Creating fiscal space for poverty reduction in Ecuador : a fiscal management and public expenditure review.

Format:

Book

Government document

Contributor:

World Bank.

Inter-American Development Bank.

Series:

World Bank country study 0253-2123

Document of the World Bank and the Inter-American Development Bank

A World Bank country study, 0253-2123

Language:

English

Subjects (All):

Finance, Public--Ecuador.

Finance, Public.

Economic assistance, Domestic--Ecuador.

Economic assistance, Domestic.

Poverty--Government policy--Ecuador.

Poverty.

Government spending policy--Ecuador.

Government spending policy.

Fiscal policy--Ecuador.

Fiscal policy.

Poverty--Government policy.

Ecuador.

Physical Description:

xxxiv, 243 pages : illustrations ; 26 cm.

Place of Publication:

Washington, DC : World Bank : Inter-American Development Bank, [2005]

Summary:

Creating Fiscal Space for Poverty Reduction in Ecuador is part of the World Bank Country Study series. These reports are published with the approval of the subject government to communicate the results of the Bank's work on the economic and related conditions of member countries to governments and to the development community.

Ecuador's impressive fiscal performance of 2003 and 2004 is encouraging, but fragile. Several structural bottlenecks could impede fiscal discipline and recovery, which is a pre-condition to develop a poverty reduction agenda. Tax earmarkings, multiple exemptions, an expansive payroll, and growing pension bills have reduced to a minimum the available fiscal space for development needs. Reversing poverty trends is critical for the country's stability, and this can only be achieved with well-targeted, effective and efficient pro-poor programs. The status quo is not an option for poverty reduction.

Preserving a sound fiscal position and deepening positive social outcomes are well within reach. Among the country's main strengths are: a prolonged oil windfall; the existence of and compliance with fiscal rules; substantive progress on social outcomes despite decreasing budgets; and a series of ongoing reforms on budget management. Ecuador's fiscal stress and poor budget management is deeply rooted in a governance system benefitting rent-seeking elites. The challenge is to provide more effective, efficient, sustainable, and equitable assistance to the poor.

Contents:

Fiscal Policy Faces Historical and Structural Constraints xxii

Fiscal Trends and Challenges xxiii

Pro-Poor Expenditure and the Room for Additional Fiscal Space xxv

Public Expenditure Management (PEM) and Other Institutional Issues xxviii

Conclusions and Policy Recommendations xxx

A Selection of Key Policy Recommendations xxxiv

1 Fiscal Policy in a Dollarized Economy 1

The Ecuadorian Economy: Some Historical Background 2

The Role of Fiscal Policy in a Dollarized Framework 4

Structural Constraints on Fiscal Policy 6

2 Fiscal Trends and Challenges 11

The Volatility of Fiscal Variables 11

Fiscal Performance Before and After Dollarization 11

The Challenge of Revenue Management 14

Fragmented Tax Structure 15

Tax Exemptions and the Erosion of the Tax Base 17

Earmarking: The Undermining of Budget Flexibility 17

Expenditure Trends 17

The Fiscal Transparency, Stabilization and Responsbility Law 26

Stabilization Funds 26

Fine-Tuning Fiscal Rules 28

Issues in Debt Sustainability 31

Exercise 1 Fiscal Sustainability under a Sudden Drop in the Price of Oil, Surge in Interest Rate, or Capital Outflows 33

Exercise 2 Fiscal Sustainability under Tax Revenue Volatility 34

Policy Recommendations 34

3 Pro-Poor Expenditures and the Fiscal Space 39

Is Social Expenditure Enough for Poverty Reduction? 40

Is Social and Basic Infrastructure Expenditure Pro-Poor? 42

Main Social Programs 42

Subsidies in Basic Infrastructure Services 49

How Much Fiscal Space Is Available for a Poverty Reduction Strategy 52

Reversing Current Expenditure 52

Making an Optimal Selection of Public Investment 54

Assessing Defense Spending 55

How Much Off-Budget Fiscal Space Can Be Found for a Poverty Reduction Strategy 56

Freezing or Reducing Budget Earmarking 56

Reducing Tax Expenditure 57

Making Transparent and Intergrating Off-Budget Public Investment 59

Towards a Results-Oriented Budget: Attaining the Millennium Development Goals 59

Policy Recommendations 64

To Shift Public Expenditures Toward a Pro-Poor Focus 65

To Re-Target Public Subsidies 66

Trade-Offs Between In- and Off-Budget Fiscal Space 68

To Reach Selected MDGs 69

4 Performance of Public Expenditure Management 71

The PEM Process and its Recent Performance 72

Budget Management Review in the Central Government 74

Budget Formulation 74

Execution 79

Budget Management Review in Social Programs and Subnational Governments 84

Social Programs 84

Provincial and Municipal Governments 90

Budget Transparency, Accountability, and Participation 94

Are There Sufficient Conditions for a Multiyear Budgeting Framework in Ecuador? 97

Policy Recommendations 98

Appendix A An Estimation of the Potential Output And the Structural Fiscal Balance in Ecuador 105

Appendix B Summary of the Budget Process 111

Appendix C Major Budgetary Issues in Priority Social Programs 115

Appendix D Budgetary Framework of Decentralization in Ecuador 127

Appendix E Budgetary Framework of Decentralization in Ecuador 137

ES.1 Potential Sources of Fiscal Space and Estimated Annual Impact xxviii

2.1 Volatility of NFPS Variables, 1993-2003 12

2.2 Ecuador: Actual and Structural Fiscal Balance, Fiscal Stance and Fiscal Impulse 13

2.3 Total Revenue of the Non-Financial Public Sector and Central Government 15

2.4 The Structure of the Tax System 16

2.5 Selected Tax Administration Indicators, 2001-03 16

2.6 "Optimal" Fund vs FEIREP Flows for Debt Reduction 29

2.7 Evaluation of Compliance with the Fiscal Rules 30

3.1 Ecuador: Social Expenditure of Central Government as a Percentage of GDP 41

3.2 Pro-Poor and Non Pro-Poor Social Expenditures 43

3.3 Social Expenditure and Energy Subsidies, by Income Quintile 45

3.4 Basic Services Subsidies by Expenditure Quintile 50

3.5 Rigidity of the Central Government Budget, 2001-04 53

3.6 Ecuador: Personnel Involved in Defense and Security 55

3.7 Estimated Tax Expenditures of the Internal VAT Exemptions 58

3.8 Progress by Ecuador in Meeting the Millennium Development Goals 60

3.9 Estimated Fiscal Cost of Attaining Key MDGs and Social Targets 63

3.10 Potential Sources of Fiscal Space 68

4.1 Basic Elements of Public Expenditure Management: The "Three-level Analysis" 72

4.2 Allocation of Public Spending by Tiers 73

4.3 Review of Ecuador's Public Expenditure Management and Benchmarks 75

4.4 Ranking of Ecuador's PEM in Relation to Peru, Bolivia, and HIPC Indicators 77

4.5 Sources of Government Financing 78

4.6 Budgetary Assumptions and Actuals 79

4.7 Level of Budget Execution of Sector Expenditures 81

4.8 Changes in the Budget Share between Executed and Approved 82

4.9 Forms of Local Participation within Selected Priority Social Programs 85

4.10 Budget of Priority Social Programs Grouped by Social Sector 86

4.11 Budget Approved and Executed for Priority Social Programs 87

4.12 Budget Execution and Tracking Survey of Transactional Delays within PSPs 89

4.13 Positive Qualifications per Country 95

ES.1 Oil Prices, Growth, and the Fiscal Deficit xxii

ES.2 Debt Sustainability under the Fiscal Rule xxiv

ES.3 Incidence of Social Expenditure and Energy Subsidies, 1999 xxvii

1.1 Total Public Sector Net Work 7

2.1 Non-Financial Public Sector Balances 12

2.2 Tax and Non-Tax Revenue of the Central Government and Important Tax Reform Efforts 1964-2004 14

2.3 Total and Primary Expenditures 18

2.4 Trends in NFPS and Central Government Expenditures 18

2.5 Public Expenditure by Selected Functions 19

2.6 Composition of Wages by Selected Sectors 21

2.7 Institutional Composition of Public Fixed Investment 25

2.8 "Optimal" and Actual Stabilization Accumulation Scenarios 27

2.9 Base Case for Debt Sustainability 32

3.1 Incidence of Social Expenditure and Energy Subsidies 44

3.2 Telephone Penetration by Household Income Quintile 50

3.3 Rigid Compared to Flexible Public Expenditure 54

3.4 Military Expenditure, 1998-2001 56

3.5 Decomposition of Budget and Off-Budget Financing Sources 57

3.6 Chile: Fondo Concursable 65

4.1 Changes in Shareof NFPS Expenditures, by Government Tier 72

4.2 Emergency Decrees 80

4.3 Stock of Arrears 83

4.4 Budget Execution of Social Programs 88

4.5 Seasonal Patterns in Budget for Social Programs 90

4.6 Planned Compared to Executed Transfers of the 15-Percent Law, 1997-2003 91

4.7 Transfers and Payments of the 15-Percent Law to Municipalities 93

4.8 Transfers of the 15-Percent Law and the New Subnational Budget Cycle 93

4.9 LAC Index of Budgetary Transparency 94

4.10 Revenue Base for the 15-Percent Law with/without Oil Revenue 102

1.1 The Costs and Benefits of Dollarization 5

1.2 Ecuador's Political Economy 9

2.1 The Civil Service and the Wage Unification Law: A Step in the Right Direction 22

2.2 Ecuador's Oil Funds 26

2.3 The Base Case Scenario 32

3.1 Teacher Absenteeism in Primary Schools 48

3.2 Household Expenditures on Water: The Case of Machala, El Oro 51

3.3 Main Conclusions of the World Bank Ecuador Poverty Assessment 61

3.4 The Chilean Competitive (Concursable) Fund for Public Programs 66

4.1 The Six Stages of a Comprehensive Multiyear Budgeting Framework 98

4.2 Main Recommendations of the IMF-ROSC 99

4.3 Ecuador-Institutionalizing a Virtual Poverty Fund: A Look at Best-Practice in Uganda 101

A.1 Structural Fiscal Balance 109

C.1 Budget Execution at BDH, by Financing Source 117

C.2 Budget Execution at PAI, by Financing Source 118

C.3 Budget Execution at LMG, by Financing Source 121

C.4 Budget Execution at PRADEC, by Financing Source 123

C.5 Budget Execution at PAE, by Financing Source 123

D.1 Current and Capital Spending of Municipalities and Provincial Councils 130

D.2 Priorities of Subnational Investment Spending 131

D.3 Capital Spending of Municipalities and Provincial Councils in the Health and Education Sectors 133

D.4 Administration of Schools,

Teachers, and Students in The Education Sector, School Year 2000-01 134

D.5 Public Spending in Health Sector 134

E.1 Subsidy Distribution by Consumption Deciles 138

E.2 Distribution of the Cooking-Gas Subsidy by Ethnic Group 138

E.3 Effect of Various Reform Scenarios for the Cooking-Gas Subsidy 139

A.1 Actual and Potential GDP 107

A.2 Primary Balance 108

B.1 Flow of Budgetary Funds 112

C.1 Organization of the BDH Operating in 14 Provinces 116

C.2 Organization of PAI Operating Nationwide 119

C.3 Organization of LMG Operating in 40 Municipios 120

C.4 Organization of PRADEC Operating in 443 Juntas Parroquiales 122

C.5 Organization of PAE Operating in the Coast and Sierra 124

D.1 Intergovernmental Transfers, 1996-2003 128

D.2 Sources of Revenue for Transfers to Subnational Governments 129

D.3 Own Revenue and Expenditures per Level of Government and Veritcal Fiscal Imbalances, 1997 and 2002 132

E.1 Distribution of the Gas Subsidy Retargeted with SelBen 140.

Notes:

Includes bibliographical references (pages 239-243).

ISBN:

0821362569

0821362577

OCLC:

60312015

Publisher Number:

9870821362563

9780821362563