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2.4.3. Fourteen lessons learnt
Lesson 1
Macroeconomic stability and fiscal discipline are essential to expand the fiscal space
. The experiences of Botswana, Brazil, Lesotho and Thailand show that all that can be done
to maintain macroeconomic stability by applying principles of fiscal prudence, will eventually bring benefits in terms of creating fiscal space and its sustainability. In
Botswana, the new resources generated by the diamond mining agreements were used prudently by the Government, so as not to jeopardize the fiscal situation. Brazil was able to
combine macroeconomic stability with social inclusion policies based on high levels of social investment, which helped boost demand for domestic consumption; an important
part of its success rested on monetary policy and fiscal responsibility. In Botswana and
Lesotho, despite the rapid growth in tax collection, governments didn’t embark on a similar expansion of public spending, so the resulting cumulative surplus made it possible
not to sacrifice the budget for social protection to any great expect during the recent economic crisis. Thanks to prudent fiscal policy and notable social spending priorities,
Thailand, despite a modest performance in terms of tax collection, was able to reallocate resources to strengthen its universal health strategy. This experience also shows that
creating fiscal space for a particular purpose can be achieved by reallocating resources from less efficient to more efficient sectors or categories of expenditure.
Lesson 2
Economic growth is important, but it is not always the main determinant in creating fiscal space for the extension of social protection.
The analysis of fiscal space creation does not bear out the belief that it is dependent on exceptional economic growth. Brazil
and Costa Rica, which are very different in both size and economic characteristics, are proof that the right combination of economic growth even if moderate and inclusive
policies aimed at generating funds give good results. Costa Rica took advantage of a sustained policy to strengthen the social sector institutions in the 1960s and 1970s;
especially social insurance and non-contributory cash transfers programmes. South Africa shows that social protection spending can be substantially increased even if the countrys
economic performance is moderate. Likewise, Thailands poverty reduction policies allowed the Government to lower the level of financing of its social assistance
programmes.
Namibia is an excellent illustration of the mechanisms available to countries with moderate macroeconomic and fiscal performance. None of the macroeconomic factors usually
associated with the creation of fiscal space were in any way outstanding. Production grew at a moderate rate and was not transformed into a higher level of fiscal revenue, as had
been expected. From a macroeconomic standpoint, average economic growth was far below the dynamic rates of countries such as Botswana and Mozambique, where average
GDP growth exceeded 8 per cent per year. In addition, the Government decreased its participation in the economy and by 2008 the level of taxation and expenditure was
considerably lower than in 1991, just after Independence. Nonetheless, the Government was able to generate a fiscal surplus in the second half of the 2000s, an indication of the
highly prudent fiscal policy.
Lesson 3
Political will is crucial
. From the evidence culled from the countries analysed in this report, it is clear that political commitment is the key to extending social protection. A
country may experience high economic growth and generate a fiscal surplus, but if social protection is not a fiscal priority, that extension will not happen automatically. The
existence of active policies for extending social protection is crucial. This is particularly
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true in contexts such as that of South Africa where the Government operates under very restrictive fiscal conditions, usually accompanied by a fiscal deficit. If public funds grow
just at a moderate rate and external aid is limited, then the critical decision involves modifying the composition of public spending by increasing the budget of priority sectors
as against that of other sectors. In Lesotho, the Prime Minister and the key political parties demonstrated a strong political commitment to approve and proceed with the allocation of
more funds to existing programmes, to open up additional fiscal space by implementing new social programmes and to reform existing mechanisms that were not financially
sustainable in the long term.
However, there is always some degree of competition for any new fiscal space when it comes to investing in development. In a world characterized by scarcity of resources and
by opportunity costs, social protection is just one among many possible uses of fiscal resources. This is particularly true when the new fiscal space is created by increasing
taxation. Then, once fiscal space has been generated, the process of allocating the new fiscal space among alternative uses responds to complex social criteria in which many
forces play a part. Factors that play an important role in such decisions include a countrys idiosyncrasy, its culture, its political situation, its history, the interests of power groups and
the distribution of political and economic power among them, to name just a few.
Lesson 4
Fiscal space for extending social protection is a highly political matter.
Decisions such as reducing in Thailand or eliminating in Costa Rica the army, or renegotiating the
revenue from the exploitation of hydrocarbons in Bolivia explain certain major changes in the financing of social protection. In Bolivia, the decision involved a series of highly
complex, and sometimes antagonistic, political processes involving the various stakeholders. The outcome, however, was the creation of a truly universal social pension
system in a country with one of the highest levels of poverty in South America. In Brazil, heated political battles were fought for years over the advantages or disadvantages of
creating a tax on financial transactions, which eventually played a key role in financing and consolidating the universal health system until social contributions based on financial
transactions were finally abolished and replaced by other sources of income.
Lesson 5
Social contributions are an effective tool for generating fiscal space
. This conclusion is crucial in terms of the economics of social protection financing. Fiscal space for social
security is quite specific because, unlike other areas of investment for development, social insurance usually based on payroll contributions has been a source of financing from the
very inception of social security systems. Depending on the particular social security model adopted, social contributions can play an important role in explaining the size of
fiscal space generated by the country as a whole. In many countries, especially in the industrialized world, it is difficult to imagine a social security scheme without its specific
sources of financing based on social contributions. Several of the developing countries studied also provide positive evidence of the feasibility of generating a significant
proportion of fiscal space through social contributions. Apart from Brazil and Costa Rica there are nations in Latin America Argentina, Chile, Colombia, Panama, Uruguay where
it would be unthinkable today to envisage a sustainable system of social protection without the resources generated from social contributions.
Lesson 6
Labour formalization policies are a means of creating fiscal space through the extension of coverage
. In the absence of a change in real wages or personal income, an increase of social contributions can, by definition, only come from reductions of
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informality. The interventions to extend social security to independent workers and to extend effective coverage to micro and small enterprises would generate fiscal space
regardless of general taxation policies.
Innovations in the creation of fiscal space by increasing coverage or the collection of social contributions can bring very significant returns. In Brazil there have been innovations both
in fiscal instruments and in social policy. From the standpoint of the countrys social protection system, some of the most important innovations include the introduction of the
rural “semi-contributory” pension scheme, the use of taxes on financial transactions to generate resources from the formal economy, improvements in the administrative and
institutional framework of the social contribution collection system, and measures to facilitate and increase the tax coverage and social security of micro and small enterprises.
Case studies of Brazil and Costa Rica provide evidence contrary to the neoclassical argument that increased levels of social contributions may cause greater informality. Costa
Rica has one of the highest rates of nominal and effective social contributions in all Latin America, yet, along with Chile and Uruguay, it has one of the lowest rates of informality.
The country also appears among the top countries in terms of competitiveness, well above regional averages. As in the case of Brazil, social contributions do not therefore seem to be
associated with labour market informality. If social inclusion policies are able to improve the quality and employability of the labour force, and if such interventions provide more
opportunities for the development of an extended business base, the expected outcome should be a reduction in the level of informality.
Lesson 7
Renegotiating the terms of distribution of wealth generated by the exploitation of natural resources is a feasible option.
In the developing world there are many experiences of countries whose natural resources have been exploited for a long time, with
few benefits in terms of the distribution of gains among the population. Yet the example of Bolivia and Botswana addressed in this report are proof that this can change and that the
results in terms of creation of fiscal space can be impressive.
Bolivia is an example of the political and economic feasibility of negotiating more equitable terms for the distribution of profits from the exploitation of natural resources. In
Bolivia the renegotiation was radical, and because of its positive impacts on the creation of fiscal space it constitutes a strategic step in the direction of sustainable development and
economic growth. In Botswana, the diamond agreement with De Beers was essential for the expansion and consolidation of fiscal revenues. It proves that win-win strategies can be
implemented in that kind of context and that agreements can be renegotiated under advantageous terms. This is also a good example for mineral-driven economies that opt for
joint ventures between the Government and the private sector to exploit this type of resource.
Lesson 8
The efficiency of social expenditure management does matter
. It is possible to create fiscal space by reviewing programmes and institutional and administrative mechanisms.
Reforms in the organization of social transfer programmes, in terms both of its structure and the tools and criteria used for allocating resources, so as to introduce a degree of
selectivity and progressive incentives – such as the renovation of educational programmes
and the Bolsa Família – can be effective as a mechanism for creating fiscal space. As in
Thailand, governments should adopt a pragmatic and strategic approach to policymaking. Thailands experience is thus proof that improvements in the allocation of resources and in
the appropriateness of expenditure can make a valuable contribution to efficiency.
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Money is important but, again, money alone is not enough. For more than a decade, from 1994 to 2006, poverty rates in Costa Rica remained stable at around 20 per cent of the
population, despite the fact that an extensive institutional framework was already in place. That said there remain problems with targeting and with programme design, which reduce
efficiency.
Lesson 9
The design of the social protection system does matter.
In connection with the concept of the social protection floor promoted by the ILO, a central idea is the need to design
comprehensive social protection systems that combine different types of instruments in a coordinated manner. Countries should be very careful about the initiatives they create. A
long list of social programmes may generate problems of coordination between these. Moreover, the contribution of some programmes to the fight against poverty may be quite
small. Costa Ricas experience raises two potential problems. Firstly, it is usually very difficult to cancel or reverse programmes that are under way, and so policymakers may
tend to keep them even though they do not bring the desired results. Secondly, if there are too many programmes, the demand for additional financing may set them in competition
with other priorities.
Lesson 10
Social investment pays and contributes to economic development
. Studies on the impact of increased social investments in Bolivia confirm the advantages of such a strategy
on economic growth. Bolivia provides evidence against the argument that investment in social protection competes against private investment. Expenditure on social protection is
injected into the economy and becomes part of a circular flow of income. These injections are useful to support growth in spending in the short term and contribute to
macroeconomic stabilization in times of crisis.
Viewed in the long term, the social security system has acted as a direct contributor to the countrys competitiveness by enhancing the health status of the population, and as an
indirect contributor by reducing inequality and promoting social peace – two elements that
investors are inclined to give weight to when deciding where to locate their companies. In addition to the experience of Bolivia, there is evidence from Brazil, Costa Rica and
Thailand which supports the idea that investment in social protection has a positive effect on the generation of income, growth and fiscal revenue in the long term.
Lesson 11
There are advantages in combining contributory programmes with non-contributory programmes
. The evidence from Thailand suggests two things about universal health coverage. First, it reaffirms the idea that general taxation plays a critical role in the
achievement of this objective in countries where informal labour markets prevail. Second, universal coverage in Thailand was not the product of just one source of financing general
taxation, but was made possible by using a hybrid model that combined the mechanisms of both contributory and non-contributory schemes.
Lesson 12
Non-contributory social protection benefits are a viable option in the pursuit of universal coverage in countries with a large informal economy
. The example of social pensions in Bolivia and South Africa show that, while the possibility of extending
traditional social insurance may be limited mainly because of the predominance of the informal economy over the formal economy, a non-contributory benefit scheme is a viable
option for guaranteeing universal rights in accordance with the approach to the social protection floor promoted by the ILO. Once we have created the universal programmes
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