Example 1: Synopsis of poverty, risk and vulnerability
Example 1: Synopsis of Poverty, Risk and Vulnerability - Chile
Source: This example is taken from the Project Concept Document for the proposed World Bank Social Protection Technical Assistance Loan to the Republic of Chile
Table 2. Despite gains in the fight against poverty, indigence remains persistent.
| |1987 |1990 |1992 |1994 |1996 |1998 |2000 |
Source: World Bank (2003)
Notes:
1. All calculations using CASEN household surveys
2. All income values are total monthly household income per equivalent adult, and deflated to Santiago 2000 pesos
3. Monthly per capita poverty line, expressed in Santiago 2000 pesos, equal to $40,562
4. Monthly per capita indigence line, expressed in Santiago 2000 pesos, equal to $20,887
Table 3. Chile’s poorest households are at greatest risk
|Population |Risk Indicator |Urban |Rural |
| | |dec 1 & 2 |dec 5, 6 &|total |dec 1 & 2 |dec.5, 6 & 7|total |
| | | |7 | | | | |
|From 0 to 5 years |
Example 2 (a): Shape of Sector - Bulgaria
Source: Bulgaria: Public Expenditure Issues and Directions for Reform, Report No. 23979-BUL
Chapter 8: Social Protection: issues and recommendations
1. Bulgaria has a comprehensive social protection system consisting of a mix of programs inherited from the socialist period, such as family benefits, as well as new programs, initiated during the 1990s to address the social outcomes of economic reforms, including unemployment programs and social assistance. Prior to 1991, guaranteed employment served as the main social protection mechanism in the country. Social assistance had a relatively small role, with limited programs for those who were not able to work, such as the elderly and the disabled. With the economic restructuring and reforms of the late 1990s, the social protection system has expanded to encompass welfare programs that explicitly help households to cope with the new risks of poverty and unemployment.
2. Over the past decade, Bulgaria has been quite successful in completing a first phase of substantial post-socialist social protection reforms, including establishing the legislative and institutional framework for labor market and social assistance systems, and laying the ground for pension reform, based on a diversified multi-pillar model. The second phase of reforms involves steps to address new challenges, including unemployment growth, particularly long-term unemployment, the changing nature of poverty, and upcoming shocks to households, such as the planned increase in domestic energy prices. The road ahead entails important challenges to improve the sustainability of social protection mechanisms, and to strengthen the targeting and effectiveness of programs.
3. This chapter starts with an overview of the overall expenditure envelope for social protection, the coverage of the system, and the poverty alleviation impact. The rest of the chapter discusses issues related to the social protection system at large, as well as specific policy issues within the three subsectors: pensions, labor markets and social assistance. It also presents analyses of the incidence and effectiveness of programs, based on three nationally representative household surveys conducted in 1995, 1997 and 2001.[1]
A. Overview of Social Protection
Expenditures
4. Over the 1990s, social protection financing in Bulgaria averaged 12 percent of GDP, peaking at 15 percent in 1993, and dropping to a low of 9.3 percent of GDP during the crisis of 1996. Social protection spending increased at the outset of the transition period with the growth of unemployment and the influx of early retirees into the pension system. Real social expenditures started to decline in 1992 alongside inflationary financing and as a consequence of the 1996/97 crisis it fell to a record low of 36 percent of 1991 levels by 1997. After 1997, social protection spending grew alongside GDP, attaining 13.6 percent of GDP in 2001, and has been gradually recovering its purchasing power (Figures 8.1 and 8.2). As a share of total consolidated government expenditures, social protection expenditures increased from 21 percent in 1996 to 33 percent in 2001—and these are projected to reach 35 percent in 2002.
Figure 8.1 Social Protection Expenditure: 1991-20001 (% of GDP)
[pic]
Source: MOLSP, MOF.
5. The composition of social protection spending has changed as follows in the 1990s. Family benefits have declined relative to other benefits, as the main benefit, child allowance, has been frozen in nominal terms since 1997. Social assistance benefits, including the two main targeted cash benefit programs for low income households—the Guaranteed Minimum Income (GMI) and energy benefit programs—have increased as a share of GDP. Pensions after falling to 6 percent of GDP during the crisis in 1996/1997, account for 9.1 percent of GDP in 2001.
6. Figure 8.2 Social Protection Spending and GDP Dynamics in Real Terms (1991=1)
[pic]Source: MOLSP, NSI, MOF.
7. Old age pensions comprised almost 55 percent of total social protection spending in 2001 (Table 8.1). Another 11 programs account for more than 30 percent of spending: the larger ones are the unemployment benefit (5 percent), disability pensions (5 percent), child allowances for children of insured parents, and sickness benefits (3 percent each). The remaining 22 programs account for 4 percent of social protection spending. The major ones are described in Sections B through E.
|Table 8.1 Main Social Protection Programs by Level of Expenditures, 2001 |
| |Rank |Expenditures (Mil. |Share in Total Social Protection |
| | |Levs) |Expenditures (%) |
|Old Age Pensions |1 |2205 |55 |
|Unemployment benefits |2 |212 |5 |
|Disability pensions |3 |220 |5 |
|Child allowances, insured parents |4 |106 |3 |
|Sickness benefits |5 |102 |3 |
|Occasional and monthly means tested benefits |6 |90 |2 |
|Energy subsidy |7 |75 |2 |
|Social pensions, means tested |8 |73 |2 |
|Farmers pensions |9 |60 |1 |
|Maternity and child benefits, uninsured parents |10 |47 |1 |
|Child care benefits, insured parents |11 |45 |1 |
|Social care services and institutions |12 |39 |1 |
|Other programs |13-34 |148 |4 |
|Administrative costs | |607 |15 |
|Total, including administrative costs | |4,026 |100 |
|Note: The heading “Other programs” refers to the remaining 22 programs from both social insurance and social assistance category. |
|Source: MOLSP, MOF. |
8.65 The effectiveness of the overall intergovernmental fiscal system needs to be strengthened in order to ensure that local governments have sufficient resources to cover their expenditure obligations, including social assistance. This will require adequate own revenues at the municipal level, as well as a transparent, predictable and equitable system of intergovernmental transfers. The current formula for allocating transfers is excessively complicated and changes annually. In the case of the earmarked transfers for social assistance, the transfers allocated do not cover local needs and, as a result, the central government provides compensating transfers periodically, either in the fiscal year in which the deficits accrue, or afterwards. This considerably limits the capacity of local governments to plan expenditures. The fiscal decentralization program approved in mid- 2002 addresses some of these issues.
8.66 The 2002 budget law increases the share of funds coming from the central budget to 75 percent (25 percent to come from local budgets) and there are plans to centralize funding of social benefits in 2003. This is a step in the right direction since it would improve the safety net for the poorest households and help to assure that a basic safety net is provided to all who qualify. In the absence of centralized financing, the poorest municipalities will still not be able to fully cover social assistance. Local governments will retain the discretion to provide additional benefits on top of the national programs. The benefits of centralized funding is demonstrated by the energy benefit program, another social assistance. It is provided during the November-April heating season, and it is 100 percent financed through central transfers and experiences no delays in payments.
Example 2 (b): Shape of Sector - Costa Rica
Source: This example is taken from the report Costa Rica: Social Spending and the Poor, Report 24300-CR Vol. 1 .
3.64 Unlike many other LAC countries, Costa Rica has relatively few institutions managing and operating social assistance programs. There is only one single institution, the FODESAF, charged with financing social assistance programs. FODESAF is, thus, in a unique position to influence institutions and programs to improve efficiency and coordination by introducing production-based financing mechanisms and promoting program coordination. Some of these actions have been introduced since 1999, when FODESAF instructed programs and institutions to provide targets to be achieved and to rate programs and institutions according to the attainment of these targets. These efforts will need to be, however, consolidated and formalized in the institutional and legal framework of FODESAF to be effective.
3.65 FODESAF has some structural problems. First, most FODESAF allocations (about 77 percent) are fixed allocations determined by old laws which also often earmark tax. The poverty line is calculated by the Institute of Statistics based on the cost of a basic food basket and other necessities. In June 2001, the cost of poverty line was set at c$26,084 urban and c$20,094 rural (US$81 and 62) per capita per month. The cost of the basic food basket (extreme poverty line) was set at c$11,965 urban and c$10,200 (US$37 and 32) per capita per month (exchange rate used c$320 per one dollar). Information contained in the document "Evaluacion del Programa Regimen No Contributivo de Pensiones Por Monto Bisico", Draft FODESAF, 2000.
Proceeds to certain programs irrespective of the changing needs of the poor. This makes it impossible for new governments to change budget allocations according to new priorities or needs of the poor. Old priorities remain in place with no possibility of changing them. For instance, as observed in Table 30, too much may have been spent on housing (and or contributory pensions) and too little may have been spent on child care programs (see allocations for Ministry of Health vs. those for BANHVI and CCSS). Also, and because of this situation, FODESAF has little flexibility to address the needs to the "new" poor in crisis times. Thus, FODESAF law needs to change to allow flexible allocations of funds to different programs according to needs and the changing needs of the poor.
3.66 Second, FODESAF has little effective control over the efficiency and impact of
programs it finances, especially allocations mandated by law to programs and institutions. These institutions are not accountable to FODESAF. This limits the capacity of FODESAF for effective monitoring and evaluation of those programs, and reduces
incentive based financing, and corrective measures, if needed, as a result of such
monitoring and evaluation.
Third and finally, FODESAF has limited ability to plan for resource spending since a large percentage of budgeted funds are not effectively disbursed by the Treasury during the course of the fiscal year. In fact, only about 63 percent of budgeted funds, on average for 1990-2000, have been disbursed. Disbursements as a share of budgeted funds have,
however, increased to about 66 percent since 1999 Table 30.
Table 30: Budget Allocations by FODESAF Main Assistance Programs,
1990-2000 (%)
|Items |1990 |1995 |1998 |1999 |2000 |
|CEN-CINAI, MOH |22.2 |11.4 |6.0 |7.0 |6.8 |
|School Feeding, MOE |6.8 |11.1 |12.6 |13.9 |13.1 |
|BANHVI-Housing Bond |29.1 |26.9 |31.7 |37.2 |32.3 |
|IMAS, Assistance programs |1.7 |11.4 |9.8 |4.1 |10.5 |
|Patronato Nacional de la Infancia |4.1 |4.5 |3.8 |5.1 |5.1 |
|Assistance pensions, CCSS |19.4 |18.6 |22.9 |21.1 |20.7 |
|Other |16.7 |16.1 |13.2 |11.6 |11.5 |
|Total |100.0 |100.0 |100.0 |100.0 |100.0 |
|% Spent vs. Budgeted |60.2 |58.6 |62.6 |65.9 |66.8 |
Source: Figures provided by FODESAF
3.67 The goal of the government should be to continue streamlining institutions and
consolidating programs financed by FODESAF. Some program consolidation has already
taken place since 1999. Some scholarship programs which were administered by IMAS
have been given to FONABE (Fondo Nacional de Becas), under the Ministry of
Education. This has reduced administrative costs, has permitted increments in coverage of subsidies, and has contributed to better targeting of subsidies.
Example 3: Judgments on Shape of Sector - Argentina
Source Managing Social Risks in Argentina,
4.2 Overall SP Framework: Findings and Recommendations
In Argentina there are gaps in the provision of basic social services and infrastructure as well as in the social insurance system’s coverage of vulnerable groups that are far larger than one would expect for a country at its level of per capita income, despite the sizable amount of resources spent on social programs and services. The SP system in Argentina includes a large number of targeted social assistance programs (over 60 at the federal level) that by default attempt to address major shortcomings in social insurance and provision of basic social and infrastructure services, as well as meet the specific needs of vulnerable groups.
Federal social insurance programs reinforce a dualistic system which favors the non-poor. Formal sector employees (where the non-poor are concentrated) have access to a wide range of social insurance benefits and transfer programs (i.e. pensions, health care, unemployment insurance, per-child income subsidies), while those who do not have formal employment have access to public services of lower quality (i.e. health care), or none at all (i.e. unemployment insurance, pensions). It is particularly notable that the present program of Asignacions Familiares is highly regressive: this would thus be an ideal candidate to reduce and/or eliminate and/or make more progressive through means testing, as part of a program to reduce labor costs in Argentina.
The safety-net of targeted SP programs is then left to respond to the gapping holes in coverage generated by this dualistic system, which is an impossible task, both in terms of the resources and the administrative capacity required. In general, although existing targeted programs do intend to address important risks faced by vulnerable groups and are well targeted, their coverage is low (see Table 2: Risks by Age Group) and there are some interventions of questionable cost-effectiveness. Very preliminary estimates of the annual cost of implementing key SP strategies to address the main risks for the unprotected indigent poor in all age groups is as follows: 1) ECD program coverage to all indigent 0-5 year olds, $135 million (all urban poor $479 million); 2) scholarships to all indigent 14-18 year olds currently not attending secondary school, $87 million; (all urban poor $400 million); 3) implementing an income support program covering indigent 25-64 year olds, $270 million (all urban poor $1.2 billion); 4) expanding non-contributory pensions to cover all elderly urban indigent, $30 million (all poor $252 million); Total costs for the urban indigent are roughly $522 million (all urban poor $2.3 billion).
The scope for re-allocation within the current federal Social Protection program menu and allocation of expenditures is narrow. While total federal social protection expenditures exceed $18 billion per year (roughly $500 per Argentine per year, 32% of all national social sector expenditures, and 5% of GDP), federal expenditures on targeted social assistance programs are only about $2 billion ($60 per Argentine per year, 3.8% of national social sector expenditures, and 0.68% of GDP).[2] The bulk of the remaining $16 billion finances three long-standing social protection programs: contributory pensions ($13 billion), the Asignación Familiar child allowance ($1.7 billion), and FONAVI and other federal housing programs ($1 billion). The menu of options for rationalizing the SP strategy within current budget constraints should include reallocating resources away from some of these programs (which are partially funded with general tax revenues) towards targeted interventions for the poor.
Efforts to enhance targeted SP interventions at the federal level should focus on the fact that a relatively small budget ($2 billion) currently finances a complex array of over 60 programs -- with overlapping objectives and target groups -- which comprises the current federal safety-net The sheer number of programs suggests a surplus of administrative effort which can be rationalized, and hence made far more cost effective, by collapsing the number of programs into a far simpler structure. Because these programs are managed by a large number of agencies, they utilize different targeting mechanisms, selection criteria, size of transfers, etc., leading to further inefficiencies in the use of resources. Moreover, there is not a unique system to identify beneficiaries across programs, which not only leads to inefficiency, but opens up to the possibility of people receiving multiple from several programs. In sum, the current structure of targeted federal SP interventions generates not only higher administrative costs than needed, but also dispersion of efforts and likely low impact for the given amount of resources.
In some cases, better targeting of key programs can be used as a strategy to improve coverage rates within current expenditure levels. Two programs display particularly poor targeting results, and should be prioritized for review: a) non-contributory pensions (current budget $570 million), only 35% of which are targeted to vulnerable groups. By reallocating these funds to the elderly poor, coverage could be vastly improved; b) the federal housing program (FONAVI - current budget $900 million) is not well-targeted to poor neighborhoods and households. Redefining federal requirements for use of FONAVI funds at the provincial level, along with technical support for implementing the program under new guidelines, could significantly enhance this program’s coverage of the poor.
Delivery means for key safety-net interventions need to be reconsidered: cash transfers versus in-kind delivery of benefits. The pros and cons of alternative delivery methods need to be carefully weighed in order to determine the most effective means of safety-net intervention. As an income transfer, cash has two main advantages over in-kind (i.e. food) programs. First, they simplify administrative arrangements and reduce administrative costs as a share of total transfers. Second, distributing income (in the form of cash, checks, or vouchers) empowers poor families to exert own choices in consumption of food and other necessities. However, not all programs can be optimally delivered as an income transfer. Direct provision of enriched foods, along with nutritional education has been found to be more effective than cash or food stamps to combat malnutrition of mothers and infants. For other vulnerable groups a combination of delivery mechanisms can be optimal; for example both workfare and food stamps can be targeted to the unemployed to achieve optimal risk reduction for this group. Finally, in some cases the lower costs of delivering pure income transfers can be outweighed by the benefits arising from alternative program designs. For example, while direct income transfers are cheaper and administratively less costly than workfare (which in addition to wages for participants involves substantial costs for construction materials), workfare programs offering a low wage do not distort work incentives, and in addition provide social infrastructure to poor communities. Yet in most other cases, such as support for poor single mothers with a large number of children, the handicapped, the elderly poor, and providing scholarships for poor children as an incentive to attend school, pure cash transfers would probably be the most cost-effective instrument for Argentina.
Substantial improvement in monitoring and evaluation efforts have been made in the past few years, but this is limited. Efforts by SIEMPRO and specific program evaluation efforts (particularly in the case of the Trabajar program) have been made to assess program targeting, coverage, and impact. This effort, however, is limited by the lack of an adequate household survey system and instruments, which means that accurate assessments of even basic indicators such as school attendance rates or the incidence of social protection programs nationwide cannot be accurately estimated. Continued improvement in program monitoring and evaluation depends to a significant degree on improved national statistical collection (see below).
National statistics on poverty are deficient in critical areas, and require improvement in order to orient and evaluate Social Protection programs. Argentina currently lacks a nationally representative household survey system (the sample excludes rural areas). Therefore, it is impossible to accurately assess national poverty levels, and the distribution and characteristics of poverty across urban/rural settings. Furthermore, traditionally marginalized groups - in particular the indigenous - receive little attention in national statistical collection, and hence in resulting poverty studies. Effective SP strategies for such groups are likely to require different approaches in terms of scope, content, and implementation arrangements, as well as the use of qualitative techniques and participatory consultations.
Preparing for crisis involves building-in several key elements which are currently lacking in Argentina’s approach to Social Protection. Social sector expenditures are currently pro-cyclical, expanding during times of economic growth and contracting during recession/crisis (World Bank 1999). Programs that provide temporary or ‘emergency’ support to vulnerable groups (such as Trabajar) do not automatically respond to rising degrees of need in the population. A list of priority social and SP programs could be developed, and a secured source of funding for these programs during crisis conditions established. The Government might consider allocating a proportion of its budget to a ‘savings’ pool which will automatically expand during periods of growth. This pool can then be drawn down to fund (expand) protected programs during crisis. Explicit mechanisms for expanding the coverage of protected programs during crisis, as well as for scaling these programs back as need recedes, also need to be developed.
Enhancing Federal-Provincial Coordination on SP Policy. In Argentina’s federal system, provinces and municipalities run many programs locally, drawing either on co-participation funds transferred from the federal level, or their own resources. In some cases, similar programs (such as Trabajar and many nutrition programs) are being implemented at the same time by both the federal government and some of the provinces. While these programs might complement each other by serving distinct segments of the population, administrative functions are likely duplicated by running two similar programs at both the federal and provincial level. Hence, it may be most efficient to move towards a model in which provinces and municipalities are responsible for program administration/implementation, under federal guidelines. The federal government, ideally, would concentrate on setting national SP priorities, and would establish general criteria, monitoring and evaluation for programs run at the provincial and/or municipal level with federal funding. Federal funding would, again ideally, be allocated so as to offset regional disparities in poverty levels as well as to ensure compliance with federal guidelines.
In light of Argentina’s federal structure, such a new framework would need to be agreed as a new social pact, similar to the pacto fiscal agreed between the Federal Government and the provinces on tax and other fiscal matters. In practice, funds transferred by the federal government to the provinces under the ley de coparticipación (provincial sharing of taxes collected at the federal level) are pre-established in terms of amounts and are unconditional, as in many industrial countries with federal systems. Hence, the federal government has little leverage regarding the allocation and use of these funds. For the Federal Government to exert any influence on the provinces in pursuit of national SP policy, there is a need for a comprehensive agreement whereby use of funds is determined by compliance with explicit federal guidelines.
Such a system already exists, at least in theory, in some sectors. For example, the federal housing program FONAVI is run at the provincial level under federal guidelines and with federal funds. However, in practice, the federal government has few ‘teeth’; provincial compliance with federal program guidelines attached to funding streams appeal to be lax and there are no penalties for non-compliance. Furthermore, federal guidelines are often inappropriate or ill-designed from the perspective of effective poverty reduction, which encourages non-compliance. In the case of FONAVI, federal guidelines require that over 80% of funds be spent on relatively expensive housing units (inaccessible to the poorest), rather than encouraging projects targeted to the poor such as slum rehabilitation. In sum, the limitations implied by the current institutional setting suggest a more active role for the federal government in social protection than might otherwise be recommended.
NGOs and civil society organizations represent key institutions in the design, provision and evaluation of Social Protection programs in Argentina. Building on the recent Consultations with the Poor in Argentina, interaction with NGOs and civil society will be critical to enhanced SP policy, improving the capacity for correctly identifying priority areas for SP policy intervention, understanding the elements of successful program implementation at the local level through both quantitative and qualitative evaluation methods, and for building social cohesion and support for future SP policy reforms. Participatory processes also increase the sustainability of SP interventions, by fostering community support for the program as well as engaging community members in the actual operation and maintenance of the program[3].
Example 4(a): Gaps and Overlaps – Kyrgyz Republic
Source: Kyrgyz Republic – Social Risk Mitigation –paragraphs 8.33 –8.36
Duplications and Gaps in Coverage
1. espite the substantial financial effort, budgeted social protection benefits do not reach half of the poor, including 40% of the extreme poor (see Table 8.8). The inadequate coverage of the system is due to a set of eligibility rules that exclude the working poor without children. About 11% of all households, and 8.6% of non-poor households, cash in more than one social protection benefit.
Table 8.8: Duplications and Gaps in the Coverage with Social Protection Programs
Note: Poverty groups are identified by consumption in the absence of SP transfers.
Source: Estimations are based on the HBS 2001.
8. The uncovered extreme poor are more likely to be younger households, headed by married males with none or few children (especially 0-6 year old children). Furthermore, the uncovered extreme poor are relying on low wages or non remunerative self-employment and are more literate (while those covered are elderly pensioners or on another form of state support, with lower education). By location, the uncovered poor are more likely to be found in urban areas, or in Jalal-Abad or Chui oblasts, and less likely to be found in Naryn and Osh oblasts. These regional disparities may be associated with difficulties in the implementation or financing of poverty reduction programs, such as the UMB and social allowances.
9. Duplication of the social protection benefit at the household level reaches 11% of the population. A substantial share of program beneficiaries (defined as individuals and their family members receiving at least a transfer) receive support from more than one program. The extent of program duplications is larger among the extreme poor (20% of these households receive multiple benefits), moderate among the non-poor, and lowest among the moderate poor. Such a level of program duplication may call for the rationalization of some these programs. With the current information, we cannot point out what specific programs seem to overlap. In some instances, supplementary benefits are piggy-backed on categorical or income-based eligibility for other primary transfer programs as a way to provide additional, specific assistance to families with a specific need. In such cases, the issue is whether there is a coherent strategy underlying such benefit relationships and whether income tests are appropriately structured to deal with linked benefits. Collecting better survey and program data is a necessary first step for better monitoring and evaluation of these programs.
10. Households benefiting from more than one SP program tend to be headed by older persons, unmarried or female heads, have relatively more children (especially 0 to 6 years old). These households are less likely to earn wages, entrepreneurship or farm income, and to rely more on the in-kind income from household plots. A larger share of households benefiting from multiple SP programs are found in urban areas, in Osh and Bishkek oblasts, and less so in Jalal-Abad, Talash or Chui oblasts. Beneficiaries of multiple social protection programs, mostly pensioners, are also found to have better access to utilities, have more durables, and own more livestock but less land.
Example 4(b): Gaps and Overlaps - Guatemala
Source: Guatemala - Poverty in Guatemala, No. 24221–GU, pp137-8.
Duplications and gaps in coverage of social protection and private transfers abound (Figure 12.4). Specifically:
o Duplications in Public and Private Transfers. The degree of overlap between public social protection and private transfers is large (upper left-hand panel of Figure 12.4). Specifically, 23% of all households receive support from both the Government and private sources. Private transfers reach only 6% of households not covered by public social protection schemes.
o Overlaps between Social Insurance and Social Assistance. Major duplications exist between SI and SA at the household level (upper right-hand panel of Figure 12.4). Three quarters of households that receive pensions also receive other social assistance benefits (such as the energy subsidy). Besides the energy subsidy, one quarter of households that receive pensions also receive other social assistance benefits (mainly programs for children). These duplications are difficult to detect by the administration as most programs target individuals not households.
o Duplications between Social Assistance Programs. Given the extensive coverage of school feeding programs, overlaps between SA programs also abound (lower right-hand panel of Figure 12.4). Most children who receive scholarships, school materials, or other social assistance programs also receive school feeding or have siblings that do. Besides school feeding, there is little overlap between the rest of the programs.
o Duplications of Private Transfers. The degree of overlapping of private transfers is smaller (lower left-hand panel of Figure 12.4). Households that receive local remittances are generally not the same as those that receive foreign remittances. About half of those receiving private donations do not receive remittances.
o Gaps in Coverage. Some 23% of the extreme poor and 18% of all poor were not covered by any type of public or private transfers, as compared with only 13% of the non-poor. The public social protection system fails to reach a quarter of the extreme poor and a fifth of the poor. Virtually all of the poor are excluded from the social insurance system.
Figure 12.4 - Duplications and Gaps in Social Risk Management Arrangements
[pic]
Note: Coverage of each group of programs is estimated at household level (unweighted by household size). World Bank calculations using the ENCOVI 2000, Instituto Nacional de Estadísticas – Guatemal
Example 5(a): Appropriateness of Spending Level - Ethiopia
Source: Ethiopia Public Spending in the Social Sectors - The Emerging Challenge, Public Expenditure Review, July 3, 2003 – paragraphs 6.29 – 6.40
What Could Ethiopia Spend on A Safety Net Program? - Potential Public Expenditure Needs.
6.29 The amount Ethiopia could potentially spend on a safety net for the poor is obviously extremely high, because the number of potential beneficiaries is very large, both in terms of those whose consumption is at unacceptably low levels, even in normal years, and of the huge numbers susceptible to drought.
6.30 Clearly the solutions to this problem lie outside of the realm of safety nets: in improved productivity of labour – both in agriculture and elsewhere - in a more diversified production base, managing population pressure, and migration. But even with the best possible outcomes, there will remain unacceptably large numbers of people who will require direct transfers. The graph below shows projected number of people living below the food-poverty line (that is the level of income required to sustain basic minimum food consumption) in Ethiopia over the next 20 years at both a 3 percent and 4 percent growth rates.
Figure 8.1: Projected Number of Persons Below the Food Poverty Line
[pic]
6.31 To provide adequate food to all of these people currently would require expenditure of about $810 million p.a.; representing 12 percent of GDP, or about one-third of all public spending. This is clearly infeasible. Below we present projections of what it might cost to provide a range of more realistic levels of safety-net coverage.
32. We have defined the options in terms of the proportion of basic food requirements that might need to be provided by a safety net. Table 6.3 below shows the broad unit costs, using different program instruments, associated with providing ‘light’ assistance (defined somewhat arbitrarily as 50 percent of the minimum food requirement of households for 4 months of the year – this corresponds roughly to the level of need faced by many of the moderately poor in Ethiopia, in many years) ; and with more substantial, ‘heavy’ support (providing 75 percent of minimum food needs for 8 months of the year - which corresponds roughly to the situation faced by the poorest in Ethiopia on a continuous basis, and by many additional households in bad drought years).
Table 8.1: Approximate Unit Costs of Large-Scale Transfer Programs
(US$ millions per million persons served – constant 2002 US$ millions)
Pure Food Public Works
Distribution \a Program \b
‘Light’ Support $ 13.5 m. $16.8 m.
[50 % of food requirement for 4 months of the year]
‘Heavy’ Transfer $ 40.5 m $50.2 m.
[75 % of food requirement for 8 months of the year]
Notes: a/ Food distribution assumes a full requirement of 18 kg. per person per month (light support is thus 36 kg. per person annually, and ‘heavy’ is 108 kg.); assumes food cost of $300/mt., and admin. costs of 25 percent;
b/ works-based programs assume same requirements , and transfer required to purchase the defined level of food/beneficiary; based on grain price of 2 Biir /kg. and program costs of $1 per $1 transferred in wages. Note this is cost per beneficiary, not works participant – wage rate and days worked could be adjusted in any combination to reached the desired transfer, depending on assumed number of dependants per worker.
33. he total costs of different safety net strategies will then depend on the choices the government makes regarding: the numbers to be covered, the degree of support to be provided to them, and the choice of instrument. Below we present the costs of 3 basic scenarios (details and assumptions are shown in the accompanying Box)
Scenario 1: An “Aggressive” Safety Net Strategy: This strategy attempts to provide at least some support to the bottom 20-25 percent of the population. It corresponds to a situation of persistent deep poverty (associated with 3 percent growth or less), and relatively bad luck with respect to exogenous shocks- foreseeing a major drought every 5 years; combined with Government taking a policy position that it is willing to use transfer instruments to alleviate widespread suffering. The program details are shown in Annex --, but broadly they involve providing a pure transfer to the bottom 10 percent (with the poorest 5 percent receiving a substantial amount, equivalent to 75 percent of the minimum food requirement for 8 months of the year); coupled with a sustained public works program that provides support for the second-poorest 10 percent of the population in a normal year, rising to 15 percent in bad years. Such a program might cost something in the order of US$ 375 million per annum currently, rising to over $ 500 million p.a. over the next decade.
Scenario 2: “Moderate” Safety Net Strategy - which involves providing limited support to the very poorest (the bottom 5 percent of the population); and a flexible Public Works Program to provide moderate levels of support (equivalent to – worth of food for – of the year, on average)) to between 5 and 10 percent of the population in normal years, gearing up to provide more substantial support in bad years. Costs would rise from about $230 million annually now, to around $ 300 million by 2010.
Scenario 3: A Minimalist Scenario. This strategy involves a tightly restricted public safety net policy: essentially leaving poverty alleviation to growth and diversification, and providing only very limited humanitarian assistance to the poorest. It assumes a declining number of absolute poor (associated with sustained growth of over 4 percent p.a.); and infrequent droughts. The program would provide free food (or cash) to the poorest 2-3 percent of the population, combined with a modest public works program, serving the next poorest 5 percent in most years, and no more than 10 percent of the population on bad times.). Such a program could be delivered for approximately $135-150 million p.a.
Table 8.2: Estimated Costs of Safety Net Scenarios
(Annual cost, in constant 2002 US$ millions)
| |2005 |2010 |2015 |2020 | |
|‘Aggressive’ Strategy |419.8 |465.9 |514.4 |564.6 | |
|Moderate Intervention |255.0 |283.1 |312.5 |343.0 | |
|Minimalist |152.1 |163.1 |173.6 |190.6 | |
| | | | | | |
Sources: staff estimates, see Box and Annex 6.2
Box 8.1: Three Broad Cost Scenarios for Safety Net Spending
34. While the costs of the aggressive safety net strategy might seem excessive, it must be remembered that the potential beneficiaries that we are talking about in the case of Ethiopia are generally surviving on levels of consumption that would place them among the very poorest almost anywhere else in the world, so considering some form of transfer for them is not inconceivable. Nonetheless, given the competing claims on public expenditure, it clearly makes sense to consider a more conservative approach.
35. The first strategy is likely unaffordable; the $ 375 million p.a. would represent 18 percent of total public expenditure, and given competing needs, in terms of education, infrastructure, and other essential investments, it would seem unlikely to be a rational use of public resources.
36. At the other end of the spectrum, the ‘minimalist’ scenario would probably result in a level of welfare loss, and human suffering, that is unacceptable. Nonetheless it provides a bottom-line indication of likely needs if things go well in terms of raising consumption levels and diversifying away from dependence on rainfed foodgrains over the next two decades.
37. The middle scenario probably corresponds best to what is likely to be required; and accords closely with the level of resources currently devoted to transfers. However given the high opportunity cost of public resources, combined with the ineffectiveness of the current arrangements, there is certainly room for improving the effectiveness, and probably reducing the incremental cost of the program.
38. Within this framework, Government and donors need to make a number of basic choices:
1) forge a consensus on what the objectives of a safety net should be in Ethiopia (for example, whether to provide adequate minimum food consumption to most of those at risk; to only cover those at risk of death by starvation; or just to provide a true ‘safety net’ in times of drought);
2) to be selective of which groups (or sub-groups) within the population should be provided with support (for example only those unable to look after themselves? (the elderly, disabled, labour-short female-headed households); whether to continue to focus on those living in selected geographic areas?)
3) Need to carefully manage the trade-off between spending on pure transfers and other poverty-reducing expenditures - by wherever possible using instruments that contribute to both objectives (such as employment of the poor on public works that contribute to longer-term income growth).
4) Need to maximize the welfare impact of each birr spent on safety net transfers; (for example by timing transfers -either during the year or the lifecycle - so that they have the greatest impact, or using safety net spending to achieve multiple poverty-reducing objectives).
39. It is our view that given the extreme scarcity of public funds in Ethiopia, the level of spending on pure transfers should be kept to a minimum, and most safety net spending directed towards works-based programs that can also finance investment in long-term assets. The fact that labour is underutilized during the non-agricultural season is an added reason for adopting an employment-based transfer scheme. Furthermore, Ethiopia is fortunate in still having a high level of investment in social capital in many areas; one manifestation of this is the fact that communities, or extended families, tend to look after many of the elderly, the infirm , or the disabled, as a result of which there are not many of the very poor who are outside of households that have able-bodied members that may be targeted by publics works programs.
6.40 Finally, we note however the extreme levels of malnutrition compared to other countries, and believe that the safety net strategy should address the needs of malnourished children below the age of 30 months, given the extreme long-term damage that can be avoided by selective nutritional interventions at this stage.
Example 5(b): Appropriatness of Spending Level - Tunisia
Source: Republic of Tunisia Employment Strategy, Volume I, Main Report No. 25456-TUN, June 28, 2003, paragraphs 4.9-4.10
4.9 With ALMP expenditures of about 1.5 percent of GDP in 2002, Tunisia ranks high compared to selected OECD countries.[4] Even if the reimbursable micro-credits are factored in, the estimated revised total expenditure on ALMPs would reach approximately 1 percent of GDP. At this level, Tunisia still ranks in the upper half of OECD countries but below the major spenders. However, under either definition, it remains well beyond many OECD countries, including both high-income (e.g., United States, Japan, United Kingdom, Canada, and Australia) and all middle/lower-income countries (e.g., Czech Republic, Greece, Hungary, Mexico).[5]
Table 37 Comparison of Composition of Expenditures (Percent of GDP) on ALMPS
Tunisia and OECU Countries, 2002 (Tunisia) and Latest Year (OECD)
| |Tunisia |OECD countries |
| | |Highest |Lowest |
|Public Employment Services and Administration |0.07 |0.26 |0.04 |
| | |Netherlands |United States |
|Labor Market Training |0.06 |0.85 |0.01 |
| | |Denmark |Poland |
|Youth Measures |0.56 |0.42 |0.00 |
| | |France |Belgium |
| | | |Hungary |
| | | |Japan |
| | | |Mexico |
|Subsidized Employment and Job Creation |0.791 |0.77 |0.00 |
| |(0.29)2 |Belgium |Norway |
| | | |United Kingdom |
| | | |United States |
|Self-Employment Support (Incl. Micro-Finance) |0.631 |0.05 |0.00 |
| |(0.13)2 |Spain |Belgium |
| | | |Denmark |
| | | |France |
| | | | |
| | | | |
| | | |Japan |
| | | | |
| | | |Netherlands |
| | | |Norway |
| | | |Switzerland |
| | | |United Kingdom |
| | | |United States |
|Total |1.491 |1.58 |0.15 |
| |(0.99)2 |Netherlands |United States |
1/Includes “gross expenditures” on micro-finance (including repayable loans).
2/Assumes “net expenditures” (grants, foregone revenue from below-market interest) as 20 percent of “gross expenditures” on self-employment support.
Sources: WB calculations based on data from MOF, ATE, MFPE, and MDE and OECD (2002), Annex Table H.
4.10 The composition of spending on ALMP in Tunisia differs substantially from the OECD. Tunisia demonstrates two tendencies (see tables 34 and 37). First, in the areas of public employment services/administration and labor market training, it ranks with the lowest spenders. One notable area where spending in Tunisia is especially low is labor market training for unemployed or at-risk adults (only 0.04 percent of GDP in 2002). In the 27 OECD countries average spending on this training is almost four times higher at 0.15 percent. In 2001, a recycling scheme for those who have lost their job was introduced. But the scheme, expected to reach 5,000 workers during the tenth Plan, is not yet operational. On the other hand, Tunisia’s expenditures compare with or even exceed the highest spenders in terms of youth measures (including pre-employment training) and support for self-employment.[6] Many countries in the OECD spend virtually nothing on these latter types of interventions.
Example 6: Overall Recommendations - Krygyz
Source: Kyrgyz Republic-Social Risk Mitigation – paragraphs 8.55 – 8.58
E. Summary of Key Issues and Policy Recommendations
55. Against the background of widespread poverty, the Kyrgyz Government can use the system of social protection effectively to tackle the worst forms of poverty. The Government can adopt an operational objective of reducing poverty among the poorest 20% of the population. To reduce extreme poverty, the Government faces a number of fundamental choices in the design of social protection policy, the most important being to determine the right balance between quasi-fiscal subsidies, pensions and social assistance spending. Pension spending and quasi-fiscal subsidies have, to a considerable degree, been crowding out more social spending on better targeted assistance. Bank advice is to restrain pension increases within financially sustainable limits, to move energy pricing towards cost-recovery levels, and to seek efficient means to cushion hardship associated with energy price increases.
• Within the pension system, balance poverty-alleviation objectives and earning-replacement objectives. The Bank’s advice is to place higher priority in the short-to-medium term on poverty alleviation objectives while retaining the framework of the 1997 reforms as the longer-term policy framework for pensions.
• Improve the impact of social assistance spending on the poorest, by increasing funding and raising the eligibility threshold for the UMB, while rationalizing or capping spending at their nominal level in the case of less efficient programs such as privileges and scholarships. Further analysis and experimentation with other targeting tools, such as proxy-means testing, is also recommended.
56. Social assistance. During the transition period, the social assistance system was reformed substantially. From a widespread system of categorical benefits, privileges and quasi-fiscal subsidies, the current system was simplified and targeted toward the poor (UMB and social allowances), while the scope of price discounts or quasi-fiscal transfers was reduced. The Government should be commended for all these improvements in the social assistance system.
57. However, substantial scope for further improvements remains. Here are a number of areas where further reform may improve the efficiency and effectiveness with which social assistance reduces poverty:
• Finding: Various social assistance programs targeted to the needy used different income thresholds to determine eligibility. This situation is probably suboptimal on a number of accounts: (i) it stretches the limits of the administrative capacity of the Ministry of Labor; (ii) generates the potential for wasteful duplication; (iii) makes it hard to assess the group of un served poor. Recommendation: Consider using consistent criteria for poverty alleviation programs (like similar eligibility thresholds for different programs, set around the per capita consumption of the poorest quintile). Implement a two-step poverty reduction agenda, by recognizing that not all the poor are equally poor. Focus the social assistance policy on the poorest quintile (or the extreme poor) first.
• Finding: There is not a safety net for able-bodied individuals without children that are falling into extreme poverty. Recommendation: Consider extending the coverage of the UMB for this category of households, eventually subject to a workfare requirement.
• Finding: A number of social protection transfers, such as scholarships and some privileges, are highly regressive. Recommendation: Consider freezing the nominal value of the benefits of these programs – allowing inflation to erode them through time – and use the resulting savings to augment the UMB.
• Finding: Even the best targeted program, the UMB, has low coverage and considerable leakage of benefits to the non-extreme-poor. Recommendation: Consider improving the impact of social assistance spending on the poorest, by increasing the funding and raising the eligibility threshold for the UMB, while rationalizing or capping spending at their nominal level in the case of less efficient programs such as privileges and scholarships. Further analysis and experimentation with other targeting tools, such as proxy-means testing, is also recommended.
• Recommendation: Improve monitoring and evaluation of SP programs.
58. Pensions: Among the policy levers that Kyrgyz policy makers can significantly control, only pension policy can potentially have a major financial effect on the economic resources available to pensioners and families containing pensioners, who include a significant subgroup of the poor. This report concurs with the Bank’s position as outlined in the latest PER of not abandoning the framework of the 1997 reforms in the longer term, but to tilt the rules to favor the poorest pensioners until poverty concerns have been somewhat alleviated and then gradually to revert to the present system:
• Recommendation: Maintain the 1997 Strategy: The Government should continue to balance the multiple objectives of income adequacy, earnings replacement, fiscal balance and sustainability, and gradual decreases in the contribution rate for pension insurance. Pensions should be indexed to changes in the consumer price index. The Government should also recognize that more adequate pension levels will flow only to new pensioners, once economic growth raises real wages.
• Recommendation: Maintain an adequate Earnings Replacement ratio: The Government should define the objective operationally as eliminating pensions that are below the extreme poverty line.
Example 7(a): Coverage - Bulgaria
Source: Bulgaria - Public Expenditure Issues and Directions for Reform, Report No. 23979-BUL.
Coverage
8.7 Social protection programs in Bulgaria have wide coverage within the population. Over 80 percent of Bulgarians received at least one type of benefit in 2001 (Table 8.2). At the aggregate level, this has remained stable since 1995. At the program level, however, there have been significant increases in coverage, namely for unemployment benefits, child allowances, and social assistance, including the extended GMI program (a combination of cash and in-kind means-tested programs which comprise the main safety net program). By and large, social protection programs have become more pro-poor since the mid-1990s. In 1995, the share of poor and non-poor households receiving benefits was nearly identical.6 7 Pensions and unemployment benefits had similar, outreach among poor and non-poor households. Child allowances were received more frequently by the non-poor than the poor and, as expected, social assistance programs had a higher outreach among the poor. The pro-poor orientation of all social protection programs with the exception of pensions-increased in 1997, and further in 2001. The share of poor households receiving all types of social assistance programs nearly doubled, from 26 percent in 1995 to 49 percent in 2001.
Table 8.2 Coverage of Social Protection Programs: 1995,1997 and 2001 (as % of
persons receiving benefits*)
| |Total |By Poverty Status of the Recipient |
| | | | |Non-poor | |Non-poor |
| | | | | |Poor | |
|Total Social Protection |80.4 |
|VGD |34% - 59% |
|VGF |30% - 65% |
|FFE |10% - 25% |
Source: 2000 Household Income and Expenditure Survey (HIES).
Example 13(a): Unit Cost Analysis - Ethiopia
Source: Ethiopia: Public Spending in the Social Sectors - The Emerging Challenge, Public Expenditure Review, July 3, 2003
Cost-Effectiveness of Current Program Spending
The table below shows the approximate cost per Birr of transfer under a sample of existing programs. Comparisons between them are of course difficult, because the programs – especially the work-based ones – have very different overhead cost structures, and serve very different purposes. Furthermore, the costs and benefits are not consistently measured, due to the data problems mentioned above.
Table 8.3: Some Estimates of Transfer Costs – Selected Programs
Approximate Approximate
Total Number of Transfer per Cost per
Program Expenditure Beneficiaries Beneficiary Birr transferred
(in value to beneficiary)
Food-for-Work \a $ 19.9 m. n/a $5.11 1.88
EGS \b n/a - $ 11.22 n/a
Gratuitous Relief \c n/a n/a $ 8.82 1.50
School Feeding \d $ 4.1 m. 258,000 n/a 2.50
Cash-for-Work \e $2.5 m. 20,341 $ 9.55 1.30
a/ FFW – Expenditure based on WFP country program table ($59.6 over 3years). No.of beneficiaries to be confirmed; benefit/costs based on distribution of 134,824 mt. Over 3 years. [Food transfers valued at 2 birr/kg. exchange rate of 8.6/US$.
b/ Based on WFP evaluation showing average transfer of 47,7 kg of food per beneficiary under EGS, and of 37.5 kg, under free food distribution; valued at 2 birr per kg.
c/ Avg. benefit based on WFP evaluation that reports avg. receipt of 37.5 kg/person, valued at 2 birr./kg., at 8.5 birr/US$; cost-benefit based on reported costs of delivered food of $350/ mt, and benefit valued at 2 birr /kg. (= approx. $235/mt.)
d/ From WFP program table for 2003-06; $ 12.4 million over 3 years, to distribute commodities valued at $4.9 m. ($1.6 m. annually) international procurement price; Tassew report implies 46 kg. per beneficiary ; actual value of package to be confirmed)
e/ based on SCF (UK) report on pilot for period Feb-May 2001; cost of Stg. 158,325 for 20,341 beneficiaries, of which stg. 121,425 distributed as wages; valued at US$1.6/Stg.
6.24 Nonetheless, a number of observations are in order. One is that the costs of food-based programs (which constitute the vast majority in Ethiopia) are particularly high, due in part to tied procurement of grain, and the high costs of domestic transport and distribution. The table below shows the average cost of delivered food under safety net programs in Ethiopia (excluding program implementation and administration costs):
International Price $130 /mt.
International Shipping : $ 50
Transport Djibouti-Regional center $ 65
Local distribution & transport: $ 40
Total cost: $285
6.25 When administrative costs are added, even free distribution can cost over $350 per ton, equivalent to about 3 Birr per kg. of food; this compares with average local market prices of about 1.5-2 birr per kg. for most foodgrains. [10]
6.26 The costs of delivering a dollar’s worth of benefits would be substantially lower if cash were distributed (see box on the SCF(UK) pilot cash-for-work scheme). However, the problem is that food is just not available at any reasonable price in many of the affected areas , especially during drought years. At the same time, however, the continued preponderance of food distribution programs – of whatever kind – undermines the development of inter-regional trade and price signals that are ultimately needed to ensure better-functioning markets. [11] Clearly this is a process that needs to be phased, but as progress is made in developing functioning markets, the fastest-possible shift to cash-based transfers is warranted.
6.27 The cost-effectiveness estimates for works-based programs are somewhat misleading, because we know that the current EGS program is badly-underfunded. Complementary inputs, such as supervision, planning and design, materials and equipment are only financed at a very low level (or not at all). In some cases a donor or NGO provides some inputs – typically to about 20 percent of program costs – but based on experience worldwide, we estimate that such complementary inputs typically cost one dollar for each dollar transferred as wages - so they should amount to about 50 percent of program costs.
6.28 Furthermore, although table 6.2 shows cost per unit transferred, it does not really tell us anything about the effectiveness of these transfers. For a number of reasons cited earlier, spending is often ineffective: because food comes too late; or because the amount of food distributed is so diluted (due to insufficiency of overall allocations, or the fact that it is disbursed among many more beneficiaries than was intended), that each household receives too little to materially affect their welfare. In the case of works programs, the stop-start nature of programs prevents them having a sustained impact on incomes of the poor; and the absence of counterpart funds and integration with local capital plans means they don’t result in creation of lasting, productive assets.
Example 13(b): Unit Cost Analysis - Guatemala
Source: Guatemala Poverty Assessment Program – Social Proection, Private Transfers, and Poverty – May 14, 2002
Cost Benefit Analysis
This section looks at the cost-benefit ratio for the main social programs that aim to reduce poverty and for private or family charity. Using the methodology described in Annex 1, we present in Table 11 estimates of the cost required to reduce the poverty gap by Qz1 for a list of social protection programs. The same simplifying assumption is maintained - that the level of consumption in the absence of a welfare program equals current consumption minus the welfare benefit. The estimation has three simple steps. First, we computed estimates of the current and counterfactual poverty gap. Second, we estimated the contribution of the program to reducing the poverty gap. Third, we estimated the cost-benefit ratio by dividing the reduction in the poverty gap due to the program by total spending on that program. Due to limitations in the ENCOVI data, program spending includes only the cost of the benefits provided through the program as reported or assessed by the beneficiary. This means that neither administrative costs nor potential incentive effects are taken into account. The resulting ratio gives the numbers of Qz spend per Qz1 reduction in the poverty gap, and the lower the number (preferably close to one), the better the outcome. To test how sensitive the results are to the choice of the poverty line, we estimated cost-benefit ratios for both total and extreme poverty lines.
Figure 18 ranks the social risk management programs by their cost-benefit ratios, using the reduction in (total or extreme) poverty as social welfare criterion. Broadly speaking, social insurance is the most inefficient arrangement in reducing (total) poverty. It costs between Qz5 to Qz9 for any Qz1 reduction in the poverty gap. Social assistance programs are the most efficient. For most social assistance programs, it takes between Qz1.4 and QZ2 to reduce the poverty gap by Qz1. However, some social assistance programs, which already have a reputation for contributing little to reducing poverty, are among the worst performers, such as the school transport subsidy (Qz6.1) and the scholarship system (Qz2.9). Figure 18 also illustrates the cost benefit ratios of the social risk management programs using extreme poverty as social welfare criterion. First, note that all ratios increase monotonically as expected. The story remains, in broad terms, the same. For most social assistance programs, it takes Qz2 to Qz8 to reduce the extreme poverty gap by Qz1. The only re-ranking occurs in the cases of alimony and school transport and energy subsidies, which are more inefficient in fighting extreme poverty than total poverty. These programs are better at reaching the moderately poor than the extremely poor.
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Example 14: Labor Market and Other Incentive Effects
Source: This example is taken from Brazil Critical Issues in Social Security, p.10-11
A World Bank Country Study 22513, May 2001
Reducing collateral inefficiency
There are two major inefficiencies in the Brazilian labor market, both of which can be traced at least in part to weaknesses in the social security system. First, because of the relative generosity of government pensions, there is little or no mobility from the public to the private sector. Second, the high payroll tax rates levied to finance RGPS benefits (that, together with ad hoc taxes levied to fund social security benefits, add up to about
33% of the cost of labor), and the high general tax rates needed to meet - the pension deficits for govemment and private sector workers Social security significantly raise the cost of doing business in Brazil's regulated sector
Unlike many countries undergoing fiscal adjustment, govemment workers in Brazil are generally overcompensated relative to workers with similar attributes (such as age, education and experience) in the private sector. For example, a recent study found that:
• a male worker with a high school diploma in the federal judiciary in Brasilia gets 50% higher pay, had 80% more job security, and could expect 75% higher pensions compared to his private sector - counterpart.
• a female civil servant with 12 or more years of education working in the state administration in Rio de Janeiro would get the same salary, had 70% more job security, and could expect 40% higher pensions.
• a secondary school teacher in Sao Paulo's public schools gets 15% lower pay but has 50% more job security and can expect 50% higher pensions than a similar worker in the private sector.
Large public-private differences in compensation leave no motivation for government workers to pursue possibly more productive private sector careers (this is especially true for low wage workers), and also create unintended incentives to join government service just before retiring to get higher pensions (this is especially true for high wage workers).
High payroll levies and weak links between contributions and benefits inherent in a PAYG system- made even weaker by lax administration- result in high labor costs in Brazil's regulated sector, and deepen the divide between formal and informal employment. Figure 8 illustrates that social security taxes are high in Brazil, and are exceeded only by a few European countries in the industrialized world. With reforms taking root in countries such as Argentina and Mexico, Brazil's high tax rates result in lower wages and employment in an increasingly competitive global economy.
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Example 15: Match of Risk and Target Groups
Source: Republic of Tunisia Employment Strategy, Volume I, Main Report No. 25456-TUN, June 28, 2003, paragraphs 4.27-4.28
Correspondence with The Profile of The Unemployed
4.27 noted earlier the primary target of ALMPs is the unemployed, with a special emphasis on young people. Based on the characteristics of unemployed workers in Tunisia, the following observations can be made (see table 47):
▪ Unemployment rates do not differ much between men and women but because the participation rate of men is so much higher, they account for three-quarters of all unemployed;
▪ Both the 15-19 and 20-29 age groups have much higher unemployment rates than the national average (generally the case in all countries). More pointedly, 70 percent of the unemployed in Tunisia are under 30 years old;
▪ Human capital matters. Almost 60 percent of unemployed workers have no more than primary schooling. However, unemployment remains a problem for large numbers of workers with secondary education; the unemployment rate for this group is above the national average (at 17 percent) and the group accounts for just over one-third of total unemployment;
▪ Unemployment is particularly a problem for blue-collar workers – over 60 percent of total unemployment is accounted for by trade, craft, and artisan, machine operator and unskilled labor occupations;
▪ Unemployment rates are relatively similar in rural and urban areas. However, two-thirds of all unemployed workers are in cities and other urban communities.
Table 4 Unemployment Rates and Distribution, 2001
| |Unemployment Rate |Percent Distribution of |
| | |Unemployment in Category |
|Gender | | |
|Male |15.1 |75.7 |
|Female |15.9 |24.3 |
|Education | | |
|None |9.6 |10.1 |
|Primary incomplete |9.5 |1.0 |
|Primary complete |17.5 |46.6 |
|Secondary |17.0 |35.8 |
|Postsecondary |10.7 |6.5 |
|Age | | |
|15-19 |34.1 |17.4 |
|20-29 |25.3 |50.7 |
|30-39 |10.4 |18.6 |
|40-49 |6.2 |7.9 |
|50 or Over |5.8 |5.4 |
|Location | | |
|Large City |14.4 |28.6 |
|Other Urban/Community |16.2 |37.2 |
|Rural |15.1 |34.2 |
|Occupation | | |
|Manager |3.5 |1.1 |
|Professional, Technical Specialist |17.0 |6.5 |
|Int. Professional |6.5 |3.4 |
|Clerical |15.4 |6.4 |
|Sales and Service |13.9 |14.0 |
|Primary Sector Occupations |4.5 |5.2 |
|Trade, Craft, Artisan |18.7 |24.7 |
|Machine Operator |10.6 |8.0 |
|Unskilled Labor |16.4 |30.7 |
| | | |
|ALL WORKERS |15.3 | |
Note: Unemployment rate include 15 years and plus.
Source: Employment Survey 2001, INS.
4.28 How well do Tunisia’s ALMP activities correspond to this profile of the unemployed?
▪ First of all, the emphasis on youth seems merited, given this group’s very high unemployment. The two major classes of interventions in terms of scale are pre-service training (almost by definition serving youth) and the various self-employment financing schemes oriented toward young workers (especially 20-29 years old). There are also the much smaller stages programs serving different segments of the new entrant labor force. The largest of these, by far, is SIVP1 (85 percent of planned expenditures on SIVP1/2 and CEF during the Tenth Plan), which is targeted at postsecondary graduates. On the basis of unemployment by education for youth, however, it does not seem most appropriate that postsecondary graduates should be the beneficiaries of the bulk of the resources for stages. According to the 2001 Employment Survey, the breakdown of unemployed workers in the 15-19 and 20-29 age categories shows that this group accounts for only a very small percentage of the cohort of unemployment (roughly one in ten). The pool of unemployed is dominated by those with primary schooling or less for the 15-19 age group and secondary or less for the 20-29 group (see table 48).
Table 5 Unemployment Rates and Distribution by Education, 2001, 15-19 and 20-29 Year Age Groups
| |Unemployment Rate |Percent Distribution of Unemployed |
| |15-19 years |20-29 years |15-19 years |20-29 years |
|Less Than Primary |21.9 |18.2 |4.7 |4.5 |
|Primary Complete |33.8 |23.1 |68.6 |41.4 |
|Secondary |38.6 |28.8 |26.7 |45.3 |
|Postsecondary |11.2 |26.1 |0.0 |8.7 |
|Total |34.1 |25.3 |100.0 |100.0 |
Source: Employment Survey 2001, INS.
▪ Second, given the high unemployment (overall and for younger workers) among the poorly educated, there may not be enough ALMP resources directed to this group. Only the public work sites (Chantiers publics) have a strong orientation toward workers with no more than primary education. All other programs (i.e., “stages” and micro-finance) and resources are largely directed to the better-educated Moreover, the evidence on ATE indicates that the employment offices play a much greater role in the job search of educated workers compared to the poorly educated.
▪ Third, most interventions have higher participation among men than women. This is very strongly the case for public works employment and most micro-finance programs. This emphasis corresponds to the distribution of unemployment. However, the very low participation rates for women may reflect limited job opportunities and, thus, could be disguised unemployment.
▪ Finally, the overall ALMP effort is oriented toward the cities and other urban areas, despite the fact that rural unemployment rates are higher and rural unemployment accounts for over one-third of total unemployment. Few rural workers report using ATE offices for job search. Only a minority (less than one-third) of beneficiaries of micro-credit programs are in rural areas. However, about one-half of chantier public employment is in rural areas.[12]
Example 16: Institutional Issues
Source: Turkey Country Economic Memorandum Structural Reforms for Sustainable Growth (In Two Volumes) Volume 1: Main Report No. 20657-TU – pg 103-116
4 SECOND STAGE OF REFORMS: BUILDING A SOUND OLD AGE RETIREMENT INCOME
SYSTEM
4.1 Administrative Reform
103. Now that the initial policy phase of the pension reform has been enacted, the government is turning its attention to a second phase of less high profile, but equally important, administrative reform. The administrative reform faces two challenges. The first is to support effective implementation of the PAYG policy reform. The August 1999 policy reform has shifted the base for calculation of pension benefits to the full working life of the contributor. This requires reorganization of the pension administration, in particular an increase in information sharing among the three pension funds, and a major upgrade of their management information systems. The second challenge is to improve the coverage and corhpliance of the PAYG pension system. The present administrative structure is unable to identify and enforce compliance from the nearly 40 percent of the working-age population who do not contribute to the pension system. Improving coverage and compliance will not only strengthen the social protection system in Turkey, it will also contribute to improving the financial balances of the pension system.
104. The government is well aware that meeting these challenges will necessitate clear separation of the management of pension and health insurance, and progressive integration of the three pension funds under a single administration over the longer term. It has also drafted a timebound strategy for the administrative reform of the social security system and legislation to reorganize the key institutions involved has been submitted to Parliament.
105. Implementing the policy reform. Administrative reform is needed in order for the institutions managing Turkey's public pension system to cope with the additional administrative burden imposed by the new pension legislation. In addition to collecting revenue and paying pensions, the pension institutions must now maintain detailed personal work histories on each contributor to determine initial benefit levels upon retirement. A key objective of lengthening the wage history is to create stronger incentives not to underreport wages. However, in practice, thiswill depend crucially on the ready availability of data and accurate tracking of the wage histories of individual
__________________________________
'J Figure 2.1 was produced using the World Bank PROST model. Treasury estimates using an earlier ILO model are more optimistic. While the Treasury model is more detailed, the optimistic Treasury projections can be attributed to 3 sets of assumptions: (i) no improvement in life expectancy after 25 years, (ii) continuous employment and contribution from the time of entry ir the labor force until retirement, death, or invalidity, and (iii) high levels of employment and coverage growth arising from specifying an endogenous relationship between real GDP growth and wage bill growth with real GDP growth assumed at 6% in the long run.
contributors. The three pension institutions will need to integrate their existing databases into a shared information system which is both comprehensive and readily accessible. Such an integrated management information system could be expanded to incorporate data sharing with the voluntary private pension funds as these develop over time.
106. Improving coverage and compliance. The administrative reform should also improve the ability of the pension institutions to expand the coverage of their programs and ensure compliance. Both BK and SSK have been unable to collect all due revenues. For example, SSK collects only 85 percent of the revenues declared by emplovers. In addition, many employers simply do not register with the pension institutions. Others that do register their companies fail to register all workers, underreport hours worked or underreport wages paid. Ensuring full collection of declared payments and eliminating accumulated arrears will require additional staff resources for inspection. Identifying the full wage base will require considerable change in the overall administrative approach. As a first step, information sharing among SSK, ES, and BK will improve the accuracy of data about known payers and prevent individuals from collecting benefits from multiple agencies. However, this will not provide information on people outside the system. Improving coverage will require a new approach to data collection, establishment of a unique identifier number used by all three agencies, and a single database of persons of working age that will be readily accessible to all three agencies. This new database could be used both to help identify non-contributors and to provide contributors and pensioners with improved information on their individual positions with the PAYG pension system. New internal incentives, reorganization of management structures and intensive training will ensure that the new integrated information systems are used effectively.
107. Separating pensions and health insurance. The three pension institutions will need to separate completely pension administration from health care provision and financing. Currently, the management, finances and accounting of pensions and health insurance are effectively merged in a manner which inhibits efficient and transparent operation. The administrative separation of pensions and health insurance will help improve service to contributors and beneficiaries for both pensions and health insurance. It will also ensure that an accurate and transparent picture of pension and health insurance finances is available at all times. By improving service provision and financial transparency, this administrative separation of pensions and health insurance will inspire more trust in the public social security system, which in turn will facilitate efforts to improve compliance. The separation will also facilitate deeper structural reform of the public health insurance system which is the largest provider of health services in Turkey.
108. Integration under single administration. Progressively integrating the three pension institutions under a single administration is a longer-term goal. At present, the three institutions develop their own administrative practices and their own solutions to administrative problems.The lack of harmonization and the development of individual, often incompatible, solutions to administrative problems cannot be addressed from inside the individual institutions. Achieving uniform norms and standards across the agencies will require guidance and monitoring from one central government structure. Currently, ES is under the Ministry of Finance and the other two agencies are under the Ministry of Labor. Such an integration could logically take place under the Ministry of Labor. An administrative unit would have to be set up within the Ministry of Labor capable of guiding and monitoring the administration of the three funds and harmonizing
their activities. This unit could serve as the policy development center for all three public pension funds and take responsibility for monitoring the impact of future pension reforms. It could also maintain the joint database.
4.2 Voluntary Funded Private Pensions
109. As part of the second phase of social security reform, the government has prepared the legal framework for introducing a privately funded pillar in the pension system. The new private pension schemes will complement the existing PAYG system. Participants in the new schemes will continue to be required to contribute to one of the PAYG programs. Through this reform, the government is aiming at three objectives. The first is to provide a comprehensive regulatory framework for private pension schemes which already exist to some extent in Turkey. The second objective is to expand the scope of the pension system, given the low level of benefits currently provided, without affecting the financial balances of the PAYG programs. The third objective is to expand the range of long-term savings instruments in the country. Development of voluntary private pension schemes under the new framework will prepare the ground for the possible transition to a full multi-pillar pension system over the longer term. Draft legislation for the new regulatory framework has been submitted to Parliament together with a separate law on the tax treatment of the private pension schemes. Both laws are expected to be enacted before the end of 2000.
110. The need for a new regulatory framework stems in part from the fact that the market for private pension schemes is already developing, albeit in a limited way. The regulation and monitoring of the existing products has been relatively weak.3 As the market for private pensions will expand, the government is right to introduce more comprehensive regulation before the market shapes itself. The new regulatory framework will help to reorganize the current private pensions market and bring about qualitative changes such as better portfolio management and a broader asset spectrum. Decisions will need to be made regarding the status of the existing products as many of them may not qualify under a more rigorous regulatory regime. The promotion of voluntary private pension schemes is designed to expand the scope and attractiveness of Turkey's pension system without impacting the financial bottom line of the PAYG system. Given its current fiscal situation and that of the three public pension agencies, the government has chosen not to divert contributions from the public agencies to private pension funds at this stage. The government has also been reluctant to add a mandatory funded component to the existing contribution structure, given the already high contribution rates for most salary levels. Its short-term solution is to promote the development of voluntary private pensions to complement the public pension programs in an attempt to achieve some of the benefits of a funded system without incurring most of the costs. The new schemes can also contribute to improved coverage and compliance of the PAYG system as participation in the latter will be a prerequisite. This incentive will operate as long as the administrative reform proceeds in parallel and the private pension schemes are incorporated into the integrated information system.
This section draws on a background paper by Sak 2000.
112. The government's efforts to promote the development of private pension schemes stems as well from a view that these schemes can be an important vehicle to enlarge the size and depth of the financial system in Turkey over the medium term. The new private schemes will contribute to increased savings and capital market development while providing opportunities for better pensions for individuals under a regulated setting. Currently the level of financial market development in Turkey appears to be adequate for fostering private pensions. There are financial institutions equipped to operate pension schemes and appropriate financial instruments are available in the market. The figures indicate that the capital market would have the capacity to absorb the additional financial savings flowing from private pensions.
113. Designing the right incentives. It should be noted at the outset that voluntary pension systems that complement a public pension system tend to appeal to higher-income individuals who already are saving a portion of their income. This saving is often transferred to the voluntary pension schemes from some other savings vehicle. The voluntary pension system may therefore lead to little increase in aggregate savings, at least in the short run. Furthermore, some of the demand for a private pension system also stems from the perception among workers that there is a gap in their earnings that needs to be filled. Despite the new pension law, which establishes minimum retirement ages of 60 and 58 for new entrants, workers expect to quit their jobs or to be laid off in their upper forties as they are now, and so perceive a gap between the time when their jobs end and the time when their pensions begin. The perception is that the voluntary pension could fill that gap, allowing those workers who choose to contribute extra effectively to continue to retire at age 47, the current average age of retirement, with little loss of income. To avoid the resultant negative impact on the PAYG system of losing these contributors, it is important that the new private pension schemes provide sufficient disincentives to dissuade workers from retiring too early. The current proposal which would result in loss of tax exemptions if money is withdrawn before the retirement age is in line with international practice.
114. Turkey already has relatively high labor costs and high payroll taxes. The effective rates are being raised even further by the August 1999 reforms, as discussed above. In order to induce workers to join the system and part with even more of their salaries, the system has to be attractive, flexible, and transparent. Putting excessive restrictions on the accounts will reduce their value to workers and make them less attractive. In this light, the voluntary pension system should not require disability or death insurance or annuitization upon retirement. Disability and death insurance is expensive, and since most participants in the voluntary scheme would be covered by one of the public schemes and would be covered in the event of disability or death, duplication in the voluntary scheme is unnecessary. The current proposal for the voluntary pension system does not include mandatory annuitization or disability and death insurance.
115. Tax treatment. The tax treatment of voluntary private pensions should be consistent with international practices while ensuring competitiveness with existing long-term savings products in Turkey. Typically either: (i) the contributions that finance the plan and the current investment return on the saved assets are exempt, while tax is imposed on the entire value of the fund when it is withdrawn (the "E/E/T" structure); or (ii) the contribution at the time it is made is taxed, but then the investment return and that part of the payout on maturity which represents repayment of the original taxed contributions are exempt (the "T/E/E" structure). In the draft tax law, contributions up to 10 percent of wage earnings with a ceiling of 50 percent of the annual minimum wage are tax exempt. The investment returns on the fund will also be tax exempt and the full benefits will be subject to income tax. Early withdrawals will be subject to tax penalties. This is in effect a form of "E/E/T".
116. Turkey should consider a broader reform of financial sector taxation which will move the entire tax structure closer to international norms and ensure a set of tax advantages which provides clear incentives in favor of longer-term savings instruments. Once the new law is enacted, broadly equivalent tax treatment will be provided to pension funds, life insurance products and health insurance products. However, there will still exist short-term financial instruments in Turkey which have more generous tax treatment than the pension funds, although these exemptions are due to expire in 2001. Mutual funds and equities held more than three months are fully tax exempt at both the buying and selling points, including investment earnings. Moreover, the lack of tax differentiation between pension and life insurance products will leave incentive distortions in place given that pension products are restricted by the minimum retirement age when a person can receive benefits, while life insurance products can be cashed in after 10 years. In addition to addressing these incentive issues, the broader overhaul of financial sector taxation should ensure that favorable tax treatment is given only to products from financial institutions which are supervised and regulated as such.
____________________________________________
79 See Selassie (2000), 'Implications of Disinflation for Banks Profitability in Turkey", in Turkey: Selected Issues and Statistical Appendix, IMF and Van Rijckeghem (1997), "The Political Economy of Inflation: Are Turkish Banks Potential Losers from Stabilization ?" Istanbul Stock Exchange Review.
Example 17: Analysis of Financing and Sustainability
Source: This example is taken from Colombia: Social Safety Net Assessment, p.64-71
Social Sector Spending in Colombia: A Focus on Social Services and Decentralization
4.6 Colombia has historically relied on economic growth and an expansion of social services as substitutes for implementing a social safety net, particularly during the 1990's. Solid economic growth allowed for a dramatic expansion in social sector spending through the late 1990's. Following a period of almost complete stagnation through the 1970s and 1980s, public expenditure (primarily on health, education, and pensions) in Colombia began to grow dramatically from 1990 onwards. Between 1990 and 1997, overall public expenditure rose by 60% increasing its share of GDP from 27% to 43%. (Velez and Foster 2001). Total social spending (defined as health, education, pensions, and other social spending) increased sharply from 1993- 1996, led by increases in health and education, and steady growth in pensions. Spending for social assistance remained at low levels throughout the 1990's and did not increase with onset of the crisis.
4.7 The 1990's were also characterized by dramatic growth in expenditure decentralization. Between 1990 and 1997, regional governments increased their control of public expenditures by 80%, accounting for 14% of GDP (versus 30% for central government expenditures). Overall, increasing -funding to regional governments accounted for 30% of the overall growth in public expenditure during the period. Most of the additional resources destined to regional governments were assigned to health and education programs, and to a lesser extent basic sanitation. Thus the growth in public social expenditures and the growth in regional government spending are two aspects of the same trend, both of which were underpinned by Colombia's solid economic growth.
4.8 The main impetus for the growth in social expenditure and the shift toward
decentralization came from the social sector policy reforms introduced in the 1991
Constitution, Law 60 and Law 100.
o The 1991 Constitution mandated substantial increases in social spending, particularly in the areas of human capital and promoted decentralization both by increasing fiscal transfers from central to local government-as well as enhancing alternative sources of financing for local government expenditures.
o Law 60 introduced in 1993 sought to promote autonomy in decision-making at the regional level. The expectation was that this would improve the efficiency and equity of public expenditure.
o Law 100 introduced in 1993 increased the pension liabilities of the state towards public sector employees, both by raising pension contributions to 13.5% of salary and by raising the employers contribution to 75% of the total. Furthermore, the state was required to assume the pension liabilities of a number of state owned enterprises that went into liquidation at around this time.
4.9 However, social assistance was not included in the dramatic social sector reforms of the 1990's that resulted in increased spending and decentralization for health and education. As a consequence, social assistance programs remain underfunded, centralized and lack a strategic focus.
4.10 First, social assistance programs did not benefit from the expansion of social sector spending described above. Whereas funding for health and education doubled from approximately 4% to 8% of GDP over the period 1990-2000, central government expenditures on "other social expenditures", including spending on the main social assistance programs and SENA, were essentially constant at approximately 2% of GDP.
4.11 Compared to other countries, public social spending in Colombia in 1996 as a percentage of GDP was slightly below the average of the selected Latin American countries. Spending on social security and welfare (4.9%) was below the Latin American selected country average of 7.1%, whereas spending on education, health and housing was closer to regional averages.
4.12 Second, since the decentralization reforms that guided social sector policy did not include social assistance, the main social assistance programs remain highly centralized. The fiscal transfers to local governments include no funding for social assistance. Local governments have almost no discretion over how social assistance and SENA training institute funds are allocated. There is, however, de-concentration of central authority through the presence of a national network of field offices for many programs, including the ICBF family welfare agency and the SENA training institute.
4.13 Finally, the strategic focus and policy directives established for most social sector programs as part of the reforms were not applied to social assistance. The safety net remains composed of an array of social assistance programs that constitute an "institutional archipelago" that is fragmented, unfocused and largely outside of the reach of those in the informal sector.
4.14 The onset of the economic recession in 1998 curtailed Colombia's ability to continue its expansion of social sector spending, thereby undermining Colombia's de-facto safety net. As outlined below, the social assistance programs that could have been mobilized to provide a counter-cyclical safety net during the crisis were hampered by structural constraints, including a historic lack of financing (particularly during times of crises), institutional inflexibility, unfocused mandates, and poor targeting. As a response to the crisis, a new set of safety net programs were introduced as the Red de Apoyo Social (RAS) to provide short-term emergency assistance until 2004, but without engaging in a broader strategic reform of the safety net. A pending issue on Colombia's policy agenda is the need to evaluate the new RAS programs' performance and decide on their future role. This should be done as part of a overall safety net reform resulting in the establishment of an agile, efficient and effective social risk management system with specific functions in crisis and non-crisis periods.
Characteristics of Colombia’s Social Assistance Programs
4.15 Colombia, like many other countries at its income level, lacks a well-defined safety net that reaches the most poor and adequately covers key vulnerable groups. Although the three new RAS social safety net programs detailed in the previous chapter have correctly identified and are beginning to address some critical gaps in the safety net, the main social assistance programs also merit a review. This sections outlines the main features of the network of social assistance programs, focusing on areas of needed reform:
Underfinancing and pro-cyclicality
4.16 Social assistance spending in Colombia is at a very low level compared to other countries in the region and to the needs of key vulnerable populations, as outlined in Chapter 2. In 2000, Colombia's spending on the four main social assistance programs - ICBF family welfare, INURBE housing, the RSS social fund and water and sewerage subsidies - was less than .7% of GDP, the lowest rate of social assistance spending of the countries reviewed. From 2001-2004 the implementation of the RAS programs will raise spending on social assistance by an additional .3% of GDP, bringing total social assistance spending to 1% of GDP, more in line with regional allocations. Nonetheless, without reforms or continued international borrowing, the sustainability of this additional spending beyond 2004 cannot be assured.
4.17 Financing of social safety net programs has been historically pro-cyclical - the opposite of what is desirable in an effective safety net. A retrospective public social expenditure review reveals that for each peso of reduced GDP, social assistance spending fell by 9 pesos, making social assistance the most pro-cyclical component of social sector spending (CRECE 2001.
4.18 This pro-cyclicality was underscored in the recent recession of the late 1990's which resulted in reduced spending on social assistance programs, with programs earmarked from payroll taxes such as the Colombian Institute for Faamily Welfare (ICBF) and the National Training Service (SENA) suffering less dramatic budget cuts than those financed through general revenues including the Social Solidarity Network (RSS) programs for the indigent elderly and internally displaced people whose programmed budgets were halved during the recession.
4.19 Earmarking in payroll taxes seems to have insulated programs from counter-cyclical budget cuts. The aggregated data in Table 4.4 show the impact of the recent economic recession on four of Colombia's main social programs. Total budgeted expenditures for all four institutions were lower in 2000 than in 1999, and execution of the budget (through November) was sharply reduced in 2000 for the three institutions excluding ICBF. Those expenditures derived from earmarking a portion of payroll taxes (SENA and ICBF) seem to have been insulated from the dramatic reduction in budgeted expenditures compared to programs whose source of funding is derived from general revenues. The budgets from general revenues allocated to RSS (which administers, among other programs, Revivir, the social assistance program targeted to the indigent elderly and the programs for the Internally Displaced People) and INLTRBE (which administers urban housing programs) were reduced by 50% as a share of GDP from 1999 to 2000.
4.20 Social protection programs in Colombia are primarily financed by earmarked payroll taxes. The tax burden increased substantially from 1990 to 1996, and is very high, creating incentives for the informal sector and decreasing the competitiveness of Colombian formal sector firms. The formal sector is over-protected, with high severance payments, vacations, 13'h month salary and other benefits, resulting in incentives for a large informal sector and high unemployment. When considering the reform of the social safety net in Colombia, this high tax burden should be kept in mind, particularly since the poor bear a disproportional burden of unemployment and informality. Kugler and Kugler (2001) have estimated that a 10% decrease in payroll taxes lowers unemployment by about 4% and several other analysts have pointed to the pernicious effects of these and other labor regulations on labor market outcomes. A strong case could be made to engage in labor market reform by lowering the tax burden though the elimination of taxes on social programs that are not targeted to the poor and securing alternative sources of revenue to finance a progressive, strengthened social safety net. However, this would need to be done carefully, as recent data reveal that earmarking served to protect social assistance spending from dramatic budget cuts. This situation underscores the importance of a comprehensive, strategic social safety net reform, as argued in the next chapter.
Example 18: Sustainability
Source: Chapter 3 –Dominican Republic - The Institutional Framework Underpinning the Budget Structure and Process, paragraphs 43-55
1. A case in point: The foreign exchange transaction tax was levied, collected and retained by the Central Bank to pay the foreign debt. This transaction fee generates roughly RD$3 billion per year (about 2 percent of total domestic revenues) but does not appear in either the budget or the annual accounts of the Central Bank, though the Ministry of Finance does receive weekly reports on the use of the exchange commission to pay external debt.[13] Donor funds are included in the budget and subject to the same financial procedures as other government spending. These are presented in separate tables in the annual budget document and annexes (by project). They are not integrated into object class or program tables in the budget proposal that is forwarded to Congress but are integrated into the detailed budget execution document and ex post accounts of the Ministries.
2. Significant spending occurs through independent and autonomous agencies. While a separate, detailed budget volume is produced for execution purposes, it is not widely disseminated to the general public. Forty-nine entities, whose spending totals RD$81.9 billion, are positively identified in this volume.[14]
3. In March 2002, the Contraloría instructed all spending units to deposit own revenues in the Treasury beginning in May 2002, as revolving funds whose disbursement would require documentation but not prior authorization. This is a very good step to improving transparency and reducing the potential for misuse of funds and abuse of public office.[15]
4. Internal debt (or arrears) can sometimes be an issue for off-budget spending. It is very important in the DR’s cash-based system to distinguish between normal payments of prior year invoices and unauthorized overspending. It is standard practice in cash-based systems for some allowance to be made in the current budget for payment of prior year invoices received after the close of the fiscal year. This is especially the case in instances where the fiscal accounts are closed at or shortly after the end of the fiscal year (the books are not held open to capture late invoices). There is a three-month delay in closing the expenditure accounts in order to capture prior year invoices as well as significant provisions in annual budgets for paying prior year carry-over expenses: these provide a wide scope for breaching fiscal discipline.
5. Assignaciones Globales is a code and designation for prior year invoices for which Ministries can request specific amounts for payment; but it is not clear if the Budget Office approves the release of the entire amount requested. Large increases in prior year invoices, as has been the case in recent years, may indicate unauthorized and uncontrolled overspending for which provisions should be clearly made in the annual budget rather than hidden under the generic rubric of Assignaciones Globales.[16] Further undermining an already weak management and financial control environment, some Ministries are even alleged to directly (albeit illicitly) negotiate the extension of credit from private banks for units under their jurisdiction.
B.3.2.2. Accuracy
6. The ex ante centralized control of spending through the Budget Office and the Contraloría should provide reasonable assurance of accurate flows. However, much of their review focuses on the accuracy or proper submission of forms and not on whether the forms are in fact accurate representations of spending transactions. The Contraloría is unable to quantify the proportion of erroneous transactions but asserts such transactions would never be processed.[17] The Cámara de Cuentas reportedly found some irregularities in all samples and noted that the average number of adverse findings has risen from five per year to 80 per year. The existence of opaque classification categories, such as Assignaciones Globales, and the President’s 14-01 account, leave broad scope for inaccuracies in transactions and flows.
B.3.2.3. Authoritativeness and Transparency
7. A number of disturbing practices persist, although there has been modest progress in the areas of authoritativeness and transparency. First, Ministries’ own revenues are reported to include unauthorized receipts and payments for routine transactions for which citizens should not be charged at all. Second, the level of transparency is compromised because of the non-user friendly formats of the approved budgets and the separation of off-budget entities into distinctive volumes. Third, the budget proposal that is submitted to Congress for ratification is only an estimate and tends to be less informative and less user-friendly than the detailed budget prepared for execution purposes.
8. On a positive note, first, the foreign exchange transaction tax has been dismantled. Second, the Government does publish monthly spending reports in major newspapers. These reports had previously been on an “approved spending” basis but as of 2002, they resorted to an “amount paid” (cash) basis and included monthly Government revenues and expense payments for individual capital projects. In addition, annual final accounts are published in a single volume, though it is unclear how widely these are distributed.
C. Recommendations
C.1. Budget Formulation and Execution
9. The credibility of budget preparation as an authoritative process can be improved by:
• Moving the budget formulation responsibilities from the Office of the President to the Ministry of Finance -- this will ensure that there is a critical mass of technical staff (not political appointees) who are specialists in budget preparation.
• Consolidating governmental and non-governmental macroeconomic forecasts, and including multi-year projections (budget year plus two) that allow for a better appraisal of the overall fiscal sustainability.
• Until they are re-engineered, coordinating the current functions of the Ministry of Finance (revenue and treasury), the Planning Office (investments), the Budget Office (expenditure formulation and execution), the Contraloría and the Cámara de Cuentas (accounting and auditing), and the Central Bank (external financing and public debt management).[18]
• Establishing within the Ministry of Finance a debt management unit that will effectively take on the responsibilities of portfolio management.[19]
• Improving overall allocative and operational efficiency through: (i) the accurate reporting of off-budget revenues and expenses of each Ministry, autonomous affiliate and decentralized agency; (ii) a rational system of expenditure programming that is based on a clearly defined national development strategy and objectives and reflects the role of government in the economy; (iii) a rational system of expenditure execution that is flexible enough to take into account emerging and justified need and, at same time, is firm enough to avert unjustifiable expenditure deviations; (iv) the effective management of public service personnel (the exact number of employees, salary levels and the corresponding public expenditure); and (v) a documented consolidation of each public expenditure item.
• Encouraging a level of policy formulation and input at the sub-sector level; and establishing responsibility for performance at the level of spending units.
• Securing the full collaboration of the NGO Alliance to effectively eliminate suspected ghost NGOs and to help genuine ones to build functional administrative structures.
• Eliminating vague or non-transparent expenditure categories and disbursement practices and allocating resources in a more transparent and credible manner.
• Submitting a comprehensive budget proposal to Congress.
C.2. Strengthening the Control System
10. The following considerations should characterize any proposal to strengthen the current control system:
• High-level leadership must have the political will to establish and sustain effective institutional structures: institutions matter, but politics triumph over institutions. This means, for example, that presidential decrees should not be used to circumvent institutional scrutiny and control system input. The recent passage of Decree 39-03 to create las Comisiones de Auditoria Social (Social Audit Commissions) to oversee public works and social expenditure projects that are executed from the Office of the President may undermine the functions of the existing system of controls.[20]
• Ordinary government accounting must be separated from specialized government auditing. If control organs are entrusted with the review and supervision of all government financial transactions, they will be too swamped in routine details to effectively monitor quality or investigate and prosecute deviations.
• Policy actions should be formulated on the basis of current capabilities and the overall performance of public sector institutions. The control system, like other public sector domains, cannot be reformed in isolation. In other words, theoretically advisable actions might have to be shelved if they are likely to produce considerable collateral damage.
C.2.1. Toward Efficient Contraloría Functions
11. The Contraloría can be streamlined for more efficiency. By virtue of its ex-ante control and other functions, it has become the one agency capable of establishing and maintaining centralized databases on public employment and contracts. Such information should be managed at the sector level and forwarded to other agencies (for example, ONAP and procurement) for direct management. However, should Contraloría suddenly devolve this function, the State will have to contend with a couple of pressing issues.
12. First, the sectors themselves are barely able to manage their own employee registries. ONAP, the office in charge of human resources, does not have access to the Contraloría’s database; and there is no indication that it is capable of developing its own database or receiving the raw or processed data from the sectors. In other words, should the Contraloría (or the proposed Office of Contabilidad) cede this critical ex-ante control function, the already inadequate record keeping on budgets, personnel and contracts would probably collapse.[21]
13. Second, the absence of central offices that are capable of establishing and enforcing adequate financial and administrative procedures, combined with the lack of trained personnel at the ministerial level, would make the devolution of responsibilities undesirable at this time. For instance, the moratorium on agency spending that the Contraloría provides would disappear unless the automated financial management system is quickly mounted and an office capable of checking the quality of input is also created. In conclusion, although the long-term aim should be the elimination of ex-ante control, some kind of centralized ex-ante control should be retained for now.
Example 19(a): Impact
Source: This example is taken from Bangladesh - Public Expenditure Review, p. 74-5
The safety net programs are reasonably well targeted and have significant development impact
192. A number of evaluation studies have provided evidence that the four large safety net programs (FFE, VGD, VGF, GR) are reasonably well targeted towards the poor and those affected by disasters. They also succeed in achieving their development objectives. Estimates based on the 2000 Household Income and Expenditure Survey (HIES) data show that households in the lowest 20 percent of the income distribution are nearly five times as likely to participate in the FFE program as those in the highest 20 percent (Table 7.2). These targeting outcomes are comparable to those of targeted programs in other
countnes. In addition, there is strong evidence from the mid-1990s that the FFE program achieves its development objective by attracting poor children to school (Ravallion and Wodon 2000). Estimates show that, on average, participation in the FFE program increases the probability of attending school by 20 percent. Preliminary evidence from the 2000 HIES shows that these gains have been sustained.
Table 7.2: Bangladesh-average participation rates, in selected social safety net programs by quintile, 2000 (%)
| |Per capita consumption quintile |
|Program |1 (lowest) |2 |3 |4 |5 (highest) |Overall |
|FFE |5.3 |4.0 |1.3 |2.0 |1.1 |2.8 |
|VGD |8.5 |7.0 |3.9 |2.8 |2.1 |4.9 |
|VGF |4.9 |4.0 |3.2 |1.9 |1.3 |3.1 |
|Overall |17.7 |13.4 |7.5 |6.6 |3.9 |9.8 |
Source. 2000 Household Income and Expenditure Survey Rural sample only
193. The VDG-program also has reasonably good targeting, and the difference between the proportion of poor and non-poor participating in the program is only slightly smaller than that for the FFE program. A recent study on the development impact of the VGD program compared the socio-economic status of the beneficiaries one year after joining the program with their status two years after leaving the program (World Food Program 1997). The study found that VGD beneficiaries owned more assets (beds, tin roofs, clothing), had more savings, and had better access to credit after the program. Importantly, the beneficiaries perceived significant improvements in their decision-making ability within the family, in the health of their family, and in incomes.
194. The two main relief programs-GR and VGF-played an important role in assisting flood households during the massive flood in 1998. Studies by the Food Management and Research Support Project-International Food Policy Research Institute (FMRSP-IFPRI) suggest that while direct distribution through these programs was quite small in comparison with private imports, the programs played an invaluable role in targeting relief to those in need. The GR program, for example, distributed more than 74,000 metric tons of wheat and rice in 1998-99, and only 11.4 percent of the recipients were not directly exposed to floods. The VGF program targeted resources to all areas (both flooded and non-flood-affected areas) of the country. As a result, while it was less effectively targeted to flood exposure, it was successful at reaching the poor. Approximately 25 percent of VGF recipients were not directly exposed to the flood, but households in the three lowest expenditure quintiles received an estimated three-quarters of the food grains distributed.
195. One important reason for the relative success of these large programs in targeting the poor is the system of identification of beneficiaries at the local level. Based on the methodology developed in Ravallion (2000), the targeting differential that estimates the difference between the proportion of poor and non-poor participants can be disaggregated into an mter-village and an intra-village component. The first measures the success of the center at channeling resources to poor villages, and the second captures the success of villages in reaching poor households. Table 7.3 presents the decomposition, which suggests that most of the pro-poor targeting performance of the FFE and VGD programs is due to pro-poor targeting within rather than across villages. Therefore, the weakest link in channeling resources from the center to the poor appears to be the process by which the center allocates resources across regions.
Table 7.3: Bangladesh - intervillage and intravillage decomposition of targeting performance: FFE and VGD
| |Proportion receiving transfers |Targeting |Decomposition of Targeting |
| | | |Differential |
| |Poor |Non-Poor |Differential |Intra- |Inter- |
| |(1) |(2) |(1)-(2) |village |village |
|FFE-1995 HES | |
|In all villages |0.118 |0.079 |0.039 |0.036 |0.003 |
|In participating villages |0.462 |0.315 |0.134 |0.146 |-0.012 |
| | | | | | |
|VGD-2000 HIES | |
|In all villages |0.071 |0.030 |0.040 |0.040 |0.000 |
|In participating villages |0.097 |0.042 |0.055 |0.055 |0.000 |
Source: FFE results from Galasso and Ravallion (2000), calculated from 1995 Household Expenditure Survey (HES) VGD results calculated from the 2000 HIES.
196. The FFW program - an umbrella of different programs and projects - is the main one aiming to help households cope with seasonal fluctuations in their wages and income. While there is no recent evaluation of this program, studies carried out in the early to mid-1990s show that these programs are well targeted to the poor, but are less cost effective than other food interventions primarily because of padding of the volume of work done and underpayment of workers (Chowdhury and Sen 1997; Osmani and Chowdhury 1983; Aluned et al. 1994).
Example 19(b): Impact - Romania
Source: background paper “Protecting the Poor and Vulnerable in Romania” for Romania poverty assessment, by Tesliuc, Pop and Florescu (2003)
E. Overall Effectiveness of Social Protection Programs in Reducing Poverty
The indicators of coverage, absolute target incidence, and relative target incidence (importance/adequacy), all reveal important information about the effectiveness of social protection programs. This section seeks to combine those multiple indicators for a more comprehensive review of these programs, in particular with respect to their effectiveness in reducing poverty.
Figure 1 plots in a single graph the three related concepts of coverage, absolute target incidence, and adequacy for various social protection programs based on a simulated model that classifies the poor based on a counterfactual of consumption (in the absence the transfers, see section II). The x-axis presents the coverage of the poor. The share of total benefits received by the poor is plotted on the y-axis (absolute target incidence). Adequacy (relative incidence) is captured by the size of the “bubbles” in the graphs (and mentioned on the graph, next to the “bubble”). A “perfectly-targeted program” would be located on the upper right-hand side of these graphs, with a large bubble (equal to the size of the poverty gap before the transfer).
The effectiveness of programs and policies varies significantly (Figure 1). Three types of programs are observed. First, the MIG has the best targeting performance, although low coverage and benefit adequacy. Second, the child allowances are less well targeted but have the largest coverage of the poor and extreme poor. Finally, the rest of the programs have high leakage, low coverage of the poor. Some programs within this group may be good candidates for rationalization, with the resulting savings to be added to the MIG.
Figure 1. Effectiveness of Social Protection Programs in Reducing Poverty
Total Poverty Extreme Poverty
[pic][pic]
Source: WB Staff Estimations based on ABF 2002
Figure 2 illustrate the improvement in coverage that occurs with the implementation of the MIG in 2002. Compared to the previous Social Aid program, the MIG has better benefit adequacy and substantially higher coverage. However, the program does not serve a large fraction of the poorest 20% of the population (89% of them).
Figure 2. Change in the Effectiveness of the Social Aid / MIG Program in Reducing Poverty
Total Poverty Extreme Poverty
[pic] [pic]
Source: WB Staff Estimations based on ABF 2002
The Government has a good tool to reduce extreme poverty in Romania: the MIG program. Marginal benefit incidence analysis had shown that an expansion of the program can be implemented without a loss in its targeting performance. Increased funding, to the target level allocated for 2002 of 0.4% of GDP or even more, will cover an increasing proportion of the extreme poor.
Some of the extreme poor, however, are likely to be missed by the program, as illustrated in Table A1 and A2 annexed. In 2002, the program was successful in covering larger households, those where the couple was living together or unmarried (pooling resources, while one of the adults claimed the benefits only for him and all dependents), the Rroma (compared to an average coverage of the poorest decile of 17%, the coverage of extremely poor Rromas was 36%), those headed by adults with no or few formal schooling, by farmers, unemployed and housewives. In general, MIG recipients are households familiar with the social assistance system; most of them (87% of total recipients) receive a number of other social assistance benefits, especially child allowances.
The extreme poor households who failed to be covered by MIG benefits are especially urban households, households affected by industrial restructuring which do not take up the program due to stigma costs, and households with two or more able-bodied individuals. These households are equally poor, and need to be covered by the program. Changing the MIG program administration rules to bring them into the safety net, and help them to climb out of poverty, is the main challenge faced by the current administration. The next section suggests a number of changes in program implementation to facilitate such an outcome.
Example 20(a): Recommendations - Bulgaria
Source: Bulgaria Public Expenditure Issues and Directions for Reform Report No. 23979-BUL.
Implementation: Challenges and Issues
8.27 As the previous section highlighted, the reform constitutes a major leap forward in building a more secure and stable pension system. Although the basic legal and institutional foundations of the new system are already operational, these foundations present some weaknesses that could hinder the successful development of the new system unless they are properly addressed. The structural framework of the new system will also have to evolve along with developments in Bulgaria's broader financial markets and its eventual accession into the European Union. The main outstanding issues and key implementation challenges are presented below within a short- (one to two years), medium- (five additional years) and long-term framework. Simulations of the financial performance of the new pension system over the long-term under various assumptions are included in a forthcoming report on Social Protection and Poverty Reduction in Bulgaria.
Short-Term Issues
8.28 Enhancing compliance and coverage. Preliminary simulations conducted by the NSSI suggest that the system will reach a comfortable financial position by the end of decade, even after accounting for transition costs. The simulations assume important improvements in compliance. Special efforts to enhance compliance initiated in 2001 (e.g., joint audits with the General Tax Directorate) should continue, and the plan to unify collection of social security contributions and taxes should be reinvigorated, as its completion date has been slipping further into the future. Expansion of the system's coverage merits special attention, as some economic groups have been poorly covered by the system since the early transition days, especially workers in the agricultural sector. Similarly, efforts to enhance revenue and expenditure control on the resources accumulated in or disbursed from the social insurance funds should continue. The amendments to the Mandatory Social Insurance Code introduced in early 2002 increased the coverage of the system: (i) employees working short-term (up to 5 working days per month), previously only insured against disability or work injury, are now insured for old age; (ii) self-employed, craftsmen, owners, farmers, paying contributions themselves, may be insured also against general sickness risks.
8.29 Monitoring and restraining the rise in disability trends. The recent changes in legislation entitle beneficiaries with disabilities of more than 70 percent to additional pension disability, calculated at 25 percent of the social pension for disability. This has generated a surge in social claims. The number of newly additional social pensions increased to 190,000 in 2001 compared to 82,400 a year earlier. The increase in the expenditure on social pensions is estimated at 0.11 percent of GDP prior to the introduction of this new benefit. The probability of becoming disabled is positively correlated with aging and deteriorating health. It is inevitable that the increase in the statutory retirement age will produce a rise in the overall number of disabled, but the surge observed during 2001 points to a potentially deeper problem. It is recommended that the NSSI closely monitor disability trends and cautiously studies disability regulations and administrative procedures if the abnormal rise in the number of disabled continues over the next year.
8.30 Clear rules for indexing pensions. The new legislative framework set forth clear criteria for determining benefits but failed to define a transparent rule for indexing benefits, retaining a fair amount of policy discretion in this area. Discretion can help control short-term volatility in the system, but it can equally foster inappropriate management of pension expenditures. Beneficiaries will also prefer a more predictable pension indexation provision in order to enjoy a smoother income and consumption pattern rather than confronting ad hoc changes. The comfortable financial position achieved by the public pillar by the end of the decade suggests that benefits could be indexed to inflation, plus a modest percentage of real wage growth.
8.31 Prompt and transparent transfer of contributions to private pension funds. A new IT system is already operational at the NSSI to support the collection of social security contributions for the PAYG, as well as the universal and occupational pension funds. The universal pillar, effectively launched on January 1, 2002, will not face the severe disruptions encountered in other European economies at the outset of the multi- pillar reform, e.g., in Poland. Nonetheless, 10 percent of contributions from occupational pension plans have not yet been reconciled. These contributions are administered by the BNB and receive a 2 percent nominal interest rate, yielding a negative interest rate and imposing a severe penalty on workers. In addition, an amendment was introduced in late 2001 expanding the period for transferring contributions from 10 to 30 days. It is critical that the NSSI issues transparent procedures for transferring contributions and that this period reverts from 30 to 10 days by the end of 2002. A long transfer period imposes unnecessary inefficiencies and costs on worker savings, equal to the foregone investment returns. The transfer period should be shortened even further in the medium term. Contributions that are not transferred within the stipulated period should obtain a market interest rate, at a minimum the market interest rate on short-term Treasury bills.
8.32 Strengthening supervision of private pension plans. A strong supervisory institution will be central to the sound development of private pension plans. SISA has less than two years of experience and is still learning about its functions. Moreover, progress in the institutional strengthening of SISA in 2001 was very limited. Thus, the institutional strengthening process should receive greater attention and government support. SISA should also intensify and formalize its collaboration with other supervisory agencies to develop joint regulations in areas that cut across different segments of the financial market and to benefit from the longer experience of those agencies. The establishment of the Consultative Committee on Financial Supervision, a separate body of senior officials from all financial services supervisory agencies, is a step forward in that direction.
8.33 Over the next two years, SISA will have to monitor closely the performance and financial sustainability of pension insurance companies and their capacity to start recovering the high investments made up-front to establish IT systems and gain market share. The financial and operational capacity of pension insurance companies seems to vary widely, with some of the smaller companies presenting a weaker profile. SISA should prepare itself to closely monitor a market restructuring process (though mergers, acquisitions and possibly even liquidations) that should subsequently result in a stronger sector.
8.34 Upgrading regulations of private pension plans. Regulations concerning accounting and valuation procedures should receive close attention, as they constitute the basis to assess the financial performance of pension plans. New accounting principles in accordance with international practices will become effective in 2003. New valuation procedures were issued in late 2001, but these guidelines continue to permit a fair amount of discretion to the pension insurance companies and could benefit from additional revisions. A regulation should be issued on investments outside Bulgaria (up to 10 percent of a pension fund's assets) and permit some initial and gradual foreign diversification of pension portfolios, a matter that will become even more pressing in the medium term as pension assets build up.
8.35 Defining the contribution rate for universal pension funds. The universal pension pillar was started in 2002 with a 2 percent contribution rate. The Mandatory Social Insurance Code, however, does not prescribe the contribution rate for the public nor the private pillar-an important vacuum within the legislation. The contribution rate will be defined on a yearly basis when Parliament approves the budget for the public pension fund. At present, workers do not have the capacity to assess what could be their potential retirement income and the share that will emanate from the public and the private pillars. Such a gap and lack of strategic direction for the public and private pillars dents the credibility of the public on the overall reform and renders the pension system more vulnerable to discretionary changes and to potential reversals. Uncertainties on the funded pillar will also hamper efforts by pension insurance companies to formulate adequate business plans in order to analyze their future viability.
8.36 It is critical for the Government to outline the roles of the two mandatory pillars, and the contribution rates to finance these benefits. The program should clearly define the path for increasing the contribution rate to the second pillar and be embodied within the legislative framework to prevent reversals. This plan should be accompanied by a new public education campaign, with renewed emphasis on the universal pillar, so workers can acquire a better understanding of the reform and make more educated decisions conceming private pension funds. As an option, the plan could link the increase in the contribution rate diverted to the funded pillar with the financial performance of the public fund. This link would need to be simple and transparent to assure the credibility of key stakeholders and prevent undue interference with the strategic direction of the pension reform. Such a plan would entail a prior definition of a viable pension indexation rule and the overall contribution rate to the mandatory system; such important provisions would need to be prescribed in the Mandatory Social Insurance Code.
Medium-Term Issues
8.37 Strengthening the legal framework. In the medium term, the legislative framework of private pension plans should be strengthened, including the governance structure of private pension plans, the authority and independence of the supervisory agency, provisions on the retirement phase, and the liberalization of the investment regime. Amendments to the Voluntary Pension Insurance Act should clarify that voluntary pension plans can offer both phased-withdrawals and annuities and define proper reserves accordingly. Pension funds are de facto offering annuities despite contradictions in the legislation.
8.38 The Mandatory Social Insurance Code, too, displays inconsistencies requiring workers to convert their savings in the universal funds into annuities, seemingly variable annuities. The law prescribes that pension insurance companies should create reserves and bear the life expectancy risk; at the same time, the law allows the heirs to receive the savings remaining in a pensioner's account upon his/her death, an inconsistency that will render the system unviable during the retirement phase. Although the retirement phase in the mandatory pillar will not be initiated for another two decades, it will be preferable to correct this serious flaw along with the introduction of other amendments to the law. Such a deficiency in the legislation could raise doubts on the long-term sustainability of the reform and discourage potential new investors from entering the pension insurance market over coming years.
8.39 Moving towards a more flexible investment regime. The infant development of Bulgaria's capital markets and cautious public debt financial policies restrict local investments available to pension funds. In the medium term, as pension assets rise relative to the size of the local capital markets, it will be necessary to increase the level of foreign diversification prescribed in the law from 10 percent to at least 25 to 30 percent. Other financial intermediaries already enjoy more liberal foreign investment policies only limited by prudential criteria on foreign exchange risk. The minimum 50 percent requirement on debt guaranteed by the state or bank deposits should be eliminated. Overall, it is preferable to define a more open investment regime in the legislation but authorize the supervisor to prescribe stricter criteria in the regulation. Such flexibility permits easier changes in the portfolio investment, in accordance with evolving market conditions.
8.40 The Government has formed a working group which is carrying out active consultation with stakeholders to develop and propose legislative solutions to address several of the short- and long-term issues discussed in the previous two sub-sections, including clarifying the functions of the SISA, improving the investment regime and management of pension schemes.
Long-Term Issues
8.41 Integrating private pensions funds with other financial markets and the EU. In the long-term, the private pension system should be better integrated with the rest of Bulgaria's financial markets and Bulgaria's accession into the European Union. This will imply the elimination of restrictions to foreign diversification; permit pension insurance company to offer a more diverse set of funds; and allow life insurance companies to provide annuities within the mandatory scheme removing the market segmentation presently envisioned in the legislation.
8.42 Increasing the retirement age of women. The public pillar will also have to adapt to EU regulations eliminating any provisions that discriminate among genders and equalizing the minimum retirement age between men and women. The increase in the retirement age of women from 60 to 63 years should be motivated not only by EU regulations but also to adjust to improvements in life expectancy and by the long-term financial sustainability of the system. Preliminary NSSI actuarial projections on the financial performance of the public pillar incorporate extremely conservative estimates on life expectancy of retirees, compared to other middle income countries. Improved life expectancy over the long term will worsen the system's dependency ratio and the overall financial position of the pension system calling for a higher retirement age, even 63 years remains low compared to the standards of OECD countries.
Example 20(b) – Recommendations - Armenia
Source: Armenia – Public Expenditure Review, Report No. 24434-AM
Recommendations on Social Protection
Based on: (i) the importance of the poverty family benefit for poverty alleviation among the extremely poor in Armenia; (ii) positive experience in its implementation; and (iii) a high probability that extreme poverty (as well as overall poverty) is going to remain an issue in the medium term, the following is recommended in the short to medium term:
o The cash poverty family benefit program should be maintained as a core of the social assistance system. Also, given that the high share of informal economic activities is likely to persist in the medium term, the targeting mechanism based on welfare proxies should be preserved.
o The Government should refrain from introducing any additional regular monthly programs such as, for instance, a housing allowance or similar.
o Efforts to improve the targeting mechanism should be continued. Based on the 2001 Integrated Living Conditions Survey, a new formula should be developed. Also, the adequacy of the benefit amount should be evaluated based on the 2001 poverty measurement results.
o Efforts to improve the benefit administration should continue through training of the benefit administrators, improved eligibility testing procedures, strengthening the role of the local authorities and communities in benefit delivery, etc. A beneficiary assessment planned for summer of 2002 is expected to provide information that will serve as a basis for improvements in the benefit administration.
o The Government should make efforts to ensure that the Integrated Living Conditions Survey is conducted regularly, since it provides information necessary for poverty monitoring and adjustments in the social assistance programs.
How much should be spent on the poverty family benefit? Table 7.4 provides an assessment of the resources needed to significantly alleviate extreme poverty in Armenia. The key parameters are the extreme poverty incidence, poverty shortfall, and the leakage of the resources to non-targeted population. The estimate is based on the results of the Poverty Update based on the 1998/99 ILCS (World Bank, 2002).
The estimates indicate that the budget for the family poverty benefit has to be kept at the minimum of 1.4 percent of GDP, if significant extreme poverty alleviation is to be achieved.
Child benefits. There are two types of cash benefits targeted at children in Armenia. One is a one time payment to new born babies. It amounts to 5,900 drams and its objective is to help families with the expenses when a new baby is born. The other is a child care allowance, which is paid to employed mothers after the maternity leave has expired (70 calendar days after the delivery). It is a regular monthly benefit paid until a child is two years old. The benefit ranges between 2,300 and 3,500 drams. In 2000, there were about 20,000 beneficiaries. Both benefits are funded by the state budget and their primary objective is to stimulate families to have more children. There is no information to assess the poverty impact of these two benefits. However, given the fact that: (i) majority of the children in Armenia are born to unemployed mothers; (ii) the families with unemployed members tend to be affected by poverty more than the average; and (iii) the importance of adequate provision for young children for their physical and cognitive development, both benefits should be maintained. Hence, the new born allowance should be increased to provide a meaningful assistance to families with a new born baby. As far as the child care leave is concerned, it is longer than in other countries (in most of the CIS countries it lasts till a child is 18 months old). Given the high poverty rate among children 0-5 years of age, on the one hand, and constrained budget on the other, the Government should consider shortening the benefit duration for 6 months, while increasing its amount.
|Table 7.4. Resources Needed for the Extreme Poverty Alleviation—Three Scenarios |
|Extreme |Poverty |Poverty |Resources |Leakage |Resources |Resources |
|poverty |shortfall |shortfall in |needed (perfect | |needed |Needed, percent of |
|incidence | |dram |targeting) | |billion dram |GDP |
|20% |25% |2,183 |15.8 |20 percent to the |23.7 |2.4 |
| | | | |non-poor and 30 | | |
| | | | |percent to other poor| | |
|15% |25% |2,183 |11.9 |10 percent to the |16.7 |1.7 |
| | | | |non-poor and 30 | | |
| | | | |percent to other poor| | |
|15% |20% |1,745 |9.5 |40 percent to other |13.3 |1.35 |
| | | | |poor | | |
|Memo items: Prices 1999. Food poverty line per adult equivalent AMD 8,730 (see World Bank, 2002b). |
Example 20(c): Recommendations - Tunisia
Source: Republic of Tunisia Employment Strategy, Volume I, Main Report No. 25456-TUN, June 28, 2003- Employment Strategy
Tunisia: Employment Strategy*
|Key Issues and Findings |Outcomes |Suggested Policy Measures |Action Plan for Implementation |
|Active Labor Market Programs (ALMPs) |
|Tunisia’s active labor market policy has evolved over|Many initiatives to support mainly first-time |Developing a streamlined menu of ALM |Reviewing in detail ALMPs composition. |
|the past decades and are the most exhaustive in the |job seekers : similar in purpose and target |interventions which could simplify coordination,| |
|region. |group. |render monitoring and accountability more | |
| | |transparent, and make it easier for clients to | |
|Number of programs has proliferated over time, their |Information are lacking on explicit targeting. |understand their options. | |
|objectives, information and implementation mechanisms| |Defining clearly targeting objectives in the | |
|are not always clear (e.g., 2121). |No systemic basis for allocating resources to |programs. |Regular monitoring of the programs and reforms. |
| |effective programs. |On a regular basis, adjusting and improving |Implementing sound impact evaluation studies of the |
|There is no evidence on the impact of the programs. | |efficiencies of the programs according to the |ALMPs (including pre-employment and in-service |
| | |needs. |training programs) for efficiently allocating public|
| | | |resources and adjusting and reforming programs . |
|Existing programs (e.g., micro-credits) target mainly|There is no appropriate social protection |Introducing social protection schemes targeted |Regular monitoring of the programs and reforms. |
|the youth unemployed. |system that provide temporary support for those|to workers already in the labor market and those|Emphasizing on employment services to facilitate job|
| |who may lose their job. |at risk of income loss. |search, retraining to adjust workers skills to |
| | | |changes in the economy, and considering options for |
| | | |passive income support system. |
|Training system is still supply driven, links to |Gaps between skills offered by first time job |Continuing vocational training reforms. |Faster implementation of the reforms. |
|market needs are weak and implementation of the |seekers and skills in demand by the market. | | |
|reform agenda has been slow. | |Promoting development of high quality in-service|Eliminating obstacles that impede in-service |
| |Negative impact on competitiveness and |training (particularly in SMEs). |training development (through review of financing |
|Low in-service training (specially in SMEs). |upgrading of workers skills. | |options for in-service training and reform of |
| | | |vocational training tax). |
• Activities in bold were identified as areas for future collaboration between the government and the World Bank.
World Bank User
N:\grosh\SP\per\New Folder\examples.doc
January 7, 2004 5:57 PM
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[1] The chapter draws upon a forthcoming report by Cornelia Tesliuc, prepared as background for both the PEIR and the Poverty Assessment Update, entitled “Social Protection and Poverty Reduction in Bulgaria.”
[2] Annex 2 provides details on federal social protection programs (program descriptions, coverage, and budgets).
[3] For further evidence on the role of community participation in SP program outcomes, see the Social Funds 2000 research results, World Bank.
[4] International comparisons on ALMP spending must be made with caution. The OECD does standardize expenditure data submitted by member countries to the extent possible. However, adjustments cannot easily be made for national differences in public administration, other aspects of social policy, and in institutions that can affect reported expenditures. For example, institutional differences in how countries provide vocational education and training for youth (e.g., through the postsecondary system, in industry, etc.) can make a substantial difference in terms of how much of this spending is included or not. Our calculations for Tunisia include the ATFP system. Although there are other public training schemes at sectoral ministry level, tey are not included in this study. In many European countries, institutional arrangements dictate that youth vocational preparation is classified as educational and not ALMP spending. In the context of Tunisia, to be consistent with international definition, it is more appropriate to to include pre-employment training among ALMPs.
[5] To factor in the reimbursable micro-credits, we have assumed that support for self-employment accounted for MD192 in 2002 (42 percent of total expenditures); virtually all of this consisted of micro-financing. If we assume that the net public expenditure (i.e., grants, foregone revenue because of below-market interest rates, plus any training and mobility support) represents 20 percent of this total, then estimated spending in this category would be MD38.
[6] Even assuming only 20 percent of expenditures are “net.”
[7] See for example: Van de Walle, D. (2002), “The Static and Dynamic Incidence of Vietnam’s Public Safety Net”, mimeo, Development Research Group, World Bank
[8] According to ILO (1998), besides the base salary, civil servants receive a housing allowance. There are also special allowances for teachers, judges, firemen, policemen, cleaners, customs agents, military people, and high representatives. Data provided by the FNR show that the proportions of total compensation due to base salary, housing allowance, other allowances, family benefits and augmentations were 45.4%, 12.4%, 25.0%, 4.2% and 13.0%, respectively.
[9] Dividing total wage bill (excluding employer contributions for FNR) by the number of civil servants in 1998 results in annual average compensation of around 2 million CFA francs. At the same time the average old age pension is slightly below 1 million CFA francs.
[10] See Harrison (2002) and SCF (200-); and Annex tables ---- ; also note costs of internationally procured food aid can be even higher than those indicated here; current US estimates at almost $450 /mt. delivered.
[11] A study of the impact of food aid on domestic process concluded that in an average year process were depressed by about 5 percent as the result of each million quintals of food aid inflows (Harrison, 2002). A major effect is when large amounts of food come too late, and overlap with the harvest.
[12] One important issue not covered in this review concerns the correspondence by region (e.g., gouvernorat) between the distribution of unemployment and ALMP activities.
[13] The funds appear in a separate budget volume that is not forwarded for legislative scrutiny or approval.
[14] The annual closing accounts document does include these entities in a single volume with on-budget organizations.
[15] Revolving funds typically operate under a statute authorizing the fees and permanently appropriating the funds such that the spending unit can use these revenues. That is, the annual budget would include a table showing all sources of financing for a program or activity, including own revenues, but the budget per se does not actually approve the spending levels from own funds, as these are limited automatically to the amount of actual collections.
[16] A government-wide estimate of the scope and extent of this problem in the DR is unavailable or unknown. However, in countries where own revenues are excluded from the budget and there no commitment control mechanisms to manage agency own revenues, it is not uncommon for own revenues to be overcommitted and to generate arrears that ultimately have an adverse impact on central government budget.
[17] The absence of ex post sampling by the Contraloría leaves scope for abuse.
[18] The basic pieces of legislation governing public resource management are: the Treasury Act of 1950, the Accounting Act of 1954, the Government Supply and Provision Act of 1966 and the Budget Act of 1969 -- they are all outdated and no longer meet the standards for an effective, modern public resource and expenditure management.
[19] The Ministry could also coordinate the collection and reconciliation of financial information from key institutions in the budget process (ONAPRES, ONAPLAN, Contraloría, Camara de Cuentas, Treasury, Banco de Reservas and Central Bank) to improve information and financial management.
[20] Each commission shall comprise five members (no allusion is made to a requisite educational background or professional experience in accounting, auditing or public fiscal management), nominated by its respective community (it is not clear who makes or approves the nominations), to control quality, from the beginning to the end of each project. This action makes for the proliferation of a fragmented public accounting and auditing system, as well as promotes the culture of opaque public expenditure management. See Diario Libre, Viernes 17 de enero de 2003.
[21] Ideally, ex-ante control should not be centralized but should be the responsibility of individual sectoral agencies. Ex-post audits could still be carried out by the Contraloría and the Cámara de Cuentas
-----------------------
‘Aggressive’ Safety Net Strategy
Free Distribution Approximate Numbers (2010)
Policy: Share of Population & Poorest 5 percent: 75 percent of food requirement for 8 months of the year. 4 million Level of Support: Next Poorest 5 percent: 50 percent food requirement for 4 months of the year 4 million
Public Works
Next Poorest 10 percent in normal years; 50 percent of food requirement for 6 months 8 million
(up to 15 percent in bad years; and up to 75 percent of food requirement 8 months)
Estimated Cost: $ 466 million p.a. by 2010
‘Moderate’ Safety Net Strategy
Free Distribution Approximate Numbers (2010)
Policy: Share of Population & Poorest 2 ½ percent: 75 percent of food requirement for 8 months of the year 2 million Level of Support: Next Poorest 2 1/2 percent: 50 percent food requirement for 4 months of the year 2 million
Public Works
Next Poorest 7 ½ percent in normal years; 50 percent of food requirement for 6 months 6 million
(up to 10 percent of population in bad years; and up to 75 percent of food requirement 8 months)
Estimated Cost: $ 283 million p.a. in 2010.
‘Minimalist’ Safety Net Strategy
Free Distribution Approximate Numbers (2010)
Policy: Share of Population & Poorest 2 1/2 percent: 50 percent of food requirement for 5 months of the year 1.6 million Level of Support
Public Works: 4 million
Next Poorest 5 percent of population in normal years (50 percent of food requirement for
(up to 10 percent in bad years)
Estimated Cost: $ 163 million p.a. in 2010
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