Public Spending for Poverty Reduction

Jeni KlugmanOne Day Workshop on Critical Issues in

Public Expenditure Management June 22, 2001

Assessing spending options: A simplified framework

Whether and where government should spend

Step 1 Determine for rationale for public intervention: 1. Market failures, including public goods, externalities, non -competitive markets 2. Address inequalities in access to services and distribution of income

Step 2

Decide among alternative instruments to offset market failures and/or improve distributive outcomes

Step 3 Decide on the type of program if state-run is chosen, and set priorities consistent with aggregate budget constraints

Potential Instruments include: Regulatory Measures: e.g. private schooling Utility tariffs and universal service obligations

Revenue Measures: Review distributive impact of revenue measures

e.g. reduce taxes on ag. export. Distinguish between public finance and provision Contract out to private sector State-run entities & programs

Analytical Tools include: Poverty diagnostics Distribution of access and spending by:

- Level of service - region/rural-urban - population group

Evaluation of selected programs

Methods to rank across programs include: cost effectiveness analysis multi-criteria analysis social cost-benefit

Assessing the distribution of public spending : Why and what

• Inform decisions and choice of instrument

• All major programs and projects—not just the social sectors (!)

• Utilization as well as access

• General caveat: investments may have longer term payoffs

Data needs

1. National census or a household survey— income and demographic variables—or service utilization data, or qualitative surveys of users.

Poverty diagnostics are a key building block

2. Spending by the central and local governments, and projects externally financed, disaggregated by service level or by region.

020406080

100120140160

Primary Secondary TeacherEducation

University

Government current expenditure Per Student by Education Level in Uganda (Ratio to primary)

Spending by level of service

Source: World Bank, 1993. “Uganda: Social Sectors: A World Bank Country Study” Washington.

Regional composition of spending

ii) poverty map

Per Patient Recurrent Expenditures on Health, by Region in Guinea, 1994 (spending ratio relative to the national average)

Region Health Center/Clinic Hospital

Conakry (capital) 2.99 1.08 Lower Guinea 0.67 0.80 Middle Guinea 0.84 1.34 Upper Guinea 0.88 0.97 Forest 0.61 0.95 All Guinea 1.00 1.00

Source: World Bank, 1996, “Republic of Guinea Public Expenditure Review,” Report No. 14039-TA.

i) Simple breakdowns by province, district

Benefit incidence analysis

Conventional (static/ average) approach has three steps:– Estimating unit cost, (subsidy) per person: requires data on

capital and recurrent costs;– Imputing the unit subsidy to households (individuals) based

on their utilization of the service—usually derived from household surveys; and

– Aggregating households (individuals) into groups (e.g. quintiles) and comparing subsidy incidence across these groups.Population can be further broken down by region, ethnic group, or gender.

Distribution of Public Education Spending by Quintile: Côte d’Ivoire

1417 17 17

35

0

5

10

15

20

25

30

35

40

1 2 3 4 5

Quintile

Perc

ent

Distribution of marginal benefits of program expansion

1. “Capture” by different income groups over time2. Remote or inaccessible regions less well-served by current

programs3. Scaling up may reduce targeting effectiveness

A program that currently benefits mainly the non-poor may still warrant expansion, as the poor may benefit disproportionately from increases in spending levels; or vice versa

 

The current distribution of benefits of spending may not be the same as what would happen with program expansion. Reasons include:

Estimating marginal benefits

Data requirements: – household data to allow calculation of quintile specific

participation (e.g. enrolment) rates

Approach is to compare average & marginal odds:1. Calculate the average odds ratio (defined as the

quintile average rate divided by population average rate)

2. Estimate the marginal odds ratio-defined as the marginal increase in quintile specific rate associated with an aggregate change in overall rate

Comparing average and marginal odds: primary education

Ravallion and Lanjow 1998

Rural India - (1993 – 4)Average Marginal

Quintile Boys Girls Total Boys Girls Total Average

odds of enrollment (mean=1.0)

Enrollment rate (%)

Average odds of

enrollment (mean=1.0)

Enrollment rate (%)

Average odds of

enrollment (mean=1.0)

Marginal odds

Marginal odds

Poorest 0.75 31.6 0.66 37.2 0.71 1.09 (6.90)

1.08 (9.65)

1.10 (8.99)

2nd 0.93 43.1 0.91 48.6 0.90 0.91 (6.05)

0.91 (6.99)

0.97 (7.92)

3rd 1.07 50.3 1.06 55.8 1.08 0.92 (5.85)

0.84 (6.54)

0.87 (7.65)

4th 1.16 58.6 1.26 62.6 1.21 0.66 (4.10)

0.66 (4.28)

0.67 (4.77)

5th 1.23 65.2 1.38 67.7 1.31 0.53 (4.08)

0.70 (5.53)

0.67 (5.69)

Caveats• Supporting functions may be more important for the poor in

the long term

• The cost of services is an inadequate proxy for the benefits received

• Neglects differences in ability of different social groups to transform access to the service into improved well-being

• Neglects differences in the quality of services provided • Government spending does not represent the full cost to

users • Results may well be sensitive to assumptions about

equivalence and economies of scale

Program Evaluations • Rigorous methodology: various statistical techniques for assessing the consequences of a program intervention in relation to what would have occurred in the absence of the program (by using, e.g., control groups).

– preferably combined with qualitative and participatory information to understand the underlying processes and constraints

• In many countries, however, few if any, rigorous evaluations of any programs have been done• Developing more systematic evaluation strategy with respect to key programs is an important part of a PRSP to inform future resource allocations

Assessing options in the short term

1. Overall fiscal analysis2. Program descriptions3. Poverty profile4. Relationship between program and

poverty profile5. Preliminary overall evaluation

Mapping programs onto poverty profile (Cerea, Brazil)

Household Group Absolute Numbers

Key income characteristics

Program Type

Risk Mean income

Poverty Incidence

(%)

Human Development Management (transfers etc)

1. Rural landless 2. Small farmers

3. Rural non-farm

4. Small town (all)

5. Metropolitan informal

6. Metropolitan manual formal workers

7. Metropolitan skilled formal workers

8. Urban inactive households

Total (All Ceará)

Key relevance to PRSPs

(i) Is the financing plan adequate & credible?

(ii) Are fiscal choices (expenditure and revenue policies) consistent with strategic priorities and institutional capacity?

(iii) Is public financial management adequate to ensure effective implementation?

See the JSA Guidelines

Costing PRSPs: Burkina Faso

• Projected medium-term budget for priority sectors:– Based on existing program budgets from line ministries and MTEF

2001-03• A financing plan for specific measures in the PRSP. BUT

– Only costing of “additional” (relative to existing sectoral programs) activities explicit but of the four priority programs in PRSP (“ Accelerated Growth” and “Good Government”) not costed

– For funding sources, only HIPC resources explicit– MTEF presented in very summary form, with a line for the so-

called “additional” PRSP expenses.

Costing Uganda’s PEAP1. Presentation of MTEF, including:

i. Linkages with the macroeconomic framework; andii. Table summarizing sectoral expenditure shares

2. Discussion and summary table of institutional Poverty Action Fund (PAF) a subset of the MTEF.

But:• Sources of funding are not clearly identified.• Annex table on “Goals, targets and indicators in the

PEAP 2000” presents partial costing for achieving specific

Cambodia’s draft SEDP(PRSP)

• Every sector presents a "wish list" • No clear presentation of a forward-looking budget. • The PIP (including "high priority projects") is

presented, but: 

– recurrent cost implications ignored. – need to link the PIP to a medium-term framework of resource mobilization is recognized, but no explicit work plan for how this is to be achieved. – unrealistic external financing envelope: PIP was 50% unfunded. – PIP presents sectoral allocations only within infrastructure. 

Conclusions1. Improving the quality of expenditure analysis

• asking the right questions at key stages in the budget cycle – about the rationale for spending, and its distributive impact

• good poverty diagnostics—both quantitative and qualitative

2. Complementarity of different data and techniques to examine the distributional impact of spending

3. Fundamentally linked to basic principles of good public sector financial management, including comprehensiveness, medium term perspective and transparency