53804 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 December 2003 No. 37 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 PROTECTING THE POOR THROUGH PROGRAMMATIC ADJUSTMENT LENDING IN PERU, BRAZIL AND COLOMBIA Evangeline Javier, Vicente Paqueo, Laura B. Rawlings, and Alberto Rodriguez Social reforms typically require long-term, incremental The Peru Programmatic Social Reform Loan policy changes. Traditional World Bank (WB) funding for (PSRL) discrete investments or technical assistance often had little broad policy impact. Even sector adjustment loans tended to be too inflexible and short-term to support ongoing Peru's PSRL in early 2001 was the first programmatic social reforms. Some countries needed new kinds of structural adjustment loan to focus entirely on social reforms. financial and technical assistance to sustain reforms during Besides supporting education, health, and social protection crisis and beyond. programs, it brought key players from government ministries together with multidisciplinary World Bank teams to help Recognizing the need for steady, incremental reforms address social aspects of public spending, increase social combined with institution building, the WB introduced program transparency and empower the poor to participate in Programmatic Structural Adjustment Loans/Credits (PSAL/ setting public policy. PSAC) in 1998. In the social arena, this instrument has provided fast-disbursing, flexible, multi-year support to The loan was conceived under difficult circumstances. A help countries preserve their social safety nets during crises corruption scandal had led to the downfall of President Alberto and strengthen them in the long run through capacity- Fujimori's regime at the end of 2000. Political uncertainty fed building and institutional reforms. In the Latin America and a severe economic downturn that swelled the federal deficit to the Caribbean Region, loans to Peru, Brazil, and Colombia 3 percent of GDP in 1999. The country needed a dramatic, illustrate how the new multi-sector social reform efforts quick fiscal adjustment--rationalizing the tax system while have worked in practice. significantly cutting expenditures. A transition government, whose mandate was to arrange clean and orderly elections within six to eight months and lay the groundwork for Table 1 - Investment & Adjustment Lending economic recovery, sought WB assistance in addressing the short-term fiscal problems and initiating medium-term social The Bank has two basic types of lending instruments: reforms extending beyond the government's short tenure. investment loans and adjustment loans. Investment loans have a long-term focus (5 to 10 years), and fi- The PSRL, with flexible, medium-term benchmarks and nance goods, works, and services in support of eco- triggers for future financing, was ideal to meet the nomic and social development projects in a broad government's diverse requirements. Three phases were range of sectors. Adjustment loans have a short-term planned, each financed by a single-tranche loan of $100 focus (1 to 3 years), and provide quick-disbursing ex- million. PSRL I, approved in June 2001 (the end of the ternal financing to support policy and institutional re- transition government's term), focused on protecting social forms. Both investment and adjustment loans are used programs critical to the poor during the difficult fiscal and flexibly to suit a range of purposes, and are occasion- political transition. Protected programs included basic and ally used together in hybrid operations. secondary education, public health, and basic infrastructure such as rural roads, water supply and sanitation services. The 1 government established a budget mechanism that protected an markets. Also, the government wanted to prevent market allocation of about $1 billion (1.9 percent of GDP) for the volatility from damaging prospects for economic growth and selected social programs despite fluctuations in revenue. Anti- social equity. President Luiz Inácio Lula da Silva's cyclical budgeting for social expenditures is important to administration, which took office in January 2003, saw the protect the poor, but was atypical in Peru until recently. WB loan as a way to demonstrate that the country was making prudent choices regarding fiscal, monetary and social policy PSRL I also laid the groundwork for administrative reforms, while building on past reforms that had improved delivery of established benchmarks and financing triggers, and social services. tremendously helped frame a dialogue about social policy with the incoming Toledo administration. It supported Brazil had made great strides toward strengthening its social improvements in Peru's integrated financial administration programs. From 1999 to 2002, it moved aggressively to system, development of targeting mechanisms for poverty- decentralize service delivery, place a floor under basic alleviation programs, and monitoring and evaluation of education and health spending, reduce inequalities among selected social programs. The government also agreed to take states and municipalities, and develop mechanisms to target steps to consolidate duplicative food supplementation assistance to poor communities. The WB supported those programs. efforts with a Special Sector Adjustment Loan in 1999, which selected 22 core human development programs for protection PSRL II built on the earlier loan, encouraging increased social and evaluation. The first PSRL supported a subset of these spending, rationalization and enhanced transparency, and programs, and others that had proved effective during the refinements to Peru's social safety net for the poor. Specific country's political transition. A complementary companion targets were set for public expenditures on selected social Technical Assistance Loan (under preparation), will help programs, and a counter-cyclical public works program Brazil build a base of knowledge needed to advance the launched. PSRL II advanced the reform agenda and improve basic social establishment of a social accountability programs and outcomes. system that promotes citizen participation in supervising and monitoring public sector The new HD PSRL continues support for performance. And it backed initiation of a Brazil's social policy innovations, and the participatory budget-preparation process for new administration's commitment to some regional departments. continue, improve and expand them, and helps protect budgets and monitoring of PSRL II continued the previous loans in social policies during transitions and some ways, with three important new facets: instability. It is part of a long-term strategy it linked structural adjustments with to help the country improve targeting, medium-term results indicators, many resource allocation, and human related to the Millennium Development development spending efficiency. Putting Goals; it facilitated transition from short- special emphasis on results-oriented term budget protection for social programs policies, it focused on strengthening to a medium-term public expenditure shift to governance by clarifying institutional benefit the poor; and supported a consistent roles, establishing transparent financing program of social reforms complemented mechanisms, and developing evaluation closely by technical assistance and tools and communications systems. It was programmatic investment loans in health innovative in pursuing a multisector and education. The government met the strategy with crosscutting themes and agreed triggers and the Board approved the strongly integrated outcomes. And it was PSRL II $100 million loan in September 2002. The WB and developed quickly, in cooperation with outgoing and incoming Peruvian government are currently reviewing progress toward administrations, because of the need for prompt action. the agreed reforms and benchmarks and triggers for PSRL III and are considering a PSRL IV to help in the decentralization of Social Sector Operations in Colombia social services in Peru. The Brazil Programmatic Sector Reform The WB also has used a programmatic approach in Colombia, developing with the government a series of investment and Loan adjustment operations addressing the social consequences of economic crisis and providing a basis for continued reforms in The Brazil Human Development Programmatic Sector Reform the social sectors. Loan (HD PSRL) was prepared during political and economic upheaval. Facing an unusually adverse external economic In 1999 Colombia experienced its largest recession in 70 environment, the new government needed to act quickly to years. GDP fell 4.3 percent, and public sector debt rose to build credibility and improve Brazil's access to international nearly 50 percent of GDP by 2000. The social consequences 2 were severe: the unemployment rate doubled, inequality and coverage of early childhood development services increased, and poverty rose dramatically. Urban poverty were improved. increased 7 percentage points between 1995 and 1999, reversing a decade of progress. Internal conflict intensified, · Expanded and more efficient health insurance coverage hundreds of thousands of people were displaced, and violence improved the health status of poor Colombians, and re- and insecurity increased. duced financial risks associated with illness. The WB and Inter-American Development Bank (IDB) · The public education regulatory framework was im- worked with President Andres Pastrana's administration to proved. To improve children's educational status respond to the crisis with a coordinated set of short-term, through increased efficiency and equity in resource al- emergency safety net operations to protect vulnerable groups. location, the program supported a new law basing re- These included a temporary employment program (the source transfers on poverty levels and student numbers Community Works and Employment Project) and a and introducing alternatives to traditional public educa- conditional cash transfer program (the Human Capital tion, including contracting out to the private sector and Protection Project) for eligible poor families. providing scholarships to high performing economi- cally poor students. The Social Sector Adjustment Loan (SSAL) was prepared at the end of President Pastrana's administration, when the peace process had collapsed and economic and social crisis was The SSAL was approved in August 2002, just before deepening. In coordination with the IDB and building on Colombia's current president, Alvaro Uribe was inaugurated. It research done collaboratively with Colombia's government, bridged the two governments, and facilitated a smooth the loan had three overarching objectives, to: transition, providing timely financial support, ensuring continuity in Colombia's social sector · build a foundation for consolidating development, and giving the newly critical education, health, and social elected government an opportunity to protection reforms and continuing commit itself to key social reforms. progress toward social equity and effi- ciency; Today, the new government is expanding and deepening reforms in · encourage the new administration to education, health, and social protection continue the reforms; along the lines envisioned in the loan. These include a new labor reform law · provide financing and support for so- and establishing a Ministry of Social cial measures to complement fiscal re- Protection, merging health, labor, and forms under a WB-supported Structural social assistance agencies. Both are key Fiscal Adjustment Loan. elements of a more efficient, equitable, and coherent social risk management The improvements supported were achieved system. Two new Programmatic Labor with little or no additional budget alloca- Reform loans reflect the government's tions, a key consideration given fiscal con- strong commitment to a medium-term straints. Specific policy reforms supported reform agenda. Over the next four years, included: these loans will support sustained implementation of an integrated social · Increased transparency and citizen oversight of social risk management system and related reforms in education, programs through independent impact and performance health, and labor. evaluations, and expanded public monitoring of the government's main social programs; Continuing Challenges · Development of a comprehensive social risk manage- To ensure that programs are measurably increasing people's ment strategy to improve Colombia's ability to assist welfare and reducing poverty, World Bank teams worked with the poor during crises and strengthen social assistance government counterparts to identify indicators of social and insurance for the chronically poor during normal progress, determine which could serve as benchmarks for times; assessing the program impact, and agree on minimum outcomes to be achieved to trigger future lending. · Improvements in social services for vulnerable Colom- Determining indicators, benchmarks and triggers is especially bians. People displaced by violence gained better ac- important and challenging in programmatic lending, which cess to state-supported social programs, the size and often addresses systemic issues and serves more diffuse characteristics of this group were analyzed, and quality groups of beneficiaries than project loans. Existing data 3 collection and information systems provide useful information While challenges remain, the three countries are constructing for this task. But difficult technical and conceptual issues systems that increase access of the poor and disadvantaged to remain, including with data quality. In Brazil, a Technical basic education, health, and social protection programs. Their Assistance Loan is helping improve data availability and social programs are being strengthened by increased quality. accountability, better coordination of state and municipal policies, greater transparency in budget planning procedures, Peru, Brazil, and Colombia's experiences with social sector and increased consumer voice. Continuing improvements and programmatic structural adjustment loans show that achieving development of counter-cyclical policies and programs will reform objectives requires years of gradual progress in better position these countries to deal with crises, enhance adjusting and building institutional capacities. Many reforms, poor people's access to social services, and make efficient use such as those involving civil service or pensions, need a long of scarce fiscal resources allocated to human capital time to build consensus. A close partnership among development. government (finance and sectoral ministries and agencies), other constituents, and the World Bank is crucial to ensure that reform agendas move forward. About the Authors The social programmatic loans have placed social issues Evangeline Javier is the Sector Manager for Health, Vicente prominently on agendas of finance ministries--an important Paqueo is a Lead Economist in the Social Protection Unit achievement. A survey of government officials in Peru and Laura. Rawlings is a Monitoring and Evaluation Spe- indicated that the loans have raised the profile of social issues cialist in the same group. Alberto Rodriguez is a Senior Edu- and emphasized that social reforms require long-term policy cation Secialist. All work in the Human Development De- changes, facilitated by consensus building and phased partment of the Latin America and the Caribbean Region of availability of program loan funding. the World Bank. This regional focus takes us to the birthplace of social Now Available! funds, one of the first crisis-response tools forged in the so- cial protection toolkit 15 years ago in Bolivia. What's more, Volatility, Risk, and Innovation: Social Protection it gives an overview of how approaches to social protection in Latin have evolved in this diverse, dynamic region to include such America and the Caribbean tools as workfare, conditional cash transfers (which also had their genesis in the region), and multisector reform pro- SPectrum Fall 2003 grams. This edition also explores new analytical approaches, describes new programs and emerging priorities, and grapples with the continuing challenge of finding effective ways to improve the capacity of individuals, households, and communities to manage risk. We believe social protection tools and strategies have a key role to play in reducing poverty and improving human de- velopment. They address the needs of vulnerable populations, generate tools for risk management through social insurance, and provide a springboard for poor people to improve their lives in the face of crisis. As important, the multisector, dynamic nature of social protection allows for integrated approaches to key areas of development, including health, education, finance, and infrastructure. Finding such synergies is crucial if we are to address extreme poverty and hunger, achieve universal primary school completion, and tackle a multitude of health Download the new look SPectrum from http:// challenges, all key elements of the Millennium Development www.worldbank.org/lacsocialprotection. This edition, the Goals endorsed by the international community in 2000. first to have a regional focus takes us to Latin America and the Caribbean, where we examine the challenges About "en breve" posed by volatility and risk and explore innovative ap- proaches to reducing vulnerability, particularly among Subscribe to "en breve" by sending an email to the poor. en_breve@worldbank.org 4