Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Ideas Matter

  • HOME
  • CATEGORIES
    • Behavioral Economics
    • Environment and Climate Change
    • Macroeconomics and Finance
    • Microeconomics and Competitiveness
    • Politics and Institutions
    • Social Issues
  • Authors
  • Spanish

Trimming the Fat for Better Growth

July 11, 2016 by Alejandro Izquierdo Leave a Comment


Why do governments need to save? In large part, for some of the same reasons people and firms need to save: to invest and help their economies grow and prosper. Public saving may make up less of national saving than household or corporate saving in Latin America and the Caribbean. But it is nonetheless vital to overall economic health. Greater public saving would allow governments to increase capital expenditures, enhance private sector productivity, and stimulate long-term growth.

 

Download the book here
Download the book here

Getting there, however, will not be easy. Current public saving rates in the region are on average more than 3 percentage points of GDP lower than in East Asia. Moreover, in recent years they have been falling, dropping from 6% of GDP in 2007 to 2.8% of GDP in 2014 with increases in current expenditures, like salaries, subsidies and social programs. Reversing that trend could be not only economically difficult, it could be politically costly. Voters in the region simply don’t support cuts. That is because expenditure increases, which should have been temporary to help during the financial crisis, now appear to voters as permanent. Expecting them to shrink in the current climate is rather unrealistic. With commodity prices currently depressed, interest rates rising, and many economies suffering, governments are likely to find little support for the traditional means of boosting public saving: spending cuts and higher taxes.

Fortunately, governments have other options. Rather than cutting public expenditures across the board, they can engage in “smart” adjustments. That is, they can dissect the budget and attack inefficiencies. One place to start is with those expenditures involving subsidies originally intended to help the poor that are badly targeted and end up subsidizing the well-to-do and rich. Take energy subsidies. A country may have an electricity subsidy for consumption on the first 150 KWh intended to help families that are struggling to pay their bills. But this invariably helps all households with their first 150 KWh, constituting a wasteful use of resources, or leakage, beyond the targeted population. If more precise targeting polices were implemented to this and other forms of energy like gasoline, natural gas, and fuel oil, governments could obtain savings of more than 1% of GDP, given that currently two-thirds of energy subsidies leak out to non-poor households.

Savings can also be obtained from better targeting of conditional cash transfers and non-contributory pensions. Such programs help reduce poverty and inequality. Spending on them has increased, even tripling in some countries between 2003-2013. But because of improper targeting they also end up subsidizing people who don’t need the programs, costing the region 0.5% of its GDP. Reductions on tax expenditures with a social component, such as exemptions to the value added tax (VAT) or exemptions for food, medicine and rent, meanwhile, lead to even greater losses — about 07% of GDP on average, but as much as 2% of GDP in some countries−with nearly three quarters of reductions benefitting non-poor households.

Education and health expenditures should also be revisited, especially by looking at cases where the numbers of workers are excessive and wages exceed productivity. The challenge, however, is great: these areas involve universal programs intended to benefit all sectors of the population, rather than just the poor. But different methodologies can be used to look for inefficiencies. One might, for example, use countries that are highly efficient as a benchmark against which other countries can be measured. South Korea, for example, is a useful benchmark for education, given its high test scores and relatively low number of teachers per student. Excessive teacher salaries for a given level of development can also be part of the problem. Savings in both dimensions could account on average to 0.7% of GDP in education, and 0.2% of GDP in health, with wide variations across countries in the region.

Although politically difficult, it can’t begin soon enough. The public sector needs to lose weight to remain sustainable. Between 2007-2014, total government expenditure in the region jumped 3.7 percentage points of GDP with more than 90% of that going to current expenditures, and only 8% to public investment, or saving. That means money isn’t being set aside for badly needed infrastructure spending. Such spending, as a percentage of GDP, significantly lags other developing regions like Asia and has resulted in substandard roads, ports, and airports. It means that savings are woefully inadequate for that time later in the century when the number of non-working dependents will almost equal that of the working and the demand for health services and pensions will soar. Adding it all up, savings from tackling inefficiencies in energy, social programs, tax expenditures, health and education could amount to around 3% of GDP. Reducing such inefficiencies will not only help ensure fiscal solvency. It will allow for productive investments that are critical to putting the region on a sustainable path with higher growth.

Some of these issues are discussed in the 2016 edition of the IDB’s flagship series, Development in the Americas, entitled Saving for Development: How Latin America and the Caribbean Can Save More and Better. Click here to download the book.


Filed Under: #Saving, Macroeconomics and Finance, Politics and Institutions, Social Issues Tagged With: #education, #energy, #health, #saving, #subsidies

Alejandro Izquierdo

Alejandro Izquierdo es Líder Técnico Principal del Departamento de Investigación del Banco Interamericano de Desarrollo (BID). Anteriormente ocupó cargos como Economista Jefe y Gerente interino del Departamento de Investigación, Asesor Económico Regional para México y Centroamérica, y Economista Principal en el BID. Alejandro estuvo a cargo del Informe Macroeconómico Anual del BID durante varios años y es co-director del programa ejecutivo conjunto de la Universidad de Columbia y el BID sobre asuntos financieros internacionales en países emergentes. También ha liderado el informe bandera del BID, Desarrollo en las Américas, en temas como crédito y gasto público en América Latina. Antes de su carrera en el BID, Alejandro trabajó en el Departamento de Política Económica del Banco Mundial y dictó clases de macroeconomía y finanzas internacionales en varias universidades latinoamericanas. Cuenta con diversas publicaciones en revistas profesionales y volúmenes editados. Alejandro obtuvo un doctorado en Economía en la Universidad de Maryland, una maestría en el Instituto Torcuato Di Tella de Argentina y una licenciatura en Economía de la Universidad de Buenos Aires, Argentina.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Related posts

  • Four Ways to Adjust Painlessly
  • Making Saving a State Policy
  • Leveraging Behavioral Insights in the Aftermath of COVID-19
  • Labor Informality and the Pension Disaster
  • Turning a Piggy Bank into a Savings Account in Peru

About this blog

The blog of the IDB's Research Department shares ideas that matter on public policy and development in Latin America and the Caribbean.

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

Blog posts written by Bank employees:

Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


For blogs written by external parties:

For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



Privacy Policy

Copyright © 2023 · Magazine Pro on Genesis Framework · WordPress · Log in

Banco Interamericano de Desarrollo

Aviso Legal

Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

facebook
twitter
youtube
This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser.
To learn more about cookies, click here
X
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.

SAVE & ACCEPT