IMF: IRELAND = Asset Boom & Structural Fiscal Position -- March 2010
Distributional Analysis of Fiscal Policies at the IMF
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Transcript of Distributional Analysis of Fiscal Policies at the IMF
Distributional Analysis of Fiscal Policies at the IMF
PREM 2011 Knowledge and Learning ForumWorld Bank
April 25, 2011
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Outline IMF involvement in distributional analysis
Formation of the PSIA group Objectives Modus operandi
Subsidy reform Development of a reform strategy
Other topics addressed
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IMF involvement in distributional analysis
The IMF has taken a more active stance on social policies over the years IMF-supported programs have increasingly
incorporated social safety nets and protected or increases social spending
Focus sharpened with the introduction of the PRSP approach Key feature of PRGF 2002 review of PRGF-supported programs
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Formation of the PSIA group
PSIA Group set up in 2005 Reflects recognition by the Fund of:
The importance of understanding the broader implications of its policy advice, and
The need for some internal capacity to energize and facilitate the integration of PSIA into program design
Work entirely in macro and structural contexts
Now part of the mainstream work of the Fund
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Objectives
Better understand the likely impact of key reform measures on different population groups, in particular the poor;
Assess the appropriateness, timing, and sequencing of alternative measures in the design of programs; and
Where appropriate, design and integrate into IMF programs measures to mitigate any negative effects of reform policies.
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Modus Operandi
Mix of approaches to inform design of—primarily—PRGF programs: Absorb lessons from existing PSIAs carried
out by other development stakeholders Carry out own PSIAs where information gap
exists Support PSIA activities by country fiscal
economists and desk economists (and elsewhere)
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Modus Operandi (cont’d)
Complement to, not substitute for, the work of other, more important producers of PSIA In particular, close cooperation with
WB Our niche is “rapid response,” either
with interpretation of existing results or our own analysis
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Modus Operandi (cont’d)
Work program developed with the area departments of the IMF—demand driven Participation in area department missions Stand alone technical assistance missions HQ-based TA Support to area department teams in
conducting distributional analysis
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Subsidy reform
Fuel Subsidies Distributional analysis of fuel subsidies Advice on implementation of automatic
pricing mechanism of petroleum products Smoothing mechanisms to reduce volatility
of domestic petroleum prices Recommendations on alternative measures
to mitigate the impact of rising fuel prices on the poor
More general subsidy reform
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Most of the benefit accrues to higher-income groups
Bottom 2 3 4 Top All households
Total Impact 7.1 11.4 16.2 22.5 42.8 100.0Total Direct Impact 7.1 10.7 14.0 19.9 47.6 100.0
Gasoline 3.0 5.7 9.7 19.4 61.3 100.0Kerosene 19.0 19.7 20.6 20.1 20.6 100.0LPG 3.8 7.6 12.6 20.8 53.8 100.0
Indirect Impact 7.3 11.7 16.3 22.6 42.0 100.0Source: Arze del Granado and Coady (2010)
Consumption QuintilesDistribution of Fuel Subsidies Across Income Groups
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Subsidy reform (cont..)
Low prices provide insufficient incentives to reduce consumption and worsen terms of trade impact
Low prices can result in smuggling abroad, higher fiscal costs, and domestic supply shortages
High fiscal cost crowds-out high priority public investments in education, health, and infrastructure
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Developing a reform strategy I
Successful strategy needs to prepare population for reforms Identify clearly the size of the fiscal cost of
subsidies Link cost to crowding out of key public
investments which are crucial for growth and development (best way to protect most of population from high prices is through growth)
Highlight the high share of benefits going to higher groups and identify better ways of protecting poor
Identify inefficiencies of subsidies (smuggling, shortages, energy inefficiency)
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Developing a reform strategy II
Reform strategy needs to be set out in advance Identify key public investments that will benefit
from reallocation of budgetary savings Identify well-targeted programs that will be
expanded/created to protect the most vulnerable social groups
Subsidy reform may involve other policy changes such as monetary and exchange rate policies, investment incentives, credit access, etc.
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Developing a reform strategy III Sequenced and gradual reform approach may
be warranted if large price increases required (and fiscal conditions allow)
Instant adjustment of subsidies that mostly benefit the rich (higher quality foods, gasoline, jet kerosene and LPG?)
More gradual adjustment of other products to allow industry to adjust (e.g., diesel and LPG?)
Delay increase in fuels most important to poor (e.g., lower quality foods, kerosene)
But there is a limit to sequencing since large price differentials can cause market disruption (adulteration)
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Developing a reform strategy IV Develop strategy for reform of social safety net
Limit subsidies to products most important for lower income groups (low quality foods, kerosene)
Limit quantities of subsidized products Limit eligibility for subsidized products to lower income
groups (differential subsidy rates, means or proxy-means testing)
With improved targeting, consider switching from price subsidies to price-indexed cash transfers
However, subsidies and cash transfers address the symptoms but not the causes of persistent poverty
Consider developing conditional cash transfer programs
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Other topics covered
Trade liberalization, devaluation and poverty Elimination of trade preferences in the
Caribbean
Agricultural sector reform Fertilizer subsidies (Malawi) Reform of groundnut sector (Senegal and
The Gambia)
Indirect tax and public pricing reforms