1. European Commission
Implementation of tax reforms in developing countries
Brussels - May 16th, 2014
Fiscal policy in emerging and developing economies
Some experiences from Latin America
Ángel Melguizo
Head, Americas Desk
OECD Development Centre

2. Fiscal policy in emerging and developing economies
Some experiences from Latin America
2
Making fiscal reform happen in developing and emerging
economies
• Diagnostic and design
• Implementation
• Approval

3. Fiscal policy in emerging and developing economies
A conceptual framework
3
Tax policy cannot be analyzed separately from expenditures
• Budget constraint
• Political economy: willingness to pay higher taxes vs. perceived public services
Main approaches
• Tax-benefit analysis :
• How fiscal policy affects households’ incomes?
• How fiscal policy is perceived by citizens?
• Macro-analysis (e.g. infrastructure and fiscal policy)

4. Fiscal policy in emerging and developing economies
Some experiences from Latin America
4
Making fiscal reform happen in developing and emerging
economies
• Diagnostic and design
• Implementation
• Approval

5. Diagnostic and design: good tax data is needed…
5
Tax revenue over GDP
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
Tax revenues over GDP in LAC have been converging to OECD
levels since 1990…
0
5
10
15
20
25
30
35
40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Difference (A-B) LAC (A) OECD(34) (B)

6. Diagnostic and design: good tax data is needed…
6
Tax revenues
(%GDP, 2012)
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
… but there are significant differences in terms of
composition, and among Latin American economies
Tax structure
(%GDP, 2012)
0 10 20 30 40
OECD (34)
LAC (18)
Guatemala
Dominican Republic
Venezuela
El Salvador
Honduras
Paraguay
Peru
Panama
Nicaragua
Colombia
Mexico
Ecuador
Chile
Costa Rica
Bolivia
Uruguay
Brazil
Argentina
25.4
16.9
33.8
17.7
6.2
Impuestos sobre la renta y las utilidades Contribuciones a la seguridad social
Impuestos generales sobre el consumo Impuestos específicos sobre el consumo
Otros impuestos
33.5
26.2
20.3
10.7
9.3
AL (18) OCDE (34)

7. Diagnostic and design: good tax data is needed…
7
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
Statistics should take into account the regional specificities
(e.g. commodities, social insurance schemes, federalism)
0 20 40 60 80 100
Bolivia (E.P.)
Peru
Chile
Ecuador
Argentina
Colombia
Venezuela (R.B.)
Brasil
México
7.7
12.2
3.3
3.1
14.7
2.8
4.4
9.8
2.2
%GDP
PEMEX
Fiscal revenues from non-renewable resources
(billion USD and %GDP)

8. Diagnostic and design: … coupled with good analysis
8
Source: OECD (2008), Latin American Economic Outlook 2009
Inequality in Latin America and the OECD
(Gini indexes before and after taxes and public spending)

9. Diagnostic and design: … coupled with good analysis
9
Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?
Tax-benefit structure by household income deciles
(Percentage of the decile mean disposable income)
Chile Mexico
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
I II III IV V VI VII VIII IX X
Taxes Social spending Net transfers
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
I II III IV V VI VII VIII IX X
Taxes Social spending Net transfers

10. Diagnostic and design: … coupled with good analysis
10
Source: OECD (2011), Latin American Economic Outlook 2012: Transforming the State for Development
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Argentina
Brazil
Chile
Colombia
Mexico
Peru
OECD(non-LA)
Market income After taxes and transfers
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Chile
Mexico
OECD(non-
LA)
Market income
+ Cash transfers
- Income tax
+ Education (in-
kind)
+ Health (in-kind)
Inequality in Latin America and the OECD
(Gini indexes before and after taxes and public spending)

11. Fiscal policy in emerging and developing economies
Some experiences from Latin America
11
Making fiscal reform happen in developing and emerging
economies
• Diagnostic and design
• Implementation
• Approval

12. Implementation: effectively putting in place a reform
demands
12
• Technical capacity
• Improving fiscal frameworks
• Data
• Budgeting
• Rules
• Institutions

13. Implementation: the lack of technical capacity is very costly
13
PPP renegotiations are the norm in emerging and developing
economies, multiplying initial cost estimates
Source: Bitrán, E., S. Nieto-Parra and J.S. Robledo (2013), “Opening the black box of contract renegotiations: an analysis of road
concessions in Chile, Colombia and Peru.”, OECD Development Centre Working Paper 317.
Road concession contracts in Latin America
(% total cost)

14. Implementation: the role of fiscal frameworks
14
Fiscal policy tends to be pro-cyclical in Latin America…
Output gap and variation of adjusted primary budget balance
(%GDP)
Source: Daude, C., A. Melguizo and A. Neut (2010), “Fiscal Policy in Latin America: Countercyclical and Sustainable at Last?”, OECD
Development Centre Working Paper 291

15. Implementation: the role of fiscal frameworks
15
… and very sensitive to the political cycle
Source: Nieto-Parra, S. and J. Santiso (2009), “Revisiting political budget cycles in Latin America”, OECD Development Centre Working
Paper 281
Impact of elections on fiscal policy, 1990-2006
(%GDP)

16. Implementation: the role of fiscal frameworks
16
Rules seem to be working, at least during the last crisis (e.g.
Chile and Peru)
Source: Daude, C., A. Melguizo and A. Neut (2010), “Fiscal policy in Latin America: Countercyclical and sustainable at last?”, OECD
Development Centre Working Paper 291
Adjusted primary budget balance
(%GDP)

17. Implementation: the role of fiscal frameworks
17
Overall, the 2006 round of elections did not impact that much
Primary balance
-1
0
1
2
3
4
5
Primary expenditure
-2
-1
0
1
2
3
4
5
Source: Nieto-Parra, S. and J. Santiso (2009), “Revisiting political budget cycles in Latin America”, OECD Development Centre Working
Paper 281
Impact of 2006 round of elections on fiscal policy in Latin America
(%GDP)

18. Fiscal policy in emerging and developing economies
Some experiences from Latin America
18
Making fiscal reform happen in developing and emerging
economies
• Diagnostic and design
• Implementation
• Approval

19. Approval: citizens’ support is low
19
Latin America (and most emerging and developing regions)
exhibits a low tax morale
Source: Daude, C. and A. Melguizo (2010), “Taxation and more representation? On fiscal policy, social mobility and democracy in Latin
America”, OECD Development Centre Working Paper 294
Do you think cheating on taxes is justifiable?

20. Approval: gaining citizens’ support, from the middle
20
A particularly relevant segment of the population is the
emerging middle class…
Attitudes towards democracy
Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?

21. Approval: gaining citizens’ support, from the middle
21… but today they conform an unsatisfied majority
Source: OECD (2010), Latin American Economic Perspectives 2011. How middle-class in Latin America?
How middle class is Latin
America?
• Risk of downwards
mobility
• Outside the social
contract (low taxed; critical
and not fully benefiting
from education or health
care services)

22. Fiscal policy in emerging and developing economies
Some experiences from Latin America
22
Making fiscal reform happen in developing and emerging
economies
• Diagnostic and design:
•  Data and sound tax-benefit analysis
• Implementation
 Technical capacity and favourable fiscal
frameworks
• Approval
 Tax morale and the social contract

23. Thank you!
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