The Social Sectors from Crisis to Growth in Latvia

The Social Sectors from Crisis to Growth in Latvia

March 1, 2011 Peter Harrold, Indhira Santos and Emily Sinnott, The World Bank, Brussels

The World Bank

Overview 1. World Bank involvement in stabilization program 2. Demographic challenges and social spending during the

boom 3. What happened to education, health and social

protection during the crisis? 4. Remaining challenges 5. Lessons learned

2

World Bank participation in Latvia’s stabilization program

3

Latvia graduated from World Bank borrower status in 2007 Lending support Social sector reforms Emergency social safety net, including the public works program

(simtlatnieku programma) “Funds follow the student” education financing reform aimed at

increasing efficiency and quality given shrinking school-age population Protection of primary health care services during adjustment and

support of reforms aimed at substituting expensive inpatient services by outpatient and alternative care

Financial sector strengthening Small share of overall financing (EUR 400 ml), the focus was on

providing technical assistance for reform and crisis protection measures

BOOM

Demographic challenge: Decreasing and aging population

5

Dramatic fall in school-age children: 5-14 year

old population fell by 40% over 2000-2010

Declining population: Overall population fell by 5.6% in the past decade and is expected to fall by 19% over 2010-2060

Age-dependency ratio to increase substantially: Cohort of those aged 65 and over expected as a share of the working-age population projected to increase from 26% in 2000 to 66% by 2060

Effective retirement age was 59.3 in 2008 Source: World Bank staff calculations based on data from UN Population Division.

Social sector spending boomed in Latvia over 2004-2008

6 Source: World Bank staff calculations based on Eurostat data.

-10 0 10 20 30 40

Lithuania

Slovakia

Romania

Latvia

Estonia

Czech Republic

Poland

Hungary

Slovenia

Bulgaria

Real growth in social spending and social sector contribution (percent),

2004-2007

Education

Health

Social Protection

0 20 40 60 80

Romania

Bulgaria

Latvia

Hungary

Slovakia

Czech Republic

Estonia

Poland

Lithuania

Slovenia

Social Sectors as a share of total government expenditure

(percent), 2008

Health is responsible for nearly half this growth

But social protection—i.e. pensions—is the most important component

Increased health spending was driven by rising inpatient unit costs

Cost per inpatient episode and inpatient cases, 2005-2010

Source: World Bank staff, based on data from Ministry of Health and the State Compulsory State Agency News.

-

100,000

200,000

300,000

400,000

500,000

600,000

0

50

100

150

200

250

300

350

400

2005 2006 2007 2008 2009 2010 (est.)

Num

ber

of C

ases

Con

stan

t 200

3 La

ts

Cost per Inpatient Episode Inpatient Cases

0

20

40

60

80

100

120

140

Inpatient Secondary Oupatient

General Practitioner

Real change in expenditures

Change in volume (patients)

Response of the health system to budget increase (percent), 2005-2008

7

Despite spending increases, Latvia lagging in health outcomes

• 1970-1990: EU10 life expectancy stagnant and separated by only a few years (68 vs. 71).

• 1990-2009: Sudden increase in variance with Latvia, the other Baltics, Bulgaria, Romania worsening and the rest improving.

• By 2000 all began to improve; but persistent gap with pre-2004 EU members.

8

65

67

69

71

73

75

77

79

81

Life expectancy at birth, in years

EU pre-May 2004

Slovenia

Czech Republic

Croatia

Poland

Slovakia

Estonia

Hungary

Romania

Bulgaria

Latvia

Lithuania

Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011

… in particular due to circulatory system diseases and external causes

9 Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011

490503504507518520532537540545549563563572576577580587600612626644

745809

840865

915951959964965

161174143173125187194158173186150213169212217245218190217178232160357355424450421480548497605

611

605671

634632

711689

628685

5770 200 400 600 800 1000

Switzerland (2007)Italy (2008)

SpainIceland

France (2008)SwedenCyprusNorway

EU (15 Countries)LuxembourgNetherlands

AustriaUnited Kingdom

MaltaGermany

GreeceFinlandIreland

EU (27 Countries)PortugalSloveniaDenmark

Czech RepublicPolandEstonia

Slovak RepublicHungary

LatviaRomaniaLithuaniaBulgaria

Mortality Rates for Diseases All Causes and of the Circulatory System, 2009

All Causes

Diseases of the Circulatory System

All Causes with Circulatory Diseases Reduced to EU27 Average

Age-standardized rates per 100,000 population

Coronary heart disease explains a large part of the difference in mortality between Latvia and the average EU country. A high incidence of motor vehicle accidents deaths also contributes.

Matching Finland’s progress on cardiovascular disease between1990 and 2009 would bring Latvia closer to convergence.

Did Finbalt health indicators improve from 2006 to 2008? Focus on blood pressure screening

Health results • Generally, data show small

improvements for Latvia – as with comparators.

Blood Pressure Screening • Strokes and heart attacks account

for much of Latvia’s health deficit. • Serious shortfall in diagnosis and

treatment of high blood pressure. • High blood pressure more likely to

be diagnosed and treated in 2008, but still quite low, especially for men 45 and above.

• Use of medicine for high blood pressure, also improving, but still unusually low, especially for men 45-54.

10

0 10 20 30 40 50

Diagnosed or Treated for High Blood Pressure

Last Year

Diagnosed or Treated for High Blood Pressure

Last Year Age 45-54

Diagnosed or Treated for High Blood Pressure

Last Year Age 55-64

Percent

Latvia 2006 Men

Latvia 2008 Men

Lithuania 2006 Men

Estonia 2006 Men

Finland 2006 Men

0 10 20 30 40 50

Used Medicine for High Blood Pressure Last

Week

Used Medicine for High Blood Pressure Age 45-

54 Last Week

Used Medicine for High Blood Pressure Age 55-

64 Last Week

Percent

Latvia 2006 Men

Latvia 2008 Men

Lithuania 2006 Men

Estonia 2006 Men

Finland 2006 Men

Source: World Bank staff calculations, based on Finbalt.

Spending was not focused on the most vulnerable

11

0 2 4 6 8 10

Denmark Sweden Finland

Luxembourg United Kingdom

France Netherlands

Hungary Austria

Germany Belgium Ireland

Italy Greece Slovenia Slovakia

Spain Czech Republic

Romania Lithuania Portugal Croatia

Latvia Bulgaria Estonia Poland

perc

ent

of G

DP

Social assistance programs as a share of GDP small in Latvia compared to EU

countries, 2008

Old age assistance

Disability assistance

Family and child allowances

Housing assistance

Other (incl. income support)

Source: World Bank staff calculations based on OECD, Latvia SILC 2007, ESSPROS and World Bank Europe and Central Asia Social Protection Database.

Crisis

Social sector spending adjustment frontloaded

13

Frontloaded: Social sector spending cuts were large and important to overall 2009 adjustment: health and education cuts accounted for 61% of overall cuts,.

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

1200

2008 2009 2010

Year-on-year change in millions of current Lats

Other

Social protection

Education

Health

Total government spending

Social protection spending increase in 2009: Earlier pension policy changes coming into effect played a large role. SP spending did not fall until 2010 and the cuts were only one-fifth of those in education and health over crisis .

Source: World Bank staff calculations, based on Eurostat and Latvian Ministry of Finance.

In health, spending shifted from inpatient to outpatient and GP care

Composition public health spending, 2008-2010

42 36 24

15 14

17

7 8

9

12 14

17

23 27 32

0%

20%

40%

60%

80%

100%

2008 2009 2010

Inpatient Care Secondary Outpatient General Practitioners Patient Pharmaceuticals

•Real health spending fell by 26%.

•Inpatient spending, the largest category, had the largest cuts, falling by 57%.

•Inpatient stays fell by 32%.

•Outpatient, emergency services, and services for children and mothers were prioritized.

•Health safety net introduced for the first time.

Source: World Bank staff, based on data from Ministry of Health 14

Stopped investing in buildings and started investing in people

Inpatient contracted hospitals and beds fell, 2008-2010

•Changed input-mix by reducing the number of hospitals with inpatient contracts by 50%. • When hospitals’ inpatient contract removed, Ministry finds that 30% of inpatient cases disappear.

•GP visits increased.

•Day care or day surgery patients also increased.

Source: World Bank staff, based on data from Ministry of Health.

78 72 39

0

100 Hospitals

17,001 15,121 11,920

0

20,000 Beds (end of the year)

749 669 575

0

1000

2008 2009 2010

Beds per 100,000

15

Large upfront reduction in education spending in Latvia

16

Per student financing was introduced in Latvia, assisting in the adjustment to over-capacity in the system resulting from a decreasing school-age population.

Latvia introduced across-the-board spending cuts (as did Estonia). Other countries had less sustained cuts across education categories.

-300

-250

-200

-150

-100

-50

0

50

100

150

200

Estonia Latvia Lithuania Hungary Romania

in p

erce

nt

Decomposition of Change in Education Sector Spending in 2009, decrease(-)/Increase(+)

Other

Compensation

Good and services

Capital

Source: World Bank staff, based on data from Ministry of Education and Science.

In education, many schools were closed and teacher workloads reduced

Contracted Schools and Teachers in Latvia, 2007/08-2010/11

Between 2007/8 and 2009/10: •Enrollment fell by 10%. •Reduction in the number of schools (and staff) was concentrated at the primary level (-21%). •Teaching workloads fell by 24%, so many teachers were able to keep their jobs but with reduced hours or lower hours counted towards pay.

In 2010/11: •Pace of adjustment slowed. •Enrollment fell by 4%, but only 1% of schools were closed and teacher workloads increased.

Source: World Bank staff, based on data from Ministry of Education and Science

958 948 846 830 0

2000 All Schools

516 508 409 400 0

1000 Primary Schools

63 63 63 63

0

100 Special Schools

31,960 32,331 24,210 27,884 0

50,000

2007/08 2008/09 2009/10 2010/11

Teacher Workloads

17

In contrast, targeted social assistance programs were enhanced over the crisis

18

0

20

40

60

80

100

120

140

160

180

200

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Needy People (thousands)

GMI beneficiaries (thousands)

Last resort social assistance programs increased: Guaranteed minimum income (GMI) beneficiaries peaked at 80 thousand (3.9% of population) in March 2011. Social assistance spending more than doubled over the crisis, but this is still made miniature by the increase in pension spending.

Source: World Bank staff, based on data from Ministry of Welfare.

Emergency social safety net introduced rapidly; protected by IMF-EC program

14

Latvia’s social assistance programs too small to protect households at the onset of the crisis

Government rolled out quickly an emergency social safety net (2009-2011) to protect those who lost their jobs as well as the poor: Eased unemployment insurance eligibility requirements and extended duration Expanded Guaranteed Minimum Income (GMI) Introduced an emergency public works/workplace with stipends program

(WWS, simtlatnieku programma) Covered transportation for students affected by school closures Maintained pre-primary education programs for 5- and 6-year olds Exempted needy households from health co-payments and subsidized

pharmaceuticals Improved access and use of alternatives to inpatient treatment for the poor Improved primary health care services and access

Cost was not large: 0.5-0.6% of GDP per annum WB supported and EC-IMF stabilization program protected temporary

measures by including an adjustor to fiscal targets to allow additional safety net spending if necessary

Emergency public works program (WWS) was well-targeted

20

Distribution of WWS beneficiary households

% of households that belong to

bottom two quintiles % of households belong to top

two quintiles Quintiles based on asset index Currently Participating 65 18 Currently on waiting list 59 24 WWS Completed 73 13

Quintiles based on predicted consumption Currently Participating 56 18 Currently on waiting list 50 18 WWS Completed 62 14 Quintiles based on predicted income Currently Participating 69 12 Currently on waiting list 70 13 WWS Completed 70 14 Note: The WWS survey covers only a part of population and thus it is not representative of population. To create quintiles, data from Household Budget Survey (HBS) 2009 is used. The quintile cut offs are derived from HBS. To create asset index in WWS, factor-loadings from HBS are used. Similarly a model is fitted using HBS based on common variables in WWS and HBS. The coefficients derived from HBS are used to predict consumption and income in WWS.

Source: Ferre, Azam and Ajwad (forthcoming).

Challenges

Limited further savings in education and health; old-age spending pressures

22

Need for further reallocation of resources in the education and health sectors as part of continued structural reforms, but strong arguments for increasing overall sector envelopes Adapt education sector to decline in student population Under 0.2% of

GDP over 2010-2020 ...could shift freed resources to other needs, e.g. early childhood

interventions or higher education Resources for poverty-targeted programs severely limited (safety net

spending cut in 2012 adjustment) Health challenge is to constrain spending pressures and reallocate

within sector to improve health outcomes Range of estimates for health pressures. 0.3-1% of GDP over 2010-2030

...brings us to the question of old-age spending Reforms reversible—particularly where there is scope to re-roll out

infrastructure (e.g. beds closed but hospital infrastructure remaining)

Pension age increase will bring initial, but not sustained, savings

23

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2010 2020 2030 2040 2050 2060

effect on pension scheme

effect on all social insurance

effect on consolidated gov. finances

pension deficit (subsidised by 2%)

Simulation of Projected Fiscal Savings from Proposed Retirement Age Increase (Percentage of GDP)

Source: World Bank staff projections.

Lessons Learned

Lessons learned

25

Prioritize and make trade-offs in social sector spending. In Latvia, this was facilitated by: Depth of crisis Social spending relatively low as a share of GDP, but large reform

gaps in education, health and social protection going into the crisis Reforms based on analysis of where efficiency gains were highest

Take rapid action where initial weaknesses in social protection systems exist

Pension reform proved really difficult even during crisis. Pension spending increased by 27% in real terms over 2008-2010 Large cuts in education and health were politically feasible,

whereas it was not possible to make pension reforms with a short-term fiscal impact.

Thank you!