centers (forest, roads).

• Social participation lead to: i) identification of 76% of the internal control deficiencies detected, ii) 97% of civil responsibilities incurred up to $ 1,7 million, and iii) social recognition of the SAI work.

• Audit reports were presented publicly, each institution committed to a remedial action plan to be followed up by social monitoring bodies.

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5. In sum

The LAC approach to governance has:

• Required the Bank to be more adventurous

• Helped us look for trust-building opportunities in traditional investment and TA projects

• Tested small but posssibly scaleable approaches that might begin to unravel the dysfunctional low spend, low engagement, low trust governance equilibrium in Latin America.