Challenges Facing Latin America & the Caribbean (LAC) The Way We Work, The Work We Do Inter-American Development Ba

1. Challenges Facing Latin America & the Caribbean (LAC) The Way We Work, The Work We Do Inter-American Development Bank Stephen Doherty Kennedy School, Harvard University

2. Introduction (Personal) • Modernization of the State specialist • State and Civil Society division (SC2) • Regional Operations Department 2, - Central America, Mexico, Panama, Dominican Republic & Haiti • IDB 13 years, on education & governance (social / public sector economist) • African Development Bank 4 years • Consultant in Not-for-Profit Management Training Company on Health Reform (UK) and Management Training (Ecuador) • Taught at the Project & Development Planning Center of the University of Bradford in England for 6 years • Tax Inspector in the UK Inland Revenue (*) Kennedy School, Harvard University

3. Introduction (Personnel) • The Board of Governors (unpaid, part time, in country) • The Board of 14 Executive Directors (paid by IDB – full time) • President, 2 vice presidents, 1 Secretary, 1 Auditor 10 managers & 100 Chiefs / advisors etc • 29 country representatives (27 Borrowers + Paris & Tokyo) • 1000 professional & 600 administrative staff (+ or - ) • Indefinite (finance, funds management, admin, operations) • Fixed term 1 to 5 years renewable • Rotation for special technical skill, Research, Policies, Strategies • 500 long term consultants (+ or - ) • ??? Short term consultants (experienced specialists) • ??? Internationally recognized figures Ministers/Professors • Interns, studentships, Young Professionals, “secondees” Kennedy School, Harvard University

4. Introduction (Division SC2) • Access to Justice • Citizen Security • Development of Civil Society, Participation, Accountability, Social Auditing, and Promotion of Democratic Institutions • Fiscal (budget) and Economic Management, Tax Reform, (Income, Sales, Customs and Land Taxes) Transparency and Accountability • In Region 2 other divisions work on: • Social Development (health, education) • Financial / banking, infrastructure, water, sanitation • Environmental remediation & rural development (land titling) • Disaster Preparedness • Municipal and Local Development Kennedy School, Harvard University

5. LAC – The Bounty GEOGRAPHY • Land-locked countries 2, Africa 15 • Navigable rivers (compared with Africa) and coasts • Varied relief & climate, even within countries - no Sahara   • LAC more urbanized (good for access to services but slums pose a challenge in the short run) • Useful crops - cereals, sugar, soy, beef, fisheries, coffee, rubber, palm oil, plus genetic storehouses • Useful minerals, oil (Venezuela, Mexico, Ecuador, Colombia), nickel, gold, silver, tin, copper • Low population density Brazil/China, Argentina/India, Bolivia/France Germany • Moderate population growth (1 – 2% pa) • Stabilizing population - social services less of a burden Kennedy School, Harvard University

6. LAC – The Bounty History & Culture • No multinational wars, long indigenous histories, long period of independence - Haiti 1804 many others around 1819 • Varied, relatively non-conflictive cultures, common religion coexisting with traditional beliefs • Linguistic homogeneity: 2 languages give access to 90% of population • Little ethnic competition for same resources • Plentiful supply of labor, once based on immigration • Now high emigration but not a brain drain as in Africa / Asia • Remittances >$32 billion per year back to LA  • All countries in LAC except Haiti have elected governments following peaceful transition Kennedy School, Harvard University

7. Social Problems • Wealth very narrowly held - LA the most unequal continent in terms of wealth, land and income distribution (UNDP’s 2004 Human Development Report, LAC has 6 out of 13 countires with the world’s most unequal distribution of income and consumption (Gini coefficients over 0.55 + the 20/80 rule) • 43% or 200 million poor & increasing (Uruguay 12% to Honduras 80%) • Half the poor of LAC live in Brazil (30%) & Mexico (43%) • Plentiful labor meant cheap labor, immigrants but also encomiendas, indigenous people and slaves • Less reason to develop, educate, train workers because they were cheap and plentiful • Result - poor basic education, poor public health • Life is seen as cheap • LA is the most violent continent. Violence correlates with inequity rather than poverty per se (El Salvador Murder rate 110/100,000, US 11, UK 1. Civil wars have claimed 200,000 in Guatemala, 70,000 in El Salvador, 45,000 in Nicaragua) Kennedy School, Harvard University

8. Economic Problems • Denied access to or afraid of free trade and adverse terms of trade in dealings with powerful economies BoP deficits • Leads to international borrowing and debt • Once a tendency to trade protectionism (protects powerful internal interests) • Tendency for LA to seek less threatening but less beneficial bilateral trade treaties in preference to free trade. (Trade agreements reduce customs income by the way) • Tax sacrifices are lowest in the World, (Guatemala 12% of GDP) the poor can’t & the rich won’t pay (discretionary) • Ambitious & expanding social programs chronically under funded • Requiring inflationary domestic debt, and • Reinforcing the cycle of poor education and social services for the poor while Universities are free Kennedy School, Harvard University

9. Problems & Effects • Wealth often came from a narrow range of products – often a single product – sometimes criminal – often foreign controlled • Unstable in the economic sense – price / demand fluctuations, booms and busts, “exit” • Unstable in the political sense: control the product – control the county (class or clan struggle) • Illegitimate economic activities: Crime (drugs) distorts the economy, corrupts government, may make a pariah state • Bolivia / Colombia represent one extreme of political instability, Paraguay & Guatemala (pre 1995) another • Sometimes violence with stability, sometimes with instability • Even Aid itself can be destabilizing where it is a high % of economic assets & where groups can struggle for control • Groups exist apart from the mainstream – indigenous zones, the informal economy etc not identifying with the nation – Mayans in Guatemala / Chiapas Kennedy School, Harvard University

10. Problems & Effects (Reading) • Collier, Paul and Anke Hoeffler, ‘On economic causes of civil war’, Oxford Economic Papers, Vol. 50 (4), pp. 563–573, 1998. • Collier, Paul, ‘Doing well out of war: an economic perspective’, in Greed and Grievance: Economic Agendas in Civil Wars, ed. M. Berdal and D. Malone. Boulder, CO: Lynne Rienner, 2000. These findings are surprising / undermine your preconceptions! Kennedy School, Harvard University

11. Political Problems/Governance • Impressive constitutions but • Administration of law serves the rich elite; access is restricted, cumbersome, expensive  • Politics serves the rich elite, non-representative, non participatory, non democratic, not accountable, non informative • Economic & fiscal management promotes rent seeking, influence peddling & waste rather than social results • Budgets / accounts / investment decisions not transparent • Patrimony neglected • Government purchasing not systematic nor impartial • Corruption widely accepted – impunity for the powerful (until now! Nicaragua -1 president, Costa Rica 3 Presidents!!!) • Oversight (internal / external control) is weak  • State – private sector “capture” • Blurring of roles of Legislature, Judiciary & Executive Kennedy School, Harvard University

12. Problems & Effects • Into this instability slips (Chile, Argentina), slides (Honduras, Haiti, Cuba, Nicaragua) or storms (Panama,El Salvador, Guatemala, Grenada) foreign intervention, not always with the best interests of the poor majority of Latin Americans • Result has been Civil wars, coups, dictatorship & only recent establishment of democratic transition from one government to another • And wider neglect of the country itself, increasing vulnerability to disaster, social fragmentation, economic disruption Kennedy School, Harvard University

13. Human Costs - The Case of Land • With opaque law & concentrated land holding, titling small plots of the poor for example is not a priority • Squatting tolerated in the absence of land reform and as a social safety valve. e.g. “El Guasmo” Guayaquil, Ecuador • Land acquires value only for what it can produce BUT: Without title land: can’t be sold to liberate its use or user, can’t be offered as security for development loans can’t be taxed to create income for local government • No incentive to maintain, protect – leading to environmental degradation & tragedies of Mitch, Gonaives (Haiti) 3. de Soto, Hernando, “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere else” Basic Books, 2000 Kennedy School, Harvard University

14. The Case of Land in Haiti “ In Haiti, the poorest nation in Latin America, the total assets of the poor are more than one hundred fifty times greater than all the foreign investment received since Haiti's independence from France in 1804” “ But they hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment” De Soto Kennedy School, Harvard University

15. A Human View of Development • “Freedom, is at once the ultimate goal of economic life and the most efficient means of realizing general welfare. It is a good to be enjoyed by the world's entire population” • A move away from the idea of investment-led growth and trickle down to the idea of direct intervention at the point of the problem. We can’t wait for societies to be rich before they become democratic, free, educated, healthy etc • With this view of Latin America our mix of priorities has a clearer core • How to incorporate vague concepts into operations? 4. Sen, Armatya, “Development as Freedom” Knopf, 1999 Kennedy School, Harvard University

16. Problems to Projects - Our Work • IDB more like a mutual aid society / credit union. 47 owners 26 of whom are borrowers • Owners ( regional & non- regional) meet at an AGM raise concerns in seminars prepared by leading world figures • From concerns arise mandates • Management (Washington) develop mandates (through research, studies, workshops, presentations, consultation, leading figures, experts, staff) into… • Sector strategies ** by IDB’s Central Divisions to underpin… • Country assistance strategies and… • Studies, investment projects and grants by the operations by the operational departments, prepared by… • Me and about 150 colleagues, Governments, IDB Country Office Staff and hundreds of technical consultants, to be… • Executed by the Governments • Supervised by IDB Country Offices & Evaluated by OVE Kennedy School, Harvard University

17. 1 Sector Strategies ** • Economic growth and stability through fiscal management • Economic integration • Expand social welfare and equity • Increase education coverage • Promote equity for women and girls • Protect the natural environment • Promote democracy • Promote social inclusion of indigenous people and Afro-Latin communities • Promote transparency and reduce corruption • Participation in governance • Diminish violence • Measure impact & development effectiveness • New focus on ethics Kennedy School, Harvard University

18. 2 Country Programs From a country strategy to influence & effectiveness: • Action plan • Technical Cooperation Grant Pipeline • Studies both routine (Country Financial Accountability Assessment & Procurement Report) & special • Lending program Loans of many types & purpose • Investment, (defined outputs and defined budgeted inputs) (Both soft/concessional & ordinary ) • Institutional Support, (expected results in terms of institutional performance, and flexibly defined actions) • Policy Based, (agreements to take action and loans to spend as country pleases in exchange) • Sectoral (modality approved November) (common funds go into the budget in support of broad targets) Kennedy School, Harvard University

19. 3 Projects Project cycle (And your chance to participate) • Identify need, agree scope, agree dimensions of results. (Staff & Consultants) • Assess costs, feasibility of alternatives, action plan, budget, review lesson learned (Staff & specialist consultants) • Approve (Board of Executive Directors / President) • Execute, monitor (3 to 5 years) (the Government & IDB Country Office, both with contracted consultants) • Evaluate impact – lessons learnt (Office of Evaluation & Oversight) Kennedy School, Harvard University

20. 4 Country Strategies / Projects An exceptional approach – response to crisis / concurrent work • November 1998: Hurricane Mitch killed about 11,000 people and destroyed Central America’s agriculture • It destroyed houses of the poor who squatted by the rivers because all the good land had been taken to grow….Bananas • It destroyed schools, water supply, health services, jobs, the transport system, agricultural production Immediate need housing, water, food, services • Huge inflow of aid • Medium term need, reconstruct lost clinics, homes, schools, roads (Investment projects) • BUT…. Reconstructing the same? Or incorporating mitigation measures? (Technical Cooperation) Kennedy School, Harvard University

21. 5 Project Development • Longer term review planning, land use & economic management to prevent such a storm being a disaster again. (Technical Advice) • But could Honduras manage this? • Could Honduras also manage the huge influx of promised aid? • The Country Financial Accountability Assessment and Procurement both indicated NO Kennedy School, Harvard University

22. 6 Problem Definition CFAA/CPR • Poor accounting for funds, vague records • Huge & growing debt at varied terms, internal & external, huge debt servicing • Idle assets due to poor cash management, yet… • Weak tax & customs revenue - fiscal deficits • Couldn’t relate spending to needs & priorities / No idea of needs, value for money from government spending etc • Little participation in formulation or monitoring of Budget • Weak and corrupt procurement • High levels of discretion in all aspects of public sector management, weak legal framework, lack of financial management skills, corruption (low TI rankings) • Weak control, audit & poor public / political accountability • Poor economic performance, inflation, slow growth, Kennedy School, Harvard University

23. 7 Problem Inversion - Goals • PROCESS: • CFAA, CPR & Tax studies supplement diagnosis in Fiscal Area • OBJECTIVES: • New accounting standards, laws, manuals, and Integrated financial management system • Better budget preparation and planning • Better debt & cash, law, contracting, repayment etc • Methods and Laws to increase tax & customs revenue • Monitoring system to link spending to needs & priorities • Improved public accountability, reduced discretion, stronger legal framework, financial management / procurement skills, ethics code • Link budget to banking and interest rate policy Kennedy School, Harvard University

24. 8 Project Approval & Execution PROCESS: • Dimensions of problem, costs of solution & project studies RESULTS IDB APPROVES: • $14 m Procurement project with $8 funds from USA, Canada, Sweden, Spain & UK, 2003 • $15 m Fiscal Modernization Project to improve revenue collection and public spending in Honduras (2004) with $3 million grant from Sweden • World Bank approves technical assistance soft credit to improve poverty targeting and expenditure tracking Related actions: • IDB approves $22m project to support municipal reforms (nov 2004) • Prepares policy based loan to improve fiscal / tax laws (2005) Kennedy School, Harvard University

25. Other Operations • For the period 2003 to 2005, the IDB is expected to lend about $5.7 billion for projects for reform and modernization of the state of which Honduras is but one example But some examples of impact from personal experience • Panama: floating debt reduced by $450 million by improving treasury and municipal tax increased by $25 simply be revaluing smallholdings now a mall (2001) • Nicaragua: Private Debt reduced by buy-back program (1996). Tax revenues and equity increased in through new tax laws and codes (2003) • Mexico: Quality & coverage of schooling increased for 1.2m poor, rural & indigenous children (1997) • Haiti presented its first budget for 7 years, on time as a result of a policy based loan (2003) Kennedy School, Harvard University

26. A Word of Caution • By 1900 Argentina was among the richest countries • Uruguay had a model welfare state observed by Germany and the UK • Around 1900, LA was tied in the world economy – classic age of imperialism – free trade, labor & capital flows • China was mainly of economic significance as a market not a producer and major creditor • India was a colony, now a technology powerhouse Progress for LA is not guaranteed nor irreversible. Competition will be intense in the next century Kennedy School, Harvard University

27. Thank You & Follow up • Browse the website www.iadb.org • For a copy of this presentation send an email to: stephend@iadb.org or isabelh@iadb.org • Any questions Kennedy School, Harvard University