The World Bank The Social Sectors from Crisis to Growth in Latvia March 1, 2011 Peter Harrold, Indhira Santos and Emily Sinnott, The World Bank, Brussels
Overview 1. World Bank involvement in stabilization program 2. Demographic challenges and social spending during the boom 3. What happened to education, health and social protection during the crisis? 4. Remaining challenges 5. Lessons learned 2
World Bank participation in Latvia s stabilization program Latvia graduated from World Bank borrower status in 2007 Lending support Social sector reforms Emergency social safety net, including the public works program (simtlatnieku programma) Funds follow the student education financing reform aimed at increasing efficiency and quality given shrinking school-age population Protection of primary health care services during adjustment and support of reforms aimed at substituting expensive inpatient services by outpatient and alternative care Financial sector strengthening Small share of overall financing (EUR 400 ml), the focus was on providing technical assistance for reform and 3crisis protection measures
BOOM
Demographic challenge: Decreasing and aging population Declining population: Overall population fell by 5.6% in the past decade and is expected to fall by 19% over 2010-2060 5 Dramatic fall in school-age children: 5-14 year old population fell by 40% over 2000-2010 Effective retirement age was 59.3 in 2008 Source: World Bank staff calculations based on data from UN Population Division. Age-dependency ratio to increase substantially: Cohort of those aged 65 and over expected as a share of the workingage population projected to increase from 26% in 2000 to 66% by 2060
Social sector spending boomed in Latvia over 2004-2008 Health is responsible for nearly half this growth But social protection i.e. pensions is the most important component 6 Source: World Bank staff calculations based on Eurostat data.
Increased health spending was driven by rising inpatient unit costs Response of the health system to budget increase (percent), 2005-2008 Cost per inpatient episode and inpatient cases, 2005-2010 7 Source: World Bank staff, based on data from Ministry of Health and the State Compulsory State Agency News.
Despite spending increases, Latvia lagging in health outcomes 81 79 77 Life expectancy at birth, in years EU pre-may 2004 Slovenia 1970-1990: EU10 life expectancy stagnant and separated by only a few years (68 vs. 71). 75 73 71 69 67 Czech Republic Croatia Poland Slovakia Estonia Hungary Romania Bulgaria Latvia Lithuania 1990-2009: Sudden increase in variance with Latvia, the other Baltics, Bulgaria, Romania worsening and the rest improving. 65 8 Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011 By 2000 all began to improve; but persistent gap with pre-2004 EU members.
in particular due to circulatory system diseases and external causes Mortality Rates for Diseases All Causes and of the Circulatory System, 2009 Switzerland (2007) Italy (2008) Spain Iceland France (2008) Sweden Cyprus Norway EU (15 Countries) Luxembourg Netherlands Austria United Kingdom Malta Germany Greece Finland Ireland EU (27 Countries) Portugal Slovenia Denmark Czech Republic Poland Estonia Slovak Republic Hungary Latvia Romania Lithuania Bulgaria 161 174 143 173 125 187 194 158 173 186 150 213 169 212 217 245 218 190 217 178 232 160 357 355 424 450 421 480 548 497 605 490 503 504 507 518 520 532 537 540 545 549 563 563 572 576 577 580 587 600 612 611 605 671 634 632 711 689 628 685 577 626 644 All Causes Diseases of the Circulatory System All Causes with Circulatory Diseases Reduced to EU27 Average 745 809 840 865 915 951 959 964 965 0 200 400 600 800 1000 Coronary heart disease explains a large part of the difference in mortality between Latvia and the average EU country. A high incidence of motor vehicle accidents deaths also contributes. Matching Finland s progress on cardiovascular disease between1990 and 2009 would bring Latvia closer to convergence. Age-standardized rates per 100,000 population 9 Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011
Did Finbalt health indicators improve from 2006 to 2008? Focus on blood pressure screening Health results Generally, data show small improvements for Latvia as with comparators. Blood Pressure Screening Strokes and heart attacks account for much of Latvia s health deficit. Serious shortfall in diagnosis and treatment of high blood pressure. High blood pressure more likely to be diagnosed and treated in 2008, but still quite low, especially for men 45 and above. Use of medicine for high blood pressure, also improving, but still unusually low, especially for men 45-54. 10 Source: World Bank staff calculations, based on Finbalt.
Spending was not focused on the most vulnerable 11 Source: World Bank staff calculations based on OECD, Latvia SILC 2007, ESSPROS and World Bank Europe and Central Asia Social Protection Database.
Crisis
Social sector spending adjustment frontloaded 1200 1000 800 600 400 200-200 -400-600 -800-1000 13 Year-on-year change in millions of current Lats 0 2008 2009 2010 Other Social protection Education Health Total government spending Source: World Bank staff calculations, based on Eurostat and Latvian Ministry of Finance. Frontloaded: Social sector spending cuts were large and important to overall 2009 adjustment: health and education cuts accounted for 61% of overall cuts,. Social protection spending increase in 2009: Earlier pension policy changes coming into effect played a large role. SP spending did not fall until 2010 and the cuts were only one-fifth of those in education and health over crisis.
In health, spending shifted from inpatient to outpatient and GP care Composition public health spending, 2008-2010 Real health spending fell by 26%. Inpatient spending, the largest category, had the largest cuts, falling by 57%. Inpatient stays fell by 32%. Outpatient, emergency services, and services for children and mothers were prioritized. Health safety net introduced for the first time. 14 Source: World Bank staff, based on data from Ministry of Health
Stopped investing in buildings and started investing in people Inpatient contracted hospitals and beds fell, 2008-2010 Changed input-mix by reducing the number of hospitals with inpatient contracts by 50%. When hospitals inpatient contract removed, Ministry finds that 30% of inpatient cases disappear. GP visits increased. Day care or day surgery patients also increased. 15 Source: World Bank staff, based on data from Ministry of Health.
Large upfront reduction in education spending in Latvia in percent 200 150 100 50 0-50 -100-150 -200-250 -300 Decomposition of Change in Education Sector Spending in 2009, decrease(-)/increase(+) Other Compensation Good and services Capital Estonia Latvia Lithuania Hungary Romania Latvia introduced across-the-board spending cuts (as did Estonia). Other countries had less sustained cuts across education categories. Per student financing was introduced in Latvia, assisting in the adjustment to overcapacity in the system resulting from a decreasing school-age population. 16 Source: World Bank staff, based on data from Ministry of Education and Science.
In education, many schools were closed and teacher workloads reduced Contracted Schools and Teachers in Latvia, 2007/08-2010/11 Between 2007/8 and 2009/10: Enrollment fell by 10%. Reduction in the number of schools (and staff) was concentrated at the primary level (-21%). Teaching workloads fell by 24%, so many teachers were able to keep their jobs but with reduced hours or lower hours counted towards pay. In 2010/11: Pace of adjustment slowed. Enrollment fell by 4%, but only 1% of schools were closed and teacher workloads increased. 17 Source: World Bank staff, based on data from Ministry of Education and Science
In contrast, targeted social assistance programs were enhanced over the crisis 200 180 160 140 120 100 Needy People (thousands) GMI beneficiaries (thousands) Last resort social assistance programs increased: Guaranteed minimum income (GMI) beneficiaries peaked at 80 thousand (3.9% of population) in March 2011. 80 60 40 20 0 Social assistance spending more than doubled over the crisis, but this is still made miniature by the increase in pension spending. Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 18 Source: World Bank staff, based on data from Ministry of Welfare.
Emergency social safety net introduced rapidly; protected by IMF-EC program Latvia s social assistance programs too small to protect households at the onset of the crisis Government rolled out quickly an emergency social safety net (2009-2011) to protect those who lost their jobs as well as the poor: Eased unemployment insurance eligibility requirements and extended duration Expanded Guaranteed Minimum Income (GMI) Introduced an emergency public works/workplace with stipends program (WWS, simtlatnieku programma) Covered transportation for students affected by school closures Maintained pre-primary education programs for 5- and 6-year olds Exempted needy households from health co-payments and subsidized pharmaceuticals Improved access and use of alternatives to inpatient treatment for the poor Improved primary health care services and access Cost was not large: 0.5-0.6% of GDP per annum WB supported and EC-IMF stabilization program protected temporary measures by including an adjustor to fiscal targets to allow additional safety net spending if necessary 14
Emergency public works program (WWS) was well-targeted Distribution of WWS beneficiary households % of households that belong to bottom two quintiles % of households belong to top two quintiles Quintiles based on asset index Currently Participating 65 18 Currently on waiting list 59 24 WWS Completed 73 13 Quintiles based on predicted consumption Currently Participating 56 18 Currently on waiting list 50 18 WWS Completed 62 14 Quintiles based on predicted income Currently Participating 69 12 Currently on waiting list 70 13 WWS Completed 70 14 Note: The WWS survey covers only a part of population and thus it is not representative of population. To create quintiles, data from Household Budget Survey (HBS) 2009 is used. The quintile cut offs are derived from HBS. To create asset index in WWS, factor-loadings from HBS are used. Similarly a model is fitted using HBS based on common variables in WWS and HBS. The coefficients derived from HBS are used to predict consumption and income in WWS. 20 Source: Ferre, Azam and Ajwad (forthcoming).
Challenges
Limited further savings in education and health; old-age spending pressures Need for further reallocation of resources in the education and health sectors as part of continued structural reforms, but strong arguments for increasing overall sector envelopes Adapt education sector to decline in student population Under 0.2% of GDP over 2010-2020...could shift freed resources to other needs, e.g. early childhood interventions or higher education Resources for poverty-targeted programs severely limited (safety net spending cut in 2012 adjustment) Health challenge is to constrain spending pressures and reallocate within sector to improve health outcomes Range of estimates for health pressures. 0.3-1% of GDP over 2010-2030...brings us to the question of old-age spending Reforms reversible particularly where there is scope to re-roll out infrastructure (e.g. beds closed but hospital infrastructure remaining) 22
Pension age increase will bring initial, but not sustained, savings 3.0% 2.5% Simulation of Projected Fiscal Savings from Proposed Retirement Age Increase (Percentage of GDP) 2.0% 1.5% 1.0% 0.5% 0.0% 2010 2020 2030 2040 2050 2060-0.5% effect on pension scheme effect on all social insurance effect on consolidated gov. finances pension deficit (subsidised by 2%) -1.0% 23 Source: World Bank staff projections.
Lessons Learned
Lessons learned Prioritize and make trade-offs in social sector spending. In Latvia, this was facilitated by: Depth of crisis Social spending relatively low as a share of GDP, but large reform gaps in education, health and social protection going into the crisis Reforms based on analysis of where efficiency gains were highest Take rapid action where initial weaknesses in social protection systems exist Pension reform proved really difficult even during crisis. Pension spending increased by 27% in real terms over 2008-2010 Large cuts in education and health were politically feasible, whereas it was not possible to make pension reforms with a 25
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