Report No. 28911-EC Report No. 28911-EC Ecuador Creating Fiscal Space for Poverty Reduction A Fiscal Management and Public Expenditure Review Public Disclosure Authorized (In Two Volumes) Volume II: Background Papers November 17, 2004 Ecuador Reduction Space for Poverty Fiscal Creating II Volume Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank and the Inter-American Development Bank Public Disclosure Authorized GOE Government of Ecuador PPA Power Purchasing Agreement GTZ German Technical Cooperation Agency PPC Programacidn Peri6dica de Caja (cash balance periodic HDI Human Development Index programming) HW=(s) Highly Indebted Poor Country (ies) PPS Project for Public Spaces ICE lmpuesto a 10s Consumos Especiales (Special Consumption PRADEC Programa de Asistencia y Desarrollo Comunitario (programs Tax) of Aid and Common Development) IDB Inter-American Development Bank PRAGUAS Programa de Agua y Saneamiento para Comunidades IEOS lnstituto Ecuatoriano de Obras Sanitarias (Ecuadorian Rurales y Pequeiios Municipios (Project Appraisal Institute of Sanitary Works) Document, Rural and Small Towns Water Supply and IESS lnstituto Ecuatoriano de Seguridad Social (Ecuadorian Sanitation Project) Social Security Institute) PROBE Public Report on Basic Education IM Infant Mortality PROMEC Proyecto de Modemizacidn de 10s Sectores Elkctrico, IMF International Monetary Fund Telecomunicaciones y Servicios Rurales (Power and INEC (El Instituto Nacional de Estadistica y Censos (Integrated Communications Sectors Modernization and Rural Services System of Household Surveys) Project) INECEL lnstituto Ecuatoriano de Electrifcacidn (Ecuadorian Power PROST Pension Reform Options Stimulation Toolkit - developed by Authority) the World Bank INH lnstituto Nacional de Higiene (National Institute of Hygiene) PRS Poverty Reduction Strategy IPS interbank payment system RER Real Exchange Rate IRS/SRI Internal Revenue Service/Servicio de Rentas Internas RGP Referential Generation Price ISR personal income tax ROSC Reports on the Observance of Standards and Codes ISSFA Military Social Security Institute RUC Registro Onico de Contribuyentes (centralized taxpayers ISSPOL lnstituto de Seguridad Social de la Policia Nacional registry) (Institute of Social Security of the National Police) SAPYSB Subsecretaria de Agua Potable y Saneamiento Bhico m Oil Fields (Ishipingo-Tambococha-Tiputini) (Undersecretary of Drinking Water and Basic Sanitation) ITU International Telecommunications Union SELBEN Sistema de Identi~cacidny Seleccidn de Benejiciarios de 10s NM Internal Value Measurement Programas Sociales (Poverty Mapping and Strengthening JASS Juntas de Agua y Saneamiento (Committee for Water and Database) Disinfection) SENATEL Secretaria Nacional de Telecomunicaciones (National LAC Latin America and The Caribbean Telecommunications Office) LMG Ley de Maternidad Gratuita y Atencidn a la lnfancia (Law of SENRES Secretari'a Nacional Tkcnica de Desarrollo de 'Recursos Free Maternity and Attention to Infancy) Humanos y Remuneraciones del Sector Piblico (National LNG Liquefied Natural Gas Technical Office of Human Resources Development and LOAFYC Ley Orgclnica de Administracidn Financiera y Control Remunerations of the Public Sector) (Organic Law of Financial Management and Control) SIAN Sistema Integrado de Alimentaci6n y Nutrici6n LSMS Living Standards Measurement Study SIEH Sisrema Integrado de Encuestas de Hogares (Integrated MBS/STFS Ministerio de Bienestar Social (Ministry of Social Affairs) Home Survey System) MDGs Millennium Development Goals SIGEF Sistema Integrado de Genercia Econdnica y Financiera MED Ministry of Education (Integrated Financial Management System) MEF Ministerio de Economfa y Finanzas (Finance Ministry) SIGOB Sistema de Gestidn de Gobierno (Government Management MEM Ministerio de Energia y Minas (Ministry of Energy and System) Mines) SINEC Sistema Nacional de Estadisticas y Censos (National System MIDWI Ministerio de Desarrollo Urbano y Vivienda (Ministry of of Statistics and Censuses) Urban Development and Housing) SNEM Servicio de Erradicaci6n de Malaria (Malaria Eradication MNL Multinomial Logit Model Service) MO Mendoza-Oviedo SOTE Sistema de Oleoducto Transecuatoriano (Trans-Ecuadorian MPH Ministry of Public Health Pipeline) MYBF Multiyear Budgeting Framework SPA Subsecretaria de Proteccidn Ambiental (Undersecretariat on NBI Necesidades Bclsicas lnsatisfechns (Unmet Basic Needs) Environmental Protection) NFPS Non Financial Public Sector SPR Strategic Policy Research NWFP North West Frontier Province ssc Seguro Social Campesino (rural social security) OECD Organization for Economic Co-operation and Development sso Seguro Social Obligatorio (obligatory social security) OLS Ordinary Least Squares STFS Secretaria Tkcnica del Frente Social (Technical Secretariat ORDs Regional Development Organizations of the Social Front) OSCIDI Ojicina de Servicio Civil y Desarrollo lnstitucional (Office STFS-SIISE Sistema lntegrado de lndicatores Sociales del Ecuador of Civil Service and Institutional Development) (Integrated System of Social Indicatom of the Social Cabinet) OSINERG Organismo Supervisor de la Inversidn en Energ fa SUFTEL Superintendencia de Telecomunicaciones (Super-intendence (Supervising Agency for Energy Investment) of Telecommunications) OTECEL Bellsouth, Empresa Telefdnica TELECSA Ecuadorian Telecommunications-South America PACIFICTE!L Pacific Telephone-Fixed line telecommunications operator UBN Unsatisfied Basic Needs in the coastal region UDENOR Unidad de Desarrollo del Norte (Northern Development PAE Programa de Alimentacidn Escolar (School Breakfast office) Program) UNDP United Nations Development Programme PAHO Pan-American Health Organization UNE Union Nacional de Educadores del Ecuador (National PA1 Programa Ampliado de lnmunizacidn en las AmCricas Teacher's Union) (Immunization Program) UNESCO United Nations Educational, Scientific and Cultural PA" Programa Nacional de Nutricidn y Alimentacidn (National Organization Nutritional Program for Children) UNICEF United Nations Children's Fund PEM Public Expenditure Management VAT Value-Added Tax PER Public Expenditure Review VOIP Voice-over-IP PGE Presupuesto General de Estado (Central Government WFP World Food Programme Budget) WHO World Health Organization PHRD Public Human Resource Development mm IDB Vice President: David de Ferranti Manager, Regional Operation 111: Ciro de Falco Country Director: Marcel0 M. Giugale Deputy Manager, Regional Operations Dept. 111: Mbimo Jeria Sector Director: Emesto May Chief, Country Division 5: Vladimir Radovic Sector Leader: Mauricio Carrizosa Lead Economist: Vicente Fretes-Cibils Senior Economist, Co-Task Manager Jost R. L6pez-CQix Country Economist, Co-Task Manager: Albert0 Melo Ecuador Public Expenditure Review Volume I1 Table of Contents ACKNOWLEDGMENTS PREFACE Chapter 1. FISCAL SUSTAINABILITY EXERCISES ................................................................. 1 I. Fiscal Sustainability Under Macroeconomic Uncertainty................................................... 1 11 . Ecuador Analysis Under the Mendoza-Oviedo Model ....................................................... 4 111 . Sudden Stop approach to Fiscal Sustainability ................................................................... 6 IV . Conclusions ..................................................................................................................... 10 References .................................................................................................................................... 12 Chapter 2 . THE FISCAL RULE ................................................................................................... 13 I. Oil Stabilization Funds: A Brief Analysis of their Rationale............................................ 14 I1. Fiscal Rules in Ecuador for Oil Revenues ........................................................................ 17 I11. Government Oil Revenues in Ecuador .............................................................................. 19 IV. An Analysis of the Fiscal Rules in Ecuador ...................................................................... 21 A . The Stabilization Component of FEIREP................................................................... 22 B . The Debt Reduction Component of FEIREP.............................................................. 26 C. The 3.5 Percent Target for Growth in Real Primary Expenditures ............................ 29 References .................................................................................................................................... 30 Chapter 3 . EDUCATION.............................................................................................................. 33 I. Education Performance in the 1990s................................................................................. 34 11 . Equity in Educational Spending ........................................................................................ 47 I11. Cost-Effectiveness in Primary Education ......................................................................... 51 IV. Education Expenditure Tracking and Budget Scenario Analysis ..................................... 54 Annex 3.1 Education Cost-Effectiveness Model ..................................................................... 62 References ...................................................................................................................................... 60 Chapter 4