OECD – World Bank Seminar Democratic Governance in Mexico: A Latin American Perspective Paris, 20 th June 2007 Comments by Javier Santiso Chief Economist.

OECD – World Bank Seminar Democratic Governance in Mexico:A Latin American Perspective

Paris, 20th June

2007

Comments by

Javier Santiso

Chief Economist and Deputy Director

OECD Development Centre

2

Is Mexico different?Is Mexico different?11

Fiscal policy and legitimacy in Latin Fiscal policy and legitimacy in Latin AmericaAmerica

22

Overview

Conclusions and policy lessonsConclusions and policy lessons33

3

Democratic Governance in Mexico

• A very Hirshmanian exercise in “trespassing”.

• A welcome focus on legislative processes and the implementation of reforms

“In a nutshell, many of the distortions observed in Mexico’s policy sectors result from the role of special interests in capturing the policy-making apparatus.” (page 1)

• Mexico suffers from “interest group” politics, but so do many other Latin American countries.

4

Public Regardness Index

1 2 3 4

Ecuador

Honduras

Argentina

Bolivia

Colombia

Venezuela

Brazil

El Salvador

Mexico

Peru

Uruguay

Chile

Efficiency Index

1 2 3 4

Venezuela

Argentina

Ecuador

Bolivia

Honduras

Peru

Brazil

Colombia

Uruguay

El Salvador

Mexico

Chile

Is Mexico different?Institutional anchoring: A key driver of possibilism

Source: Mariano Tomassi. “The Institutional Foundations of Public Policy”. Journal of the Latin American Economic Association. Spring 2006.Note: Based on expert and enterprise surveys

5

Enforcement and Implementation

1 2 3 4

Argentina

Ecuador

Venezuela

Bolivia

Honduras

Peru

Brazil

Colombia

El Salvador

Mexico

Uruguay

Chile

Coordination and Coherence

1 2 3 4

Venezuela

Argentina

Ecuador

Peru

Colombia

Honduras

Uruguay

Bolivia

El Salvador

Mexico

Brazil

Chile

Is Mexico different?Institutional anchoring: A key driver of possibilism

Source: Mariano Tomassi. “The Institutional Foundations of Public Policy”. Journal of the Latin American Economic Association. Spring 2006.Note: Based on experts and enterprise surveys

6

Stability Index

1 2 3 4

Venezuela

Ecuador

Peru

Argentina

Honduras

Bolivia

Mexico

Uruguay

El Salvador

Brazil

Colombia

Chile

Adaptability Index

1 2 3 4

Venezuela

Argentina

Ecuador

Bolivia

Peru

Honduras

El Salvador

Colombia

Mexico

Brazil

Uruguay

Chile

Source: Mariano Tomassi. “The Institutional Foundations of Public Policy”. Journal of the Latin American Economic Association. Spring 2006.

Is Mexico different?Institutional anchoring: A key driver of possibilism

Note: Based on experts and enterprise surveys

7

The difference is in fiscal policy, revenue

generation

12

12

17

19

20

25

26

36

0 10 20 30 40 50

Venezuela

Mexico

LATAMAvge

Chile

Colombia

Uruguay

Argentina

Brazil

26

30

34

35

36

38

43

0 10 20 30 40 50

United States

Ireland

Portugal

Spain

OECD Avge

Czech Rep.

France

Sweden

Tax revenue in Latin America

Tax revenue in OECD

Source: OECD Latin American Economic Outlook (forthcoming) based on ECLAC and OECD Revenue statistics databases (2007)

Note: data are for (2004) and include social security contributions

% of GDP % of GDP

50

8

Is Mexico different?Is Mexico different?11

Fiscal policy and legitimacy in Latin Fiscal policy and legitimacy in Latin AmericaAmerica

22

Overview

Conclusions and policy lessonsConclusions and policy lessons33

9

Latin America suffers from low fiscal legitimacy

- Fiscal legitimacy is the confidence people place in fiscal policy

- Citizens’ satisfaction with the government’s job

- Latin American countries, and Mexico in particular, suffer from low fiscal legitimacy

- Fiscal legitimacy matters for democratic governance and fiscal performance

7

9

9

10

11

12

14

14

14

15

17

18

18

19

23

26

27

0 5 10 15 20 25 30

Ecuador

Mexico

Peru

Guatemala

Colombia

Bolivia

Panama

Parguay

Uruguay

Costa Rica

Argentina

Brazil

Venezuela

Nicaragua

El Salvador

Honduras

Chile

% of respondents who trusttax revenue is well spent

Source: OECD Latin American Economic Outlook (forthcoming) based on Latinobarómetro (2003)

Note: index based is based on citizens survey

10

Fiscal legitimacy enhances democratic

governance

Source: OECD Latin American Economic Outlook (forthcoming) based on Latinobarómetro (2003)

Argentina

BoliviaBrazil

Chile

Colombia

Costa Rica

Ecuador

El Salvador

Guatemala

Honduras

Mexico

Nicaragua

Panama

ParaguayPeru

Uruguay

Venezuela

r = 0.5

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25 30

Fiscal legitimacy (% who trust taxes are well spent)

Dem

oc

rati

c le

git

imac

y (%

sat

isfie

d w

ith d

emoc

racy

)

11

Press freedom boosts fiscal accountability

Source: OECD Latin American Economic Outlook (forthcoming) based on Freedom House (2007) and ECLAC and OECD Revenue Statistics (2007)

KoreaUnited States

SwitzerlandIreland

Slovak Rep.Turkey

Spain

ItalyFrance

Sweden

Haiti

Venezuela Mexico

Ecuador PeruBolivia

Nicaragua ChileCosta RicaColombia

UruguayArgentina

Brazil

0

10

20

30

40

50

0 10 20 30 40 50 60 70 80 90 100

Freedom of the press(Index: 0-30=Not free, 31-60=Partially free, 60-100 Free)

Tax

Rev

enu

e(2

004

% G

DP

)

12

A political transition but not in the media…

Source: OECD Latin American Economic Outlook (forthcoming) based on Freedom House (2007)

0102030405060708090

100

1980 1985 1990 1995 2000 2005 2006

Freedom of the press

Venezuela

Venezuela

MexicoMexico

Chile

Chile

LatAm avge

LatAm avge

Not free

Partially free

Free

1988 Chile’s plebiscite

13

Why is fiscal legitimacy low in Latin America?

Unlike Europe, in Latin America taxes and transfers play no redistributive role

Source: OECD Development Centre based on data by Goñi, López, and Servén (2006)

4649

545047

5156

52

0

10

20

30

40

50

60

Ch

ile

Me

xic

o

Bra

zil

La

tAm

av

era

ge

Inequality after taxes and transfers

3135 34 31

4247

5346

0

10

20

30

40

50

60

Fra

nc

e

Sp

ain

Ire

lan

d

Eu

rop

ea

ve

rag

e

Inequality before taxes and transfers

Gin

i co

effi

cien

t

Gin

i co

effi

cien

t

14

Why is fiscal legitimacy low in Latin America?

Poor quality of fiscal policy: Low quality public spending

Education Expenditures and Performance

Mexico

NorwayPolandSlovak Republic

Spain United States

Brazil

Indonesia

Thailand

Tunisia

Uruguay

300

350

400

450

500

550

600

- 5,000 10,000 15,000 20,000 25,000 30,000

Annual expenditure on educational institutions per student (2001) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents

Mat

hem

atic

s S

core

(P

ISA

200

3)

Source: OECD Latin American Economic Outlook (forthcoming) based on PISA (2003) and OECD Education at a Glance (2005)

15

Is Mexico different?Is Mexico different?11

Fiscal policy and legitimacy in Latin Fiscal policy and legitimacy in Latin AmericaAmerica

22

Overview

Conclusions and policy lessonsConclusions and policy lessons33

16

How can Latin America improve on fiscal

legitimacy? 1. Implementation is key

– Less is more? – Brazil and Mexico: It is not only a question of quantity– 1990s reform focused on technical issues but failed to get

implemented because it became entangled in politics

2. Enhance checks and balances– More and more effective– More attention to media and think-tanks (Ulysses and the

Sirens)– Peer review mechanism around LEO and Tax Centre

3. Corporate governance: The case of Pemex – The OECD corporate governance roundtable

17

Thank you!

Presentation based on:

The forthcoming “OECD Latin American Economic Outlook”

http://www.oecd.org/dev/leo