Fiscal Adjustment, Poverty and Income Fiscal Adjustment, Poverty and Income Distribution in ColombiaDistribution in Colombia

Manuel RamírezOlga Lucía Acosta

Orlando GraciaClaudio R. Karl

June 14, 2005

UNIVERSIDAD DEL ROSARIO

ContentsContents

1.1. MotivationMotivation2.2. ObjectivesObjectives3.3. ModelModel4.4. Current AgendaCurrent Agenda5.5. Scientific ContributionScientific Contribution6.6. Policy RelevancePolicy Relevance7.7. ConclusionsConclusions

1. Motivation1. Motivation

The spirit of the proposal is motivated by the recent flourishing literature around the nexus between CGE modeling and poverty analysis.Departing from the CGE research done in the country over the past two decades (e.g. Londoño, 1975; Lora, 1986; Bussolo, 1998), and motivated by SERES (Ramirez et al., 1975), we will develop a model that improves the structure between the public finances, social security system accounts and private behaviors, emphasizing in (i) using income and expenditure distribution structures given by household surveys and, (ii) demographic data (i.e. morbidity, mortality, migration and population growth rates).

2. Objectives2. Objectives

The main goal is to build an analytical tool that provides quantitative evidence for the current fiscal and socioeconomic discussions:– Tax reforms– Universal health care coverage financing– Fiscal sustainability and pension transfers

The question: What are the effects of the current fiscal reforms upon income distribution and poverty reduction goals?– Impact of extending the VAT base and other tax

reforms– Reduction of public expenses on health and education

3. Model3. Model

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3. Model3. Model

Households are classified according their geographic location and income quintilesFirms are categorized between– Social security firms (non optimizers)– Firms related to production (optimizers)

There is labor market with unemployment (introduced by a wage curve) composed by – Rural workers: agricultural and non agricultural– Urban workers: wage-earners and independents

There is one level of government that receives tax receipts and transfers, and spends them in consumption, transfers (i.e. pensions and health care services for the poor) and provision of public goodsGiven the important role of social security in the fiscal sustainability, the model includes the public and private subsystems, the latter constituted by– Pension funds– Health firms: EPS, ARS – Professional illness funds (ARPs)

3. Model3. Model

As a result of the complexity of the social security system, there is FOSYGA, a regulatory fund that centralizes health contributions of the households and firms and public transfers, and distribute them between the private and public health providers. Finally, the closure rules– Flexible exchange rate– Savings-driven– Alternatively, government level can be fixed for equal

yield and public good provision simulations

3. Model3. Model

4. Current Agenda4. Current Agenda

Definition of unprotected households and workersImproving the SAM– Government expenses in services– Social security flow estimation– Health service production and consumption

estimationsAdjusting and compacting model structure– Occam’s razor versus social security “machinery”

Demographic trendsBuilding extensions– Microsimulation household models

5. Scientific Contribution5. Scientific Contribution

This work will help promoting a line of research (that started with SERES) by connecting in a simple way elements of fiscal and economic policy (such as taxation, health care and pensions), household and firms’ behaviors, and demographic trends into a dynamic general equilibrium framework.By building a SAM and a CGE model that include elements of the current social security system and public finances, not only we give new instruments to the current academic and public discussions but also we help stimulating our graduate students in the area of applied microeconomic methods.

6. Policy Relevance6. Policy Relevance

Until now, economic policies effects on poverty and income distribution goals have been evaluated precariously prior their imposition.Although CGE models have been in use over the past two decades in the country, none of them detail the relationships that exist between the public finances, the social security system and income distribution. – Tax reforms have lacked of strong robust analysis of

the effects upon income distribution– Little has been said about the distributional effects of

cutting public expenses in health and education over time

6. Policy Relevance 6. Policy Relevance

– Excluding somehow pension reforms, fiscal adjustment analysis have lacked of demographic and distributional elements

There is a opportunity in influencing the current public discussions at – The national level

• Yearly tax reforms versus income distribution• Health service coverage financing• Fiscal sustainability in the long run of the current

pension system (Long shot)– The local level by replication

7. Conclusions7. Conclusions

This research will enhance and improve the academic production of studies related to the public policies in fiscal sustainability, as well as the academic formation of the graduate students.Several studies in the social and public policy evaluation field have been undertaken previously by our team, contributing to the development of research being proposed here. – Some of the results of these studies have served as an

important input of public policy generation.