Public Disclosure Authorized HANDBOOK ON PUBLIC SECTOR PERFORMANCE REVIEWS (IN SIX VOLUMES) Public Disclosure Authorized VOLUME 3: BRINGING CIVILITY IN Public Disclosure Authorized GOVERNANCE Edited by Anwar Shah Public Disclosure Authorized CONTENTS Handbook Series At A Glance Foreword Preface Acknowledgements Contributors to this Volume OVERVIEW by Anwar Shah Chapter 1: Public Expenditure Incidence Analysis by Giuseppe C. Ruggeri Introduction ..................................................................................1 General Issues ................................................................................2 The Concept of Incidence ...........................................................2 The Government Universe .........................................................5 What is Included in Government Expenditures ......................5 Disaggregation by Level of Government .................................6 The Database .............................................................................7 The Unit of Analysis ...................................................................8 Individuals, Households and Families ...................................8 Adjustment for Size ..............................................................10 Grouping by Age and by Income Levels ...............................11 The Concept of Income .............................................................12 2 Bringing Civility in Governance Annual versus Lifetime Analysis .............................................16 The Allocation of Public Expenditures .........................................16 Cost to Government versus Benefits to Individuals ................17 “Cost Incurred on Behalf of” Approach ...................................18 Externalities .............................................................................19 A Classification of Government Expenditures .........................20 Allocation of Specific Expenditures .........................................22 Transfer Payments ...............................................................22 Purchases of Goods and Services ........................................23 General Expenditures ..............................................................25 Allocation of Interest Payments on the Public Debt ................27 Distributional Effects ....................................................................29 Presenting the Results .............................................................29 Indices of Expenditure Incidence ............................................30 Disaggregated Indices ..........................................................30 Global Indices ......................................................................32 Conclusions ................................................................................33 References ................................................................................35 Tables: Table 1: Components of Various Income Concepts ................14 Table 2: A Classification of Government Expenditure ............20 Table 3: Selected Groupings of Government Expenditures ....29 Table 4: Global Indices of Redistribution Based on Comparisons of Gini Coefficients ..............................32 Chapter 2: On Measures of Inequality and Poverty with Welfare Implications by N. Kakwani and Hyun Son Introduction ..................................................................................1 The Lorenz Curve and Social Welfare .............................................2 Gini Index ..................................................................................4 Calculations of the Gini Index ........................................................5 Generalized Gini Index ...................................................................7 Entropy Measures of Inequality .....................................................8 Atkinson’s Inequality Measures .....................................................9 Table of Contents 3 Measuring Poverty ........................................................................11 An Illustration Using Lao PDR Data .............................................14 Some Concluding Remarks ..........................................................16 References ................................................................................17 Figure 1: Lorenz Curve ................................................................3 Tables: Table 1: Calculation of the Gini Index ......................................6 Table 2: Inequality in Lao PDR ................................................15 Table 3: Poverty Measures: Lao PDR .....................................16 Chapter 3: On Assessing Government Fiscal Policies with Application to the Philippines by N. Kakwani and Hyun Son Introduction ....................................................................................1 Welfare Measures ............................................................................2 Welfare and Income Components ...................................................4 Welfare Reform Index ......................................................................7 Indirect Taxes and Subsidies .........................................................8 An Overview of the Philippines Fiscal System ...............................9 Basis for Measuring Distributional Effects ..................................12 Analysis of Empirical Results .......................................................14 Some Concluding Remarks ..........................................................20 Tables: Table 1: Fiscal System in the Philippines – 1998 ........................10 Table 2: Government Expenditures by Sectors ...........................12 Table 3: Welfare Reform Index for Income Components – Philippines 1998 .............................................................15 Table 4: Welfare Reform Index for Expenditures – Philippines 1998 .............................................................18 Reference s .....................................................................................21 4 Bringing Civility in Governance Chapter 4: Evaluating Public Pensions by Robin Boadway and Katherine Cuff Introduction ..................................................................................1 The Imperative for Public Pension Reform and Development ...1 Demographic Patterns ...............................................................1 Economic Factors .......................................................................2 Political/Institutional Factors ....................................................3 The Rationale for Government Intervention ...................................4 Efficiency and Market Failure ....................................................5 Equity ..................................................................................6 Government Failure ...................................................................7 Redistribution .........................................................................8 Insurance Arguments ...........................................................14 Inadequacy of Savings .........................................................30 Transfers to the Elderly ................................................................24 Design Issues ...........................................................................24 The Objective Function .........................................................24 Scope of Coverage of Redistributive Instruments .................25 Methods of Targeting ............................................................27 The Form of Transfer ............................................................29 The Transfer Formula ...........................................................30 Administration ......................................................................32 Financing .............................................................................34 Economic Effects of Transfers to the Elderly ..........................35 Labor Market Effects ............................................................35 Capital Market Effects ..........................................................36 Contributory Pension Schemes ....................................................37 General Design Issues .............................................................38 Coverage ..............................................................................38 Funded versus Unfunded ....................................................38 Pension Benefits: Defined-Contribution versus Defined-Benefit ..................................................................39 Nature of Contributions ........................................................40 Individual Access to Pension Assets ....................................40 Auxiliary Insurance Programs ..............................................41 Occupational Private Pension Design Issues ..........................41 Form of Benefits ...................................................................42 Source of Contributions ........................................................44 Table of Contents 5 Vesting and Portability .........................................................44 Funding Requirements .........................................................45 Administrative Costs ............................................................46 Government Regulation ........................................................46 Public Pension Design Issues