53805 T I O N A L BA N NA K ER F T O IN R WORLD BANK T REC EN ON PM ST O RU L CT E VE ION AND D November 2003 No. 35 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region COSTA RICA SOCIAL SPENDING AND THE POOR Helena Ribe and Roxana Víquez1 Costa Rica has made substantial progress in reducing poverty over, fiscal pressures will not only limit the government's abil- and improving social sector indicators over the past decade. ity to increase social spending, but could also act as a drag on Headcount poverty declined from 27 percent in 1990 to 21 real growth prospects for the economy as a whole (see Table 1). percent in 2000, and there is near universal access to This underscores a key finding of the report: that social sector healthcare and primary education. Life expectancy has risen, challenges can not be resolved only through the allocation of while infant mortality rates have fallen. However, there are more resources, but that they will require reforms which im- also worrying signs that progress in these areas is stalling, and prove management and efficiency in the use of available re- that future improvements may be harder to achieve. The pace sources. New instruments and approaches will be required that of reduction in income poverty slowed during the second half of the nineties, Table 1 - Cos ta Rica - Ke y Economic Indicators , 1990-2000 and between 1990 and 2000, Costa Rica Indi cat ors 1990 1996 1997 1998 1999 2000 fell from 28th to 48th in the Index of GNP growth (%) 3.5 0.9 5.6 8.4 8.2 2.2 Human Development. In education, there has been an increase in the grosss Inflation (%, CPI final period) 27.2 13.9 11.2 12.4 10.1 11 enrollment rate to 61.2% of the population, Unemployment (%) 4.6 6.2 5.7 5.6 6 6 although there was also an increase in repetition rates. Across the board, educa- Public Sector Balance (% of GDP) -2 - 4.1 - 2.6 -2 - 3.6 - 3.7 tion levels are worse for those in the lower Current Account Deficit (% of GDP) - 7.4 - 3.8 - 4.9 - 5.3 - 3.1 - 3.1 income quintiles. In health, performance Foreign Direct Investment (% de GDP) --- 0.04 0.03 0.04 0.04 0.03 continues to improve in terms of life ex- pectancy, infant mortality and health sys- Domestic Public Debt (% of GDP) 18.3 24.5 23.1 21.8 25.1 23.2 tems performance, but there is increasing dissatisfaction with the system, as waiting lists grow, and focus on obtaining value for money in the social programs. patients requiring more sophisticated treatment for chronic diseases are turned away. In Social Protection, Costa Rica has There are three key questions which frame the analysis of these a well-established social assistance network to protect vulner- factors in the new World Bank report, "Poverty and Social able groups, but it does not adequately reach the very poor. Spending in Costa Rica". First, who are the poor and vulner- able groups in Costa Rica? The report addresses this by Costa Rica is not likely to be able to rely on favorable eco- providing an in-depth, multi-dimensional analysis of poverty. nomic conditions to reverse these trends. Macroeconomic Over 65 percent of the poor in Costa Rica reside in rural areas, projections do not show signs of the consistent growth that although only 49% of the total population live there. Poverty characterized the past ten years, and which allowed the gov- incidence is highest in families where the head of household is ernment to continue increasing investment in the social sec- working in agriculture, or self-employment, micro enterprise or tors. Relative to GDP, Costa Rica already spends more on domestic service, or is under- or unemployed. Poor families are social services overall than other countries in Latin America, younger, have higher dependency rates and most have no or and considerably more than the average for other countries only one income earner. Poor families are larger than non-poor at similar stages of development outside the region. More- families (4.7 family members vs. 3.7 for non-poor) and have a higher number of people below 12 years of age (1.7 vs. 0.9). 1 Full report prepared by Tarsicio Castañeda, James Cercone, Luisa Women head an estimated 48 percent of families in extreme Fernández, Fabio Durán, Rodrigo Briceño, Stephan Brunner, Juan poverty compared to 33 percent in near-poor families. One of 1 the most striking facts regard- Table 2 - Social Spe nding in the Social Se ctors in Se le cte d Countrie s - 1996 ing extremely poor families is Education Health Pensions and Social Housing Total the very high unemployment (%) (%) Assistance (%) (%) (%) rate for all family members. Argentina 3.5 1.8 8 0.8 14 . 1 The extreme poor and poor, Bolivia 7.4 2.2 4.5 0.2 14.3 when occupied, work prima- Brazil 3 1.7 11 0.6 16.2 rily in temporary activities, while the near-poor work pri- Chile 3.2 2.5 7.1 1.2 14 marily in permanent activities. Colombia 5.4 2 4.9 0.7 13 Furthermore, 16 percent of the Costa Rica 5.1 6.8 6.3 0.1 18.2 income-poor families in Costa Dominican Republic 2 1.7 0.7 2.1 6.5 Rica have no income earner in the family. Education levels Indonesia 1.3 0.4 1.1 3 5.7 are much lower for the popu- K orea 3.7 0.2 2.2 0.5 6.5 lation in the lowest income Malaysia 5 1.4 1.5 1.4 9.3 quartile group. Health condi- Mexico 3.8 0.5 3 0.5 7.8 tions also vary considerably Panama 4.6 5.6 5.7 1.2 17 . 1 between the non-poor and the poor, and despite a univer- Phillipines 3.4 0.5 0.5 0.3 4.7 sal health system, roughly 30 Turkey 3.5 0.7 1.4 0.4 5.1 percent of poor have trouble Uruguay 2.1 1.9 19.4 0.5 23.9 accessing programs (the Caja Latin America1 4 2.7 7.1 0.8 14 . 5 Costarricense de Seguro So- East Asia 1 3.4 0.6 1.3 6.6 cial (CCSS)) for the unin- sured. N ote: Percentage of GDP. 1. These figures only include countries in the table. e Source:World Bankl, 2000b, based on the IMF Government Finance Statistics Y arbook (1998) Two groups appear particu- larly vulnerable. About 84,000 children aged between 0 and 5 (95% of the poor group) to that in some OECD countries. However, in other areas, are not attending CEN-CINAI or Hogares Comunitarios cen- such as secondary education, progress has been uneven. In ters. Similarly, those over 65 years of age living in extreme pov- primary education, despite high levels of absolute coverage, erty can also be considered highly vulnerable because of their there have been increases in repetition and drop-out rates. ill health and low incomes. About 46 percent of extremely poor Although access to services for poor groups has improved people older than 65 years of age reported permanent or tem- considerably, a lack of effective targeting mechanisms re- porary physical or mental limitation with about 14,000 elderly of duces the cost-effectiveness of social programs. For ex- them (about 50 percent) not being covered by contributory or ample, the share of social assistance programs resources re- assistance pensions. ceived by the poorest 25 percent of the population just ap- proximates their share in the population, implying little or The second key question is: what has been the impact of so- no re-distributive impact of spending. More spending alone cial spending on programs that aim to improve the wel- will not solve these problems. fare for the poor? The report addresses this by examining the effectiveness of government policies and spendingin the Finally, given these problem areas, and the limited capacity to social sectors on the poor. During the 1990's, Costa Rica increase public expenditures on social services, we ask: how made impressive progress in making social spending a prior- can government spending be used more effectively to reach ity and increasing the allocations to priority programs. As a the poor and to contribute to reducing headcount poverty? result, the main indicators improved significantly. Coverage While the objective of the report was not to prescribe solu- of primary and secondary education improved substantially tions, it provides both sector-specific and general policy op- and illiteracy dropped to only 5 percent of the population tions that the government can consider. A common theme in over 12 years of age. Life expectancy at birth is above 76 the sector specific recommendations is the need for greater years, the infant mortality rate dropped from 15 to 13 for ev- flexibility in the implementation of existing programs, coupled ery thousand live births (10.3 in 2001) and access to drinking with more efficient coordination and administration to improve water is practically 100 percent. targeting and respond to the needs of the poor. For example, one of the key channels for the provision of social assistance Despite these accomplishments, the analysis indicates (FODESAF) is obliged to allocate funds to low priority spend- that the national averages hide discrepancies between ing under outdated legislation. More generally, the report ad- the income levels and that Costa Rica's performance in vocates the creation of a policy-making mechanism--charged key areas lags considerably behind comparator coun- with setting social policy, evaluating the costs, benefits and tries in the Region (see Table 2). In some areas, notably impact of social programs, exploiting synergies, and reducing health care, Costa Rica's striking performance is comparable programs overlaps. The government should consider possibili- 2 ties for improving coordination of social policies, define priori- prove services. This includes, (i) consolidating the Ministry ties and regularly evaluate the impact and targeting of social of Health's role as steward and policy maker and strengthen- programs. ing health education and public health programs; (ii) consoli- dating the Basic Teams for Integrated Health Care (EBAIS) The Road Ahead: Policy Suggestions model and improving access in order to reach the 12 percent of the population that are still not covered; (iii) improving administrative and budgeting procedures in the CCSS, and Education promote a culture of performance agreements with hospitals Some of the actions recommended for primary education in- and other health care providers, in order to increase cover- clude the following: (i) strengthening the teaching and learn- age of primary health care and improve overall system effi- ing of reading, writing and math skills in first through sixth ciency; (iv) promoting changes in the system in order to im- grades; (ii) making more effective use of learning assessment prove the financial and management autonomy of the health findings; (iii) improving in-service teacher training; and (iv) care providers, under the 1999 Deconcentration Act; (v) re- strengthening community and parental participation in school- ducing current disparities in expenditures levels by region; related matters. (vi) introduce changes in the drug procurement systems to cut down storage and purchase costs; (vii) strengthening To ensure efficient use of available resources, the following the CCSS's collection system and promoting changes in fi- structural changes should be sought: (i) update the curricula; (ii) nancial information systems; and finally (viii) establish alter- improve teacher training; (iii) increase the supply of secondary native service arrangements through public-private partner- education through several options that ships that complement the public ser- include traditional schools tele- vices supplied by the CCSS, to gradu- secundarias, distance learning, open-ac- ally introduce managed competition in cess education, virtual schools and voca- the health care market. tional training; (iv) promote collaboration with the private sector to improve the The cost implications of the continued relevance of secondary education; and (v) reform process have been estimated at help parents and students, especially in about US$70 million over five years, rural areas, to finance part of the opportu- but these costs are about half the sav- nity costs of studying through scholar- ings that can be obtained from the re- ships, conditional cash transfers, and forms over the same period. The Costa other supplemental financing schemes. Rica Health Sector Strengthening and Modernization Project will produce During the past five years, less progress substantial savings for the sector, pri- has been made among the poor than in marily through reductions in hospital- higher-income groups. For this reason, ization costs resulting from ambulatory and in addition to the coverage and qual- surgery ($12 million per year), phar- ity improvement efforts described above, maceutical management, and reduced the Ministry of Education should aim to overhead from increasing decentraliza- improve the targeting and equity of tion ($12 million per year). Improve- school food programs, transportation and ments in pharmaceutical supply chain scholarships. management alone could save over $30 million per year by reducing unnecessary inventory costs. The cost implications of the actions recommended for pri- Even under conservative assumptions regarding the effec- mary and secondary education are relatively modest when tiveness and speed of change, direct benefits would exceed compared to the resources currently allocated to education. $24 million per year. Overall, it is estimated that the efforts suggested will increase costs in the order of 6 to 7 percent of current expenditures. Social Protection This cost increase could be financed through internal effi- Pensions. The country still faces major challenges going ciency improvements, for instance by reducing grade repeti- forward: (i) to reduce replacement rates and future costs of tion rates and poorly targeted programs that provide resources the public scheme and introduce incentives that increase to less needy populations. General estimates suggest that the contributions in the early years of the earnings cycle, in or- costs involved in primary grade repetition amount to approxi- der to get them to an affordable level and to guarantee their mately US$21.2 million/year, about 10% of the budget for pri- financial sustainability; (ii) to expand coverage, improve mary education; the costs involved in secondary repetition the membership management and the control of contribu- rates are of about US$14.8 million/year. tions; (iii) to increase coverage and improve targeting of non-contributory pensions, and (iv) to strengthen the re- Health forms that will guarantee the long-term sustainability of Costa Rica needs to continue with the reform process pension schemes for civil servants. If reforms are not under- launched in the mid 90's in order to cut inefficiencies and im- taken, as the population ages sharply over the next 30 3 years--due to falling fertility rates and rising life expect- Strengthening, monitoring and evaluation ancy--the increasing financial imbalance could lead to pen- systems sion fund insolvency. The lack of an effective monitoring and evaluation systems sys- In social assistance, the spending priorities require urgent tem for the social sectors is an impediment to ensuring value for reform. Priority measures involve the following three areas: money in social spending. This is most evident in programs (i) changing legislation (the FODESAF law) to permit gov- such as the CEN-CINAI where--had a good evaluation pro- ernment to vary spending priorities in accordance with gram existed--resources could have been saved by finding the needs, and to allow the allocation of more resources to vul- most cost effective alternative for child care. Different modali- nerable groups, and be able to respond to crises; (ii) im- ties of child care, some including only parental education, oth- proving the coordination among programs to prevent dupli- ers--including center-based stimulation and early child educa- cations; (iii) improving the targeting, coverage and design tion--could have been evaluated to determine their impacts and of social assistance programs such as CEN-CINAI; and (iv) relative costs. Monitoring and evaluation is key to evaluate completing the coverage for poorer groups through non- progress, evaluate impact of programs and make more efficient contributory pension schemes. decisions on programs to improve social indicators of the poor. The practice of establishing base-lines and measuring the im- The cost implications of expanding pre-school education pact of specific programs should be implemented routinely in programs for poor children and non-contributory pensions order to draw lessons from experience--which can be used to for the poor elderly are also relatively low and may be modify programs and improve their impact. In addition, instru- covered within the existing social assistance budget. As es- ments such as Living Standards and Measurement Surveys and timated, expanding pre-school coverage to all children improved household surveys provide valuable information on through care programs offered by centers and parents-com- key target groups and on the outcomes of the main social pro- munity would amount to approximately US$26 million per grams, complementing the annual household surveys currently year. The current annual budget for the CEN-CINAI pro- carried out by the Statistical Institute. At the same time, evalua- gram is around US$19 million and an additional US$11 tion should include ex-ante and ex-post evaluation of social sec- million would be required to cover all poor children. These tor programs using cost-effectiveness and cost-benefit analysis are general estimates based on the assumption that non- to assess programs. poor children will not benefit from public programs. Costs could be cut even further if the CEN-CINAI programs are The collective impact of the actions presented in the report modified to reduce food and health care subsidies provided would contribute to progressive improvements in the impact of by the CCSS. If the programs were to reach the 7,000 poor social spending and to ensuring that poverty reduction is not elderly that are still not covered, total annual costs would tied exclusively to rapid economic growth. Clearly, improve- amount to US$3.1 million, which could be paid with the re- ments should focus on how to improve the impact of existing sources currently used to benefit non-poor pensioners. resources and ensuring that additional resourcesthat may be allocated to the social sectors are disproportionately targeted to Improving Institutional Coordination the poor. The impact of social spending in Costa Rica could be im- proved, particularly its impact on the poor, with the cre- About the Author ation of a policy-making mechanism charged with setting Helena Ribe is a Sector Leader within the Human Develop- social policy, exploiting synergies, and reducing programs ment Department of the Latin America and Caribbean Re- overlaps. The government should consider possibilities for gion, based in Washington D.C. Roxane Viquez is the ex- improving coordination of social policies by exploring the President of IMAS in Costa Rica. creation of a Council for Social Policy Coordination under the direction of the President, with a technical secretariat to Want to Know More? define priorities and regularly evaluate the impact and tar- geting of social programs. Such an entity would define pro- The report "Social Spending in Costa Rica" starts with a pro- grams and their goals, beneficiary populations, and the in- file of the poor. Poor families tend to be younger, larger and stitutional arrangements to carry out key strategies. Efforts have higher dependency rates than non-poor families, with in this direction have been undertaken in recent administra- most having no, or only one, income earner. On average, they tions, but they have been hampered by institutional rigidi- are disproportionately rural and headed by women. The poor ties and laws which have undermined coordination efforts benefit less from educational opportunities, and may have and the reform or elimination of ineffective programs or in- trouble accessing healthcare. The report provides both sector- stitutions. In this regard, allowing FODESAF greater flex- specific and general policy options to improve the impact of ibility to channel resources to vulnerable groups and to re- social spending and to ensure that poverty reduction is not tied spond to changing conditions, particularly during crisis, exclusively to rapid economic growth. Clearly, improvements will greatly contribute to improving the effectiveness of so- should focus on how to improve the impact of existing re- cial spending. sources and ensure that any additional resources that may be allocated to the social sectors are effectively targeted at the poor. Download the report from http://www.worldbank.org/CR 4