Building an Equitable Society in Colombia Building an Equitable Society in Colombia © 2021, International Bank for Rights Reserved Rights and Permissions Concept and Cover Design Reconstruction and Development / This volume is a product of the The International Bank for Carlos Reyes, Reyes Work Studio World Bank staff of the International Bank for Reconstruction and Development/ Reconstruction and Development The World Bank encourages the Interior Design and Typesetting 1818 H Street N.W. / The World Bank. The findings, dissemination of its work and Carlos Reyes, Reyes Work Studio Washington D.C. 20433, interpretations, and conclusions will normally grant permission to United States of America expressed in this volume do not reproduce portions of this work Telephone: (202) 473-1000 necessarily reflect the views of the promptly, provided the sources are Executive Directors of the World Bank acknowledged. Internet: www.worldbank.org or the governments they represent. In Spanish: www.bancomundial.org The World Bank does not guarantee Email: feedback@worldbank.org the accuracy of the data included in this publication. Team Members 3 BUILDING AN EQUITABLE SOCIETY IN COLOMBI A | and Acknowledgements This report was prepared by a core team co-led by María Eugenia Sebastián Higuera Pedraza, Pedro Cerdan-Infante, Leonardo Dávalos and Paolo Dudine under the guidance of Jorge Araujo Canon Rubiano, Vanessa Alexandra Velasco Bernal, Diana Marcela (Program Manager, ELCMU) and Ximena Del Carpio (Program Rubiano Vargas, and Luis Miguel Triveno Chan Jan. Finally, Chapter Manager, ELCPV), Donato De Rosa and Gabriel Demombynes 6 was authored by Julian Lee, Hugo Rojas-Romagosa, Juan José (Program Leaders), and overall direction of Ulrich Zachau (Country Miranda, Hasan Dudu, Viviana Perego, Santiago de la Cadena, and Director for Colombia). Chapter 1’s analysis of inequality trends and Joaquin Urrego the team is thankful to the Dirección de Ambiente drivers was led by Jose Cuesta, María Eugenia Dávalos, Julieth Pico, y Desarrollo Sostenible of the National Planning Department for with contributions from Irene Clavijo the full chapter was prepared co-leading this chapter. Desiree Gonzalez provided administrative by Paolo Dudine and María Eugenia Dávalos with inputs from all and logistics support throughout the preparation of this work chapters. Chapter 2 was authored by Pedro Cerdan-Infantes, Gabriel Maria Clara Ucros and Jairo Bedoya guided the dissemination and Demombynes, Santiago de la Cadena, Mateo Prada, Manuela Villar- communication strategy Carlos Reyes and Patricia Carley provided Uribe, Jeremy Veillard. Chapter 3 was authored by Hernan Winkler design and editing services, respectively. and benefitted from coordination and interactions with the World The team is grateful for the active dialogue with the Ministry of Bank team leading the Jobs Diagnostics for Colombia. Chapter 4 Finance and the National Planning Department in the preparation was authored by Paolo Dudine, Julieth Carolina Pico Mejia, Andres of this work, and the comments and suggestions received. The David Pinchao Rosero, and Maryan Raquel Porras Barrera, with team is also grateful for the contributions from the peer reviewers contributions from Cristina Savescu. Chapter 5 was authored by Samuel Freije-Rodriguez (Lead Economist) Maurizio Bussolo (Lead Diana C. Tello Medina, Nancy Lozano Gracia, Ivonne A. Moreno Economist) Marcel Ionescu-Heroiu (Senior Urban Development Horta, Juan C. Duque, Fernando Carriazo Osorio, Juan P. Ospina, Specialist) Marco Hernandez (Lead Economist, EAWM2) and Andrea Mauricio Quiñones, Gustavo A. García, and Jorge E. Patiño. It included Liverani (Program Leader). contributions from German Freire, Steven Schwart, Paula Andrea Rossiasco, Kelly Yelitza Montoya Munoz, Vladimir Tafur Hernandez, Building an 6 Scroll down page B UIL D ING AN EQ UITABL E S O CIETY IN CO LO M BIA | E x E CUT IV E S UM M ARy Equitable Society in Colombia Executive Summary Colombia’s high level of inequality is a core constraint to economic growth and social prog- ress. The country has one of the highest levels of income inequality in the world, the second highest among 18 countries in Latin America and the Caribbean (LAC), and the highest among all OECD countries. The disparities in income across adults grow from gaps that open early in life in opportunities for high-quality childhood development, education, and health care ser- vices. Inequality in access to good jobs further amplifies these gaps, making Colombia among the countries where inequalities are the most persistent across generations. Longstanding in- equality across regions overlaps with the large gaps in welfare between Afro-descendants and indigenous Colombians and the rest of the population. The COVID-19 pandemic has further amplified disparities and threatens to have prolonged negative effects, but this is just one of many potential extreme shocks, including climate change–related disruptions, that could substantially widen the inequality gaps. Current tax and transfer policies at best have only a modest positive impact on these imbalances, so there is clearly ample potential to improve the redistributive role of fiscal policy in Colombia. Policy reforms across many areas could help to chart a more equitable future for the country. Key Findings HIGHLIGHT 1 Colombia is one of the most unequal countries in the world, INCOME GINI COEFFICIENT, circa 2018 even more so after the COVID-19 shock, and one with very low Brazil social mobility. Colombia St. Lucia Panama Income inequality in Colombia is the highest among all OECD countries and the second high- Guatemala Costa Rica est among 18 LAC countries.1 The Gini coefficient of household income (after paying taxes and Honduras Nicaragua receiving transfers), a standard measure of inequality, reached 0.53 in 2019. For comparison, Ecuador Paraguay the Gini coefficient of the most equal country in the OECD, the Slovak Republic, was 0.24. The Mexico richest 10 percent of Colombians earned more than 11 times the income of the poorest 10 per- Chile Argentina (urban) cent. Again, for comparison, in the Slovak Republic, the richest 10 percent earned three times as Dominican Republic Bolivia much as the poorest 10 percent. The COVID-19 economic shock has increased inequality further, Peru pushing the Gini coefficient up to 0.54 in 2020 and pulling 3.6 million more people into poverty. Uruguay United States El Salvador Large inequalities also exist between different population groups. A woman in Colombia is 1.7 United Kingdom Lithuania times more likely to be unemployed than a man.2 An indigenous Colombian receives on average Latvia Israel two years less schooling than other Colombians, and an Afro-Colombian is twice as likely to live Korea Italy in a slum. Two-thirds of the children of Venezuelan migrants are not enrolled in school compared Spain to less than one-tenth of non-migrants. Australia Luxembourg Portugal Strikingly, inequality in Colombia extends beyond the material aspects of one’s livelihood. Greece Estonia Less-educated Colombians, rural residents, and those who are unemployed or poor are much Canada less likely to consider themselves to be happy. France Switzerland Ireland Inequalities also persist across generations. Children in Colombia face very different prospects Hungary Germany in life because of the circumstances they are born into a child from a low-income parent is Netherlands Poland likely to earn less than a child from a high-income parent. Among a group of 75 countries, the Austria transfer of income gap from one generation to the next in Colombia is the most entrenched Sweden Finland (Narayan et al. 2018).3 Denmark Norway Belgium Reducing inequalities is not only an objective in itself on moral grounds, but it also makes Iceland Slovenia good economic sense. Tackling inequities can lead to a better prepared, greater skilled, and Czech Republic Slovak Republic more productive labor force, stronger and more sustainable economic growth, and tighter social cohesion. For example, closing gender gaps in labor force participation and education 0 0,1 0,2 0,3 0,4 0,5 0,6 would increase Colombia’s GDP per capita by an estimated 14 percent by 2050 (Devadas and Source: Authors’ calculations, based on Gran Encuesta Integrada de Hogares (GEIH)/Large Inte- Kim 2020). A more equal society would mean better lives for all. grated Survey of Households (left), OECD income inequality database, and World Bank Equity Lab ( https //www.worldbank.org/en/topic/poverty/lac-equity-lab1/overview). Note: Latest year available. For most OECD countries data are from 2017 and 2018. For most LAC countries data are from 2019. Data for Guatemala and Nicaragua are from 2014. FIGURE1.3. Differences in Poverty Headcount by Group, GAPS IN TOTAL percentage POVERTY points, RATES 2019 BETWEEN GROUPS, %, 2019 2 Richest vs poorest UN EN VIRO N M EN T F R O N TI ERS 2020— 21 R EP ORT | SE C TION department 41 Indigenous - None 27 Migrant - non-migrant 25 Rural - Urban 15 Afro-descendant 10 - None Household head woman - Man 4 0 10 20 30 40 50 Source: Authors’ calculations, based on GEIH 2019. Note: (i) The Afro-descendant (or NARP) group includes Black, Afro-Colombian, Raizal, and Palenquero populations. The Afro-descendant and indigenous groups’ rates are compared to those of people with no ethnic identification (group “none”). (ii) The category woman-man makes references to the sex of the household head. (iii) The comparison among departments shows the differences between the one with the largest and small est indicator. 2 Departm HIGHLIGHT 2: Inequalities start early in life with gaps Am in education and health care. La G In Colombia, inequalities affect individuals early in their lives in a way that has consequences ACTUAL LEARNING OUTCOMES DIFFER GREATLY Pu San Andrés on human capital accumulation and thus the opportunities available when it comes time to ACROSS ETHNIC GROUPS. Valle de enter the labor market or otherwise earn an income. Learning Gaps Across Ethnic Groups (years of education adjusted by learning) C First, learning opportunities are not the same for all children in Colombia. Afro-Colombians 2.5. Learning Gaps Across Ethnic Groups and indigenous populations lose the equivalent of 4.7 and 4.5 years of education, respectively, 11,1 11,0 Mag 10,7 C when adjusting years of schooling by actual learning outcomes, figures that exceed what oth- A er groups lose by a full year or more. Gaps between schooling and learning are largely linked Norte de Sa to differences in teacher quality and how teachers are assigned to schools. An Moreover, despite a substantial expansion in health insurance in recent years, there are large C differences in access to high-quality health care. This contributes to disparities in outcomes 7,6 the poorest children have stunting rates that are three times larger than those of the richest 6,3 6,2 R children. Two factors affect the quality of health service provision (i) current formulas to fi- Sa nance health care providers do not account for the risk profile of the typical patient, offering Cundin very little incentive to extend differentiated care to patients with different risk factors and (ii) No ethnic group Afrocolombian Indigenous information on the quality of service provision is limited and not sufficiently used to better plan and deliver services at the local level. Source: World Bank analysis of DANE (2018b) and SABER 11 Test Scores (national stan- Source: Wo Promoting human capital accumulation from early childhood requires simplifying the admin- dardized assessment for 11th graders 2019). (2018a), and istrative procedures for citizens to access early childhood development (ECD) services, intro- ducing a core curriculum for basic competencies across the education system, and providing pedagogical support to teachers on the core curriculum guidelines. At the same time, it also requires strengthening linkages between basic and tertiary education and ensuring the quality and relevance of the curriculum. On health, the service delivery model should be transformed into a system of primary health care that is adapted to local needs and accreditation and finan- cial incentives should be provided to health insurers. HIGHLIGHT 3: Disparities in access to good jobs amplify the inequalities in human capital. THE QUALITY OF JOBS IN TERMS Just 40 percent of working Colombians hold formal sector jobs, one of the lowest rates in the OF FORMALITY AND EARNINGS IS LAC region. Stringent labor regulations and high minimum wages discourage the creation of ONE OF THE LOWEST IN LAC. 3.4a. The Quality of Jobs in Terms of Formality and formal sector jobs, leaving most Colombians working in the informal sector. The jobs of the Circa 2018 Earnings in LAC, circa 2018 future may also be out of reach for many owing to the slow adoption of new technologies 80 among disadvantaged groups, a barrier that the COVID-19 crisis has aggravated. In fact, with 70 a ranking of 109 out of 141 countries, Colombia has one of the largest disparities in the world Costa Rica Chile Uruguay in the use of technology across socioeconomic groups 73 percent of people with incomes in 60 Argentina formality (percentage points) Panama the top 60 percent use the internet compared to only 53 percent among those in the bottom Mexico Brazil 50 El Salvador 40 percent. 4 1.19. nmet asic eeds in and ndigeno s Colombia Dominican Rep. and ro Descendent o lations Peru Paraguay 40 Beyond the overall agenda of job creation, policies to promote more inclusive labor markets Ecuador A. ndigeno s o lation 30 Honduras need to target interventions to the groups that are traditionally excluded and that have suf- Bolivia fered further setbacks in economic participation as a result of the COVID-19 shock. Policies to 20 reduce labor market distortions that affect these groups include making social security con- 10 tributions proportional to the hours worked and capping the growth of the minimum wage to inflation until it reaches a level that is friendlier to job creation. Closing the gaps between 0 0 1 2 3 4 5 6 7 groups also calls for removing barriers to equitable access to economic opportunities. On gen- Hourly earnings (current US$) der, for instance, there is a pending agenda to address barriers in labor regulations that affect nmet asic eeds women and to increase access and quality to childcare centers so that more women can par- Source: Author’s estimates, based on data from SEDLAC. Note: Data for Colombia are from 2019. Informality defined using the productive definition. ticipate in the labor market. HIGHLIGHT 4: 1.19. nmet asic eeds in and ndigeno s Territorial inequalities are also high, leaving many people and lations ro Descendent o nmet asic eeds disconnected from critical services and opportunities. A. ndigeno s o lation B. ro descendant o lation The gap between the richest and poorest region in Colombia is more than double that of other TERRITORIES WITH HIGH SHARES OECD countries.5 Spatial disparities overlap with population groups defined by ethnicity the OF INDIGENOUS POPULATION ARE ALSO THOSE WITH HIGH LEVELS municipalities with high concentrations of indigenous Colombians have persistently high lev- OF VULNERABILITY. els of unmet basic needs, and Afro-Colombians predominantly live in the urban areas where, Unmet basic needs in 2005 between 2005 and 2018, unmet basic needs remained higher than in other cities. and 2018; size of the circle showing the share of indige- Inadequate housing and infrastructure are the main sources of inequality within cities. Out of nous population per munici- eeds asiceeds the 5.1 million households with housing vulnerability6 in Colombia, almost 4.4 million are in pality urban areas. Inequality has worsened in the territories that have been most affected by the nmetasic armed conflict, which has intensified disparities in access to productive factors, in particular nmet rural land. Colombia is among the top five most unequal countries in the world in terms of land concentration (Cuesta and Pico 2020b): 81 percent of private land is concentrated in the top 1 percent of farms, the highest among 15 countries in the region and significantly higher than the regional average of 52 percent (Guereña 2017). Reducing territorial inequality requires policies that strengthen the technical capacity and fis- nmet asic eeds nmet asic eeds cal performance of subnational governments, particularly among those that are lagging and need more support. Expanding connectivity from residential sections of peri-urban areas and B. ro descendant o lation Source: D and a smaller municipalities to the tertiary and secondary road network and reinforcing housing Notes: D and a with the si e o the circle showing the share o indigeno s o lations res ecti el in each m nici alit in olombia with circles in gre ha ing a programs can also increase access to opportunities and reduce inequalities. Policies need to ercent higher than ercent b t lower than ercent in orange those with a ercent better target those population groups that have been historically segregated (e.g., Afro-de- higher than ercent and lower than ercent and in red those cities with a ercent higher than ercent ities with ercent are not in the gra h scendants, indigenous populations, and more recently, migrants). nmet asic eeds n to Total Collection of Personal Income 1.23. Income Level at which Individuals Pay the PIT me (percent) (% of median income and % of GDP per capita) THE FISCAL SYSTEM HAS A LOW 500 HIGHLIGHT 5 REDISTRIBUTIVE IMPACT; FOR EXAMPLE, THE INCOME LEVEL AT 450 Taxes and transfers do little to address the evident inequalities. WHICH A PERSON STARTS PAYING 400 TAXES IS VERY HIGH. Relative to other countries in the OECD and LAC, in Colombia taxes and transfers do little 350 Income level at which individ- to reduce income inequality. Because deductions and tax thresholds in the personal income uals pay the PIT (% of medi- 300 nmet asic eeds tax (PIT) are very high, individuals start paying it only if their income is very high, about four an income and % of GDP per Percent 250 capita) times the median income. This deprives the state of resources that could be redistributed to Source: D and a 200 the poorest. Notes: D Also, and value added a with tax the si e o the(VAT) exemptions circle showing the share oand zero indigeno s rates, which are meant to make o lations res ecti el in each m nici alit in olombia with circles in gre ha ing a 150 VAT less regressive, end up granting large tax discounts to high-income individuals more than ercent higher than ercent b t lower than ercent in orange those with a ercent 100 thanpercent) half (57 higher ercentof the and tax lower expenditures than ercent and in on VAT cities red those benefit the with a top three deciles of the income dis- ercent higher than ercent ities with ercent are not in the gra h tribution. Moreover, cash transfer programs and subsidies to gas, water, and electricity suffer 50 from large leakages to high-income households. It is estimated that based on their socioeco- 0 4 5 6 7 8 9 10 nomic profile, over 65 percent of households receiving subsidies should either be receiving a Denmark Canada Korea Ireland Israel Czech Republic Netherlands Poland Italy Iceland Mexico Japan Slovenia Luxembourg Switzerland Latvia Spain Belgium Australia United States Germany Norway Austria Slovak Republic France Estonia Finland Sweden Chile Colombia iles of income (market and pension) smaller subsidy or no subsidy at all. Finally, the public pension system generates implicit (and fairly generous) subsides that accrue mostly to recipients of high pensions. Estimated Reported Policies to increase the redistributive impact of the fiscal system include (i) extending the PIT In percent of median income In percent of GDP per capita to the top two deciles of the income distribution in the short run, aiming to extend it to the top 4.22. Source: OECD Relative Revenue and Absolute and Database Development of Progressivity World Bank World Familias en Indicators. half of the income distribution over the long run as income increases and poverty is signifi- Acción (percent) cantly reduced (ii) reducing the list of goods that are VAT exempt, which could be done grad- FAMILIAS EN ACCION HELPS THE 25 25 ually by levying a low rate initially that increases over time to give time to production chains POOR, BUT A LARGE SHARE OF (especially for those goods that are excluded from VAT) to adapt their prices and (iii) better THE PROGRAM REACHES THE NON-POOR. 20 20 focusing transfers and reducing leakages in utility subsidies. Moreover, creating a dynamic, Percent of total spending Relevance and destination reliable, and integrated single social registry can inform the design and implementation of Percent of income of Familias en Accion trans- 15 15 more effective social expenditure programs. fers, by decile of income 10 10 5 5 0 0 1 2 3 4 5 6 7 8 9 10 Deciles of income (market and pension) Relative Absolute (r.a.) Source: Nuñez et al. (2020). HIGHLIGHT 6: Both internal and external shocks hinder progress toward equality. SHOCKS DERAIL THE PATH TOWARD REDUCING The COVID-19 shock increased poverty 6.8 percentage points in 2020, and 3.6 million more POVERTY AND INEQUALITY; THE CONSEQUENCES people became poor, particularly in urban areas. It also caused extreme poverty to increase OF CLIMATE CHANGE WILL AFFECT MORE INFORMAL WORKERS AND WOMEN. by 5.5 percentage points, leaving 2.6 million more people unable to cover basic food needs. Wage effects in 2050 (percent) with respect The pandemic has also worsened inequities in human capital it is expected to increase the ensionable Age by Pension Status and baseline, to the 1.26. high-impact Aggregate scenario Resources Destined to Pension Benefits rate of learning poverty7 among 10-year-old children from 53 to 60 percent if schools maintain ecile, 2019 by Income Decile, 2017 a hybrid in-person learning program through 2021, or 63 percent if distance learning contin- l Urban Rural Urban Rural Urban Rural Urban ues for the entire year. 2q 3q 3q 4q 4q 5q 5q Skilled Male formal Skilled Female formal However, COVID-19 is just one of the extreme shocks that can worsen inequalities. Climate Skilled Male informal shocks are another. Estimates indicate that households in the lower two quintiles of the in- Skilled Female informal come distribution would suffer income losses from climate change shocks that are on average Unskilled Male formal Unskilled Female formal between 1.5 and 1.6 times higher (as a percent of the pre-shock income) than those suffered Unskilled Male informal by the top quintile. Rural households are estimated to suffer from income losses that are on Unskilled Female informal average between 1.8 and 1.9 times higher than urban households. All Female Yet social assistance programs are not designed to flexibly protect households against shocks, All Male especially climate related, and the consequent depletion of assets. The lack of a social registry All Unskilled with dynamic and accurate information on households and equipped with climate risk assess- All Skilled ment tools limits these programs’ ability to adapt to new circumstances. All Formal All Informal Policy options related to climate mitigation and adaptation policies that are aimed at reduc- -0,08 -0,07 -0,06 -0,05 -0,04 -0,03 -0,02 -0,01 0 0,01 ing the impact of climate shocks on the most vulnerable include (i) strengthening the National mpact scenario Lower-impact scenario Agriculture Extension System by mainstreaming mitigation and adaptation criteria in the De- sed on GEIH 2019. Source: Authors’ calculations, based on the Encuesta Nacional de Presupuestos de los Hogares partmental Extension Plans and building the capacity of agricultural extension service provid- (ENPH) 2016–2017. ers (ii) consolidating the Sistema de Identificación de Potenciales Beneficiarios de Programas Sociales (Sisbén) (the Identification System for Potential Beneficiaries of Social Programs), social assistance administrative registries, and other key databases into a dynamic, reliable, and integrated single social registry equipped with climate risk assessment tools and (iii) strengthening carbon pricing by expanding the carbon tax and introducing an emissions trad- ing system. A more detailed set of policy options for this and other challenges is presented in table ES.1, and also presented in each chapter accompanied by relevant international experiences for each policy. 7 TABLE ES.1. Policy Options for a More Equitable B U I L D I N G A N EQU I TA B L E S OCI ETY I N COLOM B I A | ExECUT IV E S UM M ARy Society in Colombia Observed Equity Gap Drivers of the Equity Gap Policy Options Timing for Implementation Policy Options for More Equitable Access to Human Capital Quality of health care Hospital-centric model of care delivery is ineffec- • Transform service delivery model into a PHC-based model of care adapted to local needs. Medium/long term services tive in meeting the needs of the most vulnerable • Introduce financial incentives in the capitation payment for health insurers and health care populations with chronic conditions who require providers to improve quality care and achieve better health outcomes for the most vulnera- comprehensive care and better integration of ble populations. health and social care • Introduce an accreditation system for health insurers requiring them, among other measures, to develop population health management strategies for the most vulnerable populations. • Strengthen local governance by reporting health inequality data at the municipal level on a regular basis and requiring municipalities to develop plans to reduce health inequalities and assess progress on a yearly basis. Inequality in access to The limited coverage of ICBF ECD services in areas • Simplify the administrative procedures to access ECD services that generally act as entry Immediate/ ICBF’s ECD services where private childcare is not available or afford- barriers, particularly in rural areas. This implies: (1) reducing the number of documents re- short term (for simplifying able to the poorest families means that many quired by verifying information directly with other public agencies and (2) integrating the the administrative proce- children are placed into low human capital ac- ICBF’s information systems. dures to access ECD ser- cumulation trajectories, with negative effects on • Increase the supply of ICBF services in rural areas. vices) productivity over the lifecycle • Define more effective quality-assessment strategies for ECD services. • Improve the monitoring and evaluation structure of ECD service delivery by: simplifying the Medium/long term (all oth- In rural areas, the fragmentation of ECD service current formats based on input, output, process, and results indicators and building infor- er measures) modalities may be causing quality gaps in ICBF mation systems to ensure timely, high-quality data collection and processing at the local services that also affect the human capital accu- level, useful to generating alerts to detect problems with service provision. mulation of children over their lifecycle Inequalities in learning The curricular autonomy at the school level, • Introduce core curriculum guidelines for basic competencies. Immediate/ structural inequalities in teacher quality, and in- • Link the Programa Todos a Aprender (which provides pedagogical support to teachers) to short term equities in allocation of financing across schools/ the core curriculum guidelines. regions/municipalities create large inequalities in • Introduce/expand programs that teach students at the right level (focus on developing basic the quality of pedagogical practices math and reading skills based on students’ needs rather than age or grade through, for ex- ample, student tutoring such as Brujula, Aprendamos Todos a Leer). Insufficient access to services in rural areas re- • Complement in-person learning with Adaptive CAL where connectivity is available. mains a concern in post secondary education Inequalities in early Lack of relevance and quality of upper secondary • Introduce a competency-based curriculum in upper secondary school, with socio-occupa- Medium/long term dropout education, combined with low levels of learning tional skills. when entering upper secondary education, gener- • Increase the supply of upper secondary education in rural areas. ates early dropout for disadvantaged students • Strengthen linkages with tertiary education and improve the relevance of the Articulación con la Media program by diversifying the supply of programs offered from SENA (Servicio Nacional de Aprendizaje, the National Training Service) and diversifying providers of the pro- gram, with participation from the local private sector. Persistent inequalities in Inequitable financing of public tertiary education • Financing should move toward a per student allocation of service provision transfers that Full implementation in the access to quality tertiary ed- institutions generates substantial differences in reflects the operational cost of providing a good quality tertiary education and also equity medium term, but there ucation the quality of service provision concerns. are steps that can be taken • Any resources for public tertiary education institutions that are not covering operational in the immediate term to High reliance on private provision and student costs should be pooled to avoid fragmentation and linked to results and institutional im- set up the systems. loans results in high repayment burdens that lim- provement plans. it the demand for student loans for low-income • Income-contingent loan schemes should be implemented in which repayment depends on families income upon graduation. Unequal access to social The Sisbén lacks dynamism because of its census • Create a dynamic, reliable, and integrated single social registry by (1) integrating Sisbén Immediate/ programs sweep structure, causing data to become outdat- with both administrative data sources and nominalized social programs registries to keep short term for the social ed very quickly the information updated (2) implementing a co-responsibility clause in the social programs registry consolidation registry to ensure that citizens update their information on Sisbén. The lack of quality of Sisbén data usually explains • Introduce user-centered design into current and future social programs, particularly those the persistently high exclusion and inclusion er- implemented by the DPS, by: (1) removing unnecessary documentation and implementing Medium/long term for the rors from flagship social programs an electronic household folder that stores the basic documentation required by the multiple adjustments of social pro- programs, avoiding the need for citizens to make multiple requests (2) reactivating family grams Furthermore, even when social programs are pro- support programs, such as UNIDOS, as the initial step for assessing the needs of families and vided by the same public agency, most of them defining personalized integrated poverty reduction intervention plans (i.e., Ruta de la Su- still have separate and independent delivery peración de la Pobreza). chains, which translates into entry barriers and administrative burdens for citizens. Particularly for rural areas, where electronic and G2P pay- ments are difficult, people may need to travel sev- eral times to claim their benefits or get a specific document for registry Policy Options for More Equitable Labor Markets Regulation-driven barriers High transaction costs of formalization • Reduce formalization costs, including by Medium/long term to access formal sector jobs • Reducing the number of days it takes to register a firm among the poor and • Reducing the costs of firm registration (“registro mercantil”) vulnerable • Expanding the “Ventanilla Unica” (VUEs) across the country • Developing “Formulario Unico” to facilitate the registration of employees High wage labor costs • Limit minimum wage growth to the inflation rate for some years (until the minimum wage Medium to long term reaches a level friendlier to job creation) and establish an hourly minimum wage (so that part-time employment is not penalized). • Create a unit of independent experts to advise the Comisión Permanente de Concertación de Políticas Salariales y Laborales regarding decisions on the minimum wage through analy- ses of economic and social impacts. • Consider reforms to allow for the minimum wage to be adjusted according to the economic context (for example, taking into account productivity and labor market indicators) and not automatically adjusted to inflation as in the current legal setting. High non-wage labor costs • Improve the link between mandatory contributions and benefits. OECD (2019) highlights Medium/long term two strategies to achieve this goal. First, since part of the contributions to health care and family compensation funds is used to finance benefits for which formal workers are not eli- gible, it is important to broaden the sources of funding in order to reduce formal sector em- ployee contributions. Second, some of the recreational and commercial activities funded by the family compensation funds (which are not typically paid from employer contributions in advanced countries) could be made optional for employers. Labor market barriers faced Gender-biased laws and regulations • Make social security contributions proportional to the hours worked (instead of on a full- Medium/ by specific demographic time or weekly basis), which would promote formalization among female workers. Long term groups • Establish and monitor quality and safety standards within childcare centers. • Equalize the age at which men and women can retire with full pension benefits across sec- tors (as in Slovenia). • Introduce legislation prohibiting gender-based discrimination in access to credit (as in Uz- bekistan, Bahrain, Jordan, Maldives). Low spending on ALMPs that work8 • Increase spending on ALMPs by carefully evaluating existing programs in Colombia, as well Medium/ as past experiences from other countries. These should be cost efficient, while minimizing Long term distortions and displacement effects on non-participants. Weak targeting of labor market interventions to- • The Servicio Nacional de Aprendizaje (SENA) and the Servicio Publico de Empleo (SPE) Medium/long term ward minorities could tailor their services better to the specific needs of the NARP, migrant, and displaced populations. Policy Options for a More Redistributive Fiscal System PIT raises little revenue and Very high exemptions and zero-rate bracket re- • Expand the coverage of the PIT to the top two deciles of the income distribution in the short Immediate/short run is not progressive enough duce the base of the PIT to individuals whose run (and aim to expand it to individuals earning the median income over the long run as income belongs to about the top 7 percent of the income increases and poverty is significantly reduced), by reducing allowable deductions income distribution (including by making deductions a flat amount, not proportional to income) and eliminating the zero-rate bracket. VAT exemptions and Exemptions and reduced rates involve goods that • Keep zero rates only for a few goods that are primarily consumed by low-income individuals. Immediate/short run reduced rates generate are consumed by everyone, but in greater share For all other goods, use a 5, 12, and 19 percent VAT rate, depending on the share of total con- a loss of revenues, the by high-income individuals sumption contributed to by high-income individuals. At the same time, increase the amount majority of which benefit and coverage of the VAT devolution program to compensate households with income up to high-income individuals the median income. Transfers and subsidies do For cash transfers, leakages reflect inclusion er- • Improve the targeting system of subsidies by complementing the strata system with infor- Immediate/short run reach the vulnerable, but a rors in the Sisbén scoring system. For subsidies, mation from Sisbén (see concrete proposals in next section). large share of the spending leakages reflect targeting based on outdated leaks to high-income indi- proxies for household income viduals or individuals for whom the benefit is mini- mal relative to their income The pension system suffers Low participation and coverage reflect a system • Increase participation and coverage, possibly linking the pension more directly to the actual Immediate/short run from low participation and that requires a long contribution period in a amount of contributions over the work life of the individual, to make the system actuarially low coverage and as a re- context of high informality and low contribution fair. Reforms should also aim at preserving the financial sustainability of the system, i.e., sult, it faces a deficit, all of density. Also, the replacement rate generates a ensuring that the present value of future payment is matched by the present value of future which effectively generate system that is actuarially generous. The treat- contributions. transfers from general taxa- ment of savings of those individuals who will not tion to high-pension individ- receive a pension generates implicit transfers to uals current retirees Policy Options for More Equitable Opportunities across the Territory Territorial inequalities per- Better coordination between existing plans and • Strengthen subnational governments by (i) enhancing information systems and data man- Immediate/ sist at different scales and tools is needed to enhance, simplify, and stream- agement to feed territorial planning and decision making (ii) building technical strength short term dimensions line current initiatives to reduce territorial in- in weak subnational governments to plan, design, and manage key infrastructure and ser- equalities vices and (iii) translating legal reforms into concrete instruments that can guide subnational governments in the implementation of territorial laws/decrees. For example, support from the national government is needed to implement the PGOT. Existing indices could be used to identify those municipalities that need more support (e.g., Índice Municipal de Riesgo de Desastres Ajustado por Capacidades), focusing first on urban cores due to their potential to benefit surrounding territories. Urban-rural inequalities The links between rural and urban areas (e.g., • Strengthening local fiscal performance is key to reducing inequality in the territories. Local Medium/ are high infrastructure, transport, and socioeconomic finances can be improved by (i) enhancing municipal government capacities in managing a long term interaction) are weak, as are the potential mech- multipurpose cadaster and property tax collection, and (ii) deepening the operational link- anisms that can support the reduction of inequal- ages between the cadaster and fiscal management. Since Law 14 (1983), the government ity in territories has had the initiative to strengthen local finances by establishing a national system to link the cadaster and property tax however, updating the cadaster has been a difficult task. Through current catastro multiproposito initiatives, the objective is to register the rights, restrictions, and responsibilities of land and its owners to enable the introduction of a prop- erty tax. • Reinforce subnational government performance by bringing capacities where they are Immediate/ lacking through agreements or associations between municipalities, departments, and/or short term regions to address a common challenge. Colombia has different alternatives for this, such as the Pactos Territoriales or the EATs, depending on local needs. For transport, support the nascent initiatives of regional transport authorities (ARTs), under consideration by the Cali/ Valle and Bogotá/Cundinamarca governments. • Expand connectivity from residential parts of peri-urban areas and smaller municipalities to Medium/long term the tertiary and secondary road network to improve overall access to jobs, markets, and ser- vices, which tend to concentrate in larger urban areas. The Ministry of Transport has helped departments with their planning and project structuring capacities (Plan Vial Departamen- tal). Similarly, this program could be leveraged to support municipalities in the definition of competencies and instruments needed to manage the tertiary road network for access to fa- cilities. Intra-urban socioeconomic Cities have grown rapidly in the past decades, • Reinforce national housing programs with financial mechanisms to support municipalities Medium/long term inequalities, particularly in but infrastructure has not grown proportionately, in their efforts to increase the amount of available housing, aligning incentives between the the housing and education leaving many behind national government and the cities. This response would vary from city to city, going from dimensions land acquisition to provision of needed infrastructure and services that can better integrate households into the urban fabric to enable inclusive and productive urban areas. Financial mechanisms could be in the form of block grants for municipalities to invest locally and bet- ter complement and guarantee inclusive, well-connected, sustainable housing. The program should have clear eligibility parameters for participating urban areas, and the rules should specify the characteristics that cities must have to be eligible. Colombia is well advanced on identifying its local challenges and priorities (POTs modernos), and financial incentives from the central government can help operationalize them, while better supporting existing and new housing. Poor accessibility at the • Carry out a baseline accessibility analysis and identify the changes in access from improved Immediate/ intra-urban level transport services and infrastructure, which can help inform the national policy for improv- short term ing regional and urban mobility that the government approved in April 2020. Segregation in cities, with • Expand intra-urban spatial data and analysis to properly identify poverty traps and tackle Medium/long term the periphery less equipped urban segregation. The use of local indicators of the spatial association of socioeconomic vulnerability, as the ones used in this diagnostic, can help identify those areas most in need. A prioritization strategy (hoja de ruta) to improve conditions in such areas can help cities guide urban upgrading interventions. • Better target groups of the population that have been historically segregated (e.g., Afro-de- Immediate/ scendants, indigenous populations, migrants). This can be done through 4 steps: short term (i) track progress in human capital accumulation, social inclusion, and anti-discrimination measures (ii) design policies and programs that meet their specific demands and needs, which helps to reverse the processes of structural discrimination (iii) integrate protection of cultural rights of ethnic minorities when designing investments (iv) strengthen their voice and participation in decision-making spaces by supporting the technical, financial, and organizational capacities of indigenous peoples and Afro-descen- dants through their representative associations (e.g., community driven-development). Inefficiency of expenditure Inefficient allocation of subsidies • Restructure the targeting methodology of the subsidies for Servicios publicos domiciliarios Immediate/ meant to reduce intra-urban by integrating household socioeconomic characteristics (beyond dwelling conditions) from short term inequality the Sisbén database, which can increase efficiency in the use of resources and help to better identify those in need. Current methodology of stratification can be complemented by data from Sisbén to better target the most vulnerable (see last column for an example). Policy Options for Addressing the Effects of Climate Change Increased vulnerability to Insufficient investments in resilient CSA • Strengthen the National Agriculture Extension System by mainstreaming mitigation and Medium/long term wage losses due to climate adaptation criteria in the Departmental Extension Plans and building the capacity of agricul- impacts, especially among tural extension service providers. poor rural households and • Strengthen the National System of Agriculture Innovation by financing research on climate Medium/long term informal and female workers adaptation and mitigation. • Pilot and scale up green incentive packages to support mitigation and adaptation (e.g., sub- Medium/long term sidized credit lines payments for environmental services tax credits expanded agriculture insurance, etc.) • Generate guidelines and instruments to establish a framework for climate finance in the ag- Immediate/Short term riculture sector (e.g., green taxonomy for private investment) to promote private financing for sustainable practices. • Support existing initiatives with joint potential for inclusion and mitigation benefits, such as Medium/long term the NAMAs and zero-deforestation agreements, by co-financing the establishment of mea- surement, reporting, and verification systems of GHG emissions or co-funding the invest- ments required. • Encourage MADR, in coordination with DNP and MADS, to define sectoral targets for climate Immediate/Short term co-benefits generated by public sector investments in the agriculture sector and to develop guidance and instruments for monitoring and reporting on such targets. Lack of rapid response ca- Social protection systems are not sufficiently • Finalize, approve, and implement a Plan Integral de Gestión del Cambio Climático (PIGCC) Immediate/Short term pacity to climate effects on adaptive that (i) includes both mitigation and adaptation measures and (ii) embeds specific ques- vulnerable segments of the tions into the Sisbén and other social program registries to assess the exposure of house- population holds to climate change risks, such as climate-smart cash transfers, or climate-related insurance schemes. • Consolidate Sisbén, social assistance administrative registries, and other key databases into Medium/long term a dynamic, reliable, and integrated single social registry, ensuring that it is equipped with climate risk assessment tools, such as (i) climate projections and forecasts of impacts on different geographies/ communities (ii) identification variables for households to identify their potential risks related to climate change and (iii) early warning systems to identify po- tential climate change risks for households in a timely manner. • Reform social assistance programs so that they are operationally and financially prepared to rapidly and flexibly respond to climate-related events by (i) expanding coverage and gener- Medium/long term osity, (ii) introducing effective economic inclusion mechanisms to prevent households from falling back into poverty, and (iii) promoting insurance schemes (private, public, or commu- nity-based) for generating climate-resilient livelihoods. Unequal impact of second- Rudimentary carbon pricing infrastructure • Strengthen carbon pricing by: Immediate/Short term ary effects of GHG emissions in place expanding the carbon tax and and insufficient resources to introducing an emissions trading system. fund adaptation measures Medium/long term Endnotes 1 This is according to 2019 data from the World Bank Equity Lab. 6 The vulnerability of households is defined by i) the number of households living 2 Based on 2021 March unemployment data. in overcrowded housing units and (b) the number of households living in housing 3 See Narayan et al. (2018) and the World Bank’s 2018 Global Database on In- units with a qualitative housing deficit (National Statistics Institute and Ministry of tergenerational Mobility, https //www.worldbank.org/en/topic/poverty/brief/ Housing, City and Territory). Municipalities with the highest quantitative and qual- what-is-the-global-database-on-intergenerational-mobility-gdim. Intergenerational itative housing deficit areas are located in the Caribbean and the Central regions income mobility (intergenerational persistence in earnings or relative intergenera- however, when looking at the connection of households to public services, the allo- tional income mobility) is measured as the regression coefficient of a child’s earn- cation of vulnerable households is somewhat different. ings on the parents’ earnings. A higher coefficient indicates greater persistence and 7 Learning poor refers to children who can only read and understand a basic text. thus lower mobility. 8 OECD (2019), chapter 2. 4 Based on Gallup and World Development Institute (WDI) data. 5 This is based on the ratio of regional GDP per capita for the richest and poorest re- gions in 2018.