April 2012 Wo r l d B a n k B ra z i l Quarterly Knowledge Report INTERVIEW A K N OW L E D G E L E G A C Y 68673 7 Rio de Janeiro Finance Sec- retary Eduarda EDITORIAL BY MAKHTAR DIOP My last editorial to the Quarterly Knowledge report will try to look back at the reasons why we started the La Rocque ex- Brazil Economic Team and try to assess its impact. plains how the city achieved its But first I must underline the pleasure that it was working with the Brazil Economic Team and guiding its impressive fiscal reports, and the satisfaction to see it now consolidated and a useful asset to many constituencies, in turnaround, and and out of the Bank. talks about the growth sustain- ability challenges of Brazil’s The work initiated by Tito Cordella and continued by Pablo Fajnzylber, as coordinators of the Brazil Eco- second largest metropolis. nomic Team, was impeccable, and brought out consistently high quality, relevant and timely contribu- tions from the many collaborators to the Quarterly, Monthly and Dailies. I would like to thank all the many contributors for their great work. (Continued on page 20 INSIDE THIS ISSUE Editorial 1 S Ã O P AUL O C I TY S T UDY ‗Do povo oprimido nas filas, nas vilas, favelas São Paulo City Study 1 Da força da grana que ergue e destrói coisas belas Da feia fumaça que sobe, apagando as estrelas São Paulo City Hall Photo Eu vejo surgir teus poetas de campos, espaços Impacts of Shocks and 4 Tuas oficinas de florestas, teus deuses da chuva.‘ Social Protection (Caetano Veloso, Sampa) By Thomas Kenyon Interview: Eduarda La 7 Rocque São Paulo has played a key role in Brazil‘s eco- nomic development. During the twentieth cen- tury, it was at the center of an integrated eco- Impact of IOF on 9 nomic complex responsible for the country‘s Capital Flows transformation from an agricultural to an indus- trial society. For much of this period it benefited from government policies that protected domes- Early Child Education 13 tic manufacturing and encouraged the physical concentration of economic activity. Even now it remains Brazil‘s largest city, its main financial In the Loop 16 center and the location of the headquarters of most its private corporations. KEY DATES Over the past two decades the natural and po- litical advantages that Sao Paulo enjoyed over • Debbie Wetzel succeeds other Brazilian cities have dwindled. In part this Makhtar Diop as World is the reflection of a natural tendency experi- Bank Country Director for enced by almost all large cities around the Brazil —April 2 world: the dispersion of mature industries to Sao Paulo‘s performance has suffered accord- • Investment Workshop smaller urban centers and the substitution of ingly. Growth has stalled. The last two decades with the Northeastern manufacturing by service activities. But in Sao have seen a rebalancing of growth in Brazil Governors and President Paulo‘s case it has been accelerated by away from metropolitan areas in general and Zoellick —April 10 changes in Brazil and its relationship with the Sao Paulo in particular. In the 1980s, the city international economy. Trade liberalization in was richer than Belo Horizonte, the Distrito • BNDES/Instituto Lula the early 1990s and the country‘s growing spe- Federal, Porto Alegre and Rio de Janeiro. By the Conference on Brazilian cialization in commodities since 2000 have Investment in Africa—May 2000s the reverse was true. Real per capita eroded the city‘s position. household income in Sao Paulo has never re- 3 Printed on recycled paper Page 2 April 2012 gained the level it reached in the late tion economies that distinguish a city of economic geography is a generational 1980s. its size and diversity. challenge that will not be resolved in one mayoral administration. And its emphasis Structural change has also had a dislocat- Sao Paulo‘s inherent strengths - a large on catalytic projects in partnership with ing effect on land and labor markets local market, a broad range of intermedi- the private sector and civil society is an within the metropolitan region. The loss of ate services and a diverse skills base - are effective means of tackling the inefficien- traditional manufacturing jobs in the east- at the core of the city‘s strong potential as cies that undermine the city‘s livability. ern districts of the city has not been com- well as its ability to find a new vocation. Here are three additional ways in which, This is likely to lie in some combination of following our analysis, the municipal gov- pensated for by new activities in services high-end services with large returns to ernment might continue to respond: or modern industry. Its southern, eastern dense agglomeration; large, established and northern extremities have attracted industries for which persistent demand Step 1: Renegotiate the debt and improve new residents while failing to generate exists and in which Sao Paulo has a sig- expenditure management: any significant employment opportunities. nificant legacy base of skills; and new Renegotiate the debt: Sao Paulo is cur- Private real estate investment and public innovative activities that build from rently renegotiating the terms of its debt strengths as yet latent or realized on only service delivery have strongly reinforced with the national treasury. Our calcula- a small scale. tions indicate that on current trends the the divide between a wealthy, relatively dynamic core and impoverished peri- All this requires public investment. The room for capital expenditure and debt urban areas. most immediate problem facing Sao amortization will fall to zero by 2030, Paulo is its fiscal situation is unsustain- when the municipality‘s current option of Reversing this record of spatial inequality able. On current trends, the space for capping debt service at 13 percent of net will require large investments in public debt service and capital expenditures will revenue expires. On the other hand, the fall to zero by 2030. Unless the city rene- various refinancing scenarios under dis- infrastructure, social services and job gotiates its debt with the federal govern- cussion with the federal government – creation. The municipality‘s creative use none of them necessarily endorsed by the ment, refinances the balance at signifi- of public-private partnerships (PPPs), ur- cantly lower interest rates and strength- World Bank or the Brazilian National ban concessions and other instruments ens its capacity for budget planning and Treasury – imply a significant increase in for urban regeneration has allowed the execution, it will not be able to afford the fiscal space for investment and other redevelopment of previously abandoned investment required. priorities. Our modeling shows that there or underused areas. The expansion of is relatively little difference in long-run The Municipality‘s long-term planning impact among the three proposals under these initiatives could help Sao Paulo framework – Sao Paulo 2040 – recog- discussion: one under which the city am- attract talent and exploit the agglomera- nizes the nature and scale of the problem. ortizes 20 percent of its outstanding debt It acknowledges that reshaping the city‘s and in return receives a lower interest rate of six percent plus IGP-DI on the bal- Figure 1: Average Household Income: Selected Metropolitan ance; a second that applies a retroactive interest rate of six percent to the entire debt stock since 2000; and a third that re- indexes to the IPCA plus an assumed 3 percent margin. Reform expenditure management: But debt renegotiation will be insufficient unless backed by reforms to expenditure, and in particular investment planning and management. At present the expenditure envelope is not determined in a manner consistent with fiscal sustainability to meet required debt targets. Priorities are only tenuously transmitted to the two key decision phases of the process – the elaboration of the LOA, and then the weekly meetings to discuss the evolution of revenues and the reallocation of re- sources. And there is a very strong ten- dency simply to maintain existing pro- grams and structures, adding on addi- tional programs or investments as addi- tional resources become available. Overall the current system lacks predictability. Source: WB, calculated from PNAD Qua r te r l y K n o w l e d g e R e po r t Page 3 There are several ways in which invest- sistent demand: both ‗legacy‘ industries involving it as a source of finance and ment execution might be strengthened. that are no longer competitive in their project management capacity. Fortu- One would be to limit the amounts that nately, Sao Paulo has already introduced current form but elements of which might several important innovations in urban could be reallocated without a revision reemerge in some new form and those planning, as it gained the autonomy and of the budget law in the assembly. This that are growing rapidly and are placed to territorial planning responsibility through might be complemented by the inclu- benefit from large-scale shifts in demand. national decentralization. There are at sion of larger contingency allocations, The first offers a means of finding higher- least two ways in which these innovations based upon historical experience, to wage occupations for the hundreds of might be extended – to include the recla- cover events which might reasonably be thousands of former manufacturing em- mation of contaminated ‗brownfield‘ sites and to capture value created by infra- expected but whose consequences are ployees (e.g. automotive and textiles). But structure investments through tradable unpredictable (such as flooding and the largest driver of employment growth is development rights. landslides). Another mechanism for likely to come from established activities tightening budget management would for which there is predictable and rising Reclaim brownfield sites: The withdrawal of industry has left a large residue of ex- be to require each unit to report on sig- demand. An obvious example is construc- industrial areas, including in the city core, nificant deviations from the planned tion. Already one of the largest in the city, some of them heavily polluted. Many have budget. This would gradually eliminate it is likely to grow further reflecting de- been redeveloped; but there is still a large systematic deviations and strengthen mand from social housing initiatives, local stock of untouched sites. Given the dyna- credibility. and national infrastructure projects and mism of the property market and the pro- demographics. But generating innovative jected demand for housing over the next Step 2: Develop an explicit strategy for decade or so most of these are likely to be supporting private sector-led growth: solutions to low-cost and carbon-efficient profitable without government interven- housing will require a combination of re- tion. The first task is to improve the map- Large cities like Sao Paulo typically have search capabilities, design skills, building ping of sites. An information management three inherent strengths: a large local materials and construction. This requires system for contaminated areas would market; a broad range of intermediate a well-articulated innovation system. stimulate private sector interest and services; and a diverse skills base. make it possible for the city to make plan- Growth tends to be led by services, non- And strengthen the innovation system: ning decisions involving contaminated standardized manufacturing and R&D. Sao Paulo already benefits from the two sites. Second, the city could develop in- key ingredients of a well-functioning inno- struments to reduce barriers to private Each requires a different policy ap- vation system: human capital and finance. sector redevelopment. This could be done proach. through existing instruments such as ur- It has over 570,000 graduate and under- Retain high-end services: Ensuring that ban concessions and urban operations, by graduate students enrolled in universities, including private sector incentives within business and technical services remain colleges, university centers, and federal contracts and bidding specifications. at the core of Sao Paulo‘s vocation institutes. They are among the best in the would be important for generating jobs country: the University of São Paulo is the Expand use of tradable development that the financial sector alone will not only Brazilian university ranked amongst rights: Existing instruments such as urban provide. This would require continuing the top 200 in the world. Yet, these two operations could used to generate addi- to attract a highly-talented labor force crucial building blocks have not combined tional revenues for investment in strategic with the right mix of skills and lowering to generate an effective innovation sys- infrastructure, like the Line 4 Metro pro- the transaction costs to those employ- tem. The explanation appears to lie in a ject. Transport demand in a large, devel- ees exchanging knowledge and com- lack of integrated physical locations and a oped metropolitan area like Sao Paulo is mercializing new ideas. Congestion, high shortage of supporting services. Rather closely intertwined with developments in real estate prices and other factors af- than increasing the supply of graduates or the real estate market. Investments that fecting the quality of life pose serious start-up capital, the city needs to concen- increase the relative accessibility of a obstacles to retaining very highly-skilled trate on facilitating their interaction. This section of the city change the economic labor, which has a number of highly may involve a more pro-active role in pro- geography of the city and are reflected in attractive global cities to choose from viding the appropriate infrastructure (e.g. higher land prices. This represents an elsewhere. science and technology parks, specific opportunity for value capture through the investments in transport and logistics). issue tradable development rights like Nurture the competitiveness of high- Certificates of Additional Building Poten- demand industries: But services alone Step 3: Extend the use of public-private tial (CEPACs). So far CEPACs have also will not generate the right mix of employ- financing mechanisms: only been used in two urban operations – ment. Thus, the city could also aim to �gua Espraiada and Faria Lima – due to In addition to developing a strategy for nurture the competitiveness of estab- supporting the competitiveness of the administrative and legal complications in lished industries for which there is per- private sector, the city could benefit from their implementation. Page 4 April 2012 I M PA C TOF SHOCKS AND SOCIAL PROTECTION: S OM E R E FL EC TI ONS FROM T HE A NALY S IS O F B RA ZIL 2008-2009 By Anna Fruttero During the past five years food prices and economic woes have alternated in capturing newspapers‘ headlines. In 2007, after many years of growth below 10 percent, food prices started increas- ing rapidly, reaching about 40 percent in July 2008. As the prices of staples jumped sharply, food riots broke out in developing countries around the world. At the end of the summer 2008, the bankruptcy and bailout of major finan- cial institutions, such as Lehman Broth- ers and AIG, led to a global financial crisis that was followed by what has become to be known as the ―Great Re- cession‖. During 2011 the world experi- enced a very similar pattern. In early 2011, food price increases were back in the headlines. After having fallen mark- edly during the Great Recession, food prices started accelerating in late 2010. of the world was hit sequentially by the Belém and Salvador compared to about And over the year the risks to global food price increase and the financial crisis 15 percent in Recife and Fortaleza. financial stability have increased sub- followed by an economic slowdown. High food prices affect households mainly stantially, as a result of Europe‘s debt through consumption and income chan- Food price increases in 2008. 1 crisis and weak growth prospects in nels: they increase the cost of a fixed many advanced economies combined Brazilian inflation started increasing to- consumption basket, thus coeteris pari- with a series of shocks to the global wards the end of 2006 and reached a bus reducing welfare; and they increase financial system. peak of around 7 percent, in June 2008. It incomes that depend directly or indirectly averaged 5.3 percent for the 2007-2008 on agricultural markets. All households as These shocks induced a policy response two-year period. This increase was driven in most of countries around the World. consumers will be negatively affected by mainly by food prices which rose substan- the food price increase. However, the To address the negative effect of food tially during 2007 and 2008. Food price price increases governments adopted overall net effect depends on whether inflation peaked in June 2008 at about (and how much) households also benefit import-tariff reduction measures, intro- 18.3%. Price growth for all other catego- duced food subsidies; or increased civil in terms of their income. Our analysis ries was roughly constant around 5 per- suggests that despite living in one of the servant pay and pensions. To address cent - or lower, for housing, residential the effects of the global financial crisis world‘s largest food exporters, most of goods and communication items. Behind Brazil‘s population experienced a decline many countries adopted expansionary this large increase in the average price of monetary and fiscal policies. Within in welfare as a result of the food price food, there was substantial variation increase in 2008. Naturally, higher in- fiscal policies, stimulus packages often across both specific types of foods and included a diverse range of tax meas- comes arising from a greater value of regions of the country. The price of grains agricultural production were particularly ures, infrastructure spending and in- (cereals), which grew by 80 percent in the creases in social protection. Within important in rural areas than in urban twelve months to July 2008, led the in- areas, where few people benefit directly social protection, responses usually crease, followed by that of tubers and included a range of measures to in- from agriculture. Since Brazil is 80% ur- roots (50 percent) and meat (40 percent). ban, the aggregate picture for the country crease the coverage or generosity of Even within food groups there was a large social assistance programs, as well as as a whole was one of reductions in aver- variation across different parts of the age welfare as a result of higher food scale up school feeding programs or country. Grain prices, for example, grew by prices. Behind the average impact, how- labor market programs. 125 percent in Salvador, but by less than ever, the consequences of higher food Indeed, the effectiveness of a response 50 percent in Fortaleza. The price of flour prices are different across the income to a crisis will depend on the instru- and pasta rose by almost 40 percent in distribution. The poor – particularly the ments used and their ability to reach rural poor – either gain or lose less from those individuals most affected by that higher prices than the middle groups. And 1. In the July 2010 Quarterly I had presented the rich lose little, since they spend a specific crisis. In this note we reflect on the preliminary results of an ongoing analysis the role of social protection programs in small proportion of their incomes on food of the impact of high food prices on household mitigating the negative effect of adverse welfare in Brazil. In this section I will present to begin with. shocks in Brazil during the period of the final set of results that include new analysis 2008-09 when the country as the rest to account not only for the effect on consump- Brazil has two main income transfer pro- tion but also on income. grams targeted to the poor: the Continu- Qua r te r l y K n o w l e d g e R e po r t Page 5 ous Cash Benefit program (BPC) and the ments, announced it would use Bolsa population. This leaves the urban poor Bolsa Familia program. BPC is a monthly Famiíia to help mitigate the impact of particularly vulnerable to crisis4. Expand- unconditional cash transfer targeted to rising food prices on the population. While ing the program could be one solution. the elderly over 65 and to individuals of this program is intended to address However, this should be done with caution any age with severe disabilities, with chronic poverty, it has been a useful in- since there are reasons for the lower cov- family per capita income below one- strument in mitigating the effects of the erage of CCTs in urban areas. The exis- fourth of the minimum wage. It started food price increase. The existence of a tence of more work opportunities in urban in 1995 and is coordinated by the Minis- program with such high-coverage allowed areas increases the opportunity cost of try of Social Development. Bolsa Família the government in 2008 to swiftly channel households‘ time and the benefit offered is a cash transfer program which re- resources to a large part of the popula- by CCTs is relatively low compared with sulted from the unification of a series of tion, through an increase in the benefits3 urban household incomes. In addition, pre-existing conditional cash transfer transferred to beneficiaries of the pro- there are important differences in health programs and was launched in the end gram (about 11 million families then). This and education coverage in urban com- of 2003. The program provides a mini- policy was well-targeted as most of the pared with rural areas. School enrollment mum level of income to poor and ex- beneficiaries in Bolsa Família are poor or and health service usage are normally treme poor families and the transfers extreme poor, and it was successful in higher, so there is less need for demand are conditional on compliance with sev- protecting the poorest. The increase in side stimuli to increase them and there is eral requirements, with benefits varying transfers was substantively protective for need to tailor the CCT programs to groups according to the monthly per capita the poorest 10 percent of the urban distri- where there may be more impact such as income of the family and its composi- bution and the poorest 20 percent of the the youth to provide them with incentives tion. Bolsa Familia is the largest condi- rural distribution. to stay and complete secondary school5. tional cash transfer intervention in the Thus, CCT programs can be an effective world, with over 13 million beneficiary However, it could not fully compensate measure to mitigate the effects of a crisis families (about 25% of the Brazilian the negative welfare consequences of the like food price increases for the existing population), presence in all 5.565 Bra- increase in food prices, in particular for beneficiaries, but there remains a large zilian municipalities and an annual the urban poor. This is due mainly to the share of the poor, mostly the urban poor, budget of R$16.7 billion in 20112. The limited size of the increase relative to the that cannot be easily reached through objective of the program is twofold: (a) welfare losses and to the higher share of these programs. reduce poverty and inequality and (b) the rural poor than of the urban poor cov- break the inter-generational transmis- ered by the program (Figure 1), which left In 2008 the minimum wage was in- sion of poverty through investment in most of them unprotected. Indeed, most creased by 10 percent which resulted in human capital. CCTs in Latin America began as targeted an equivalent increase in the value of the to the rural extreme poor. And even large BPC transfer. This measure protected the As part of its response to the food price nationwide programs like Bolsa Familia increase Brazil, as many other govern- and Oportunidades (Mexico) still cover a 4. See ―Safety Nets Work: In Times of Crisis higher share of the rural than the urban and Prosperity.‖ Paper prepared by the staff of the World Bank Group for the April 21, 2012, 2. This is equivalent to US$8.9 billion. Minis- Development Committee Meeting. try of Social Development and Fight to Hun- 3. The basic transfer of Bolsa Família increased ger (MDS), information as of December by R$4 (8 percent) and the transfer per child by 5 Ribe, H, D. Robalino and I. Walker (2011) 2011. R$2 (13 percent) ―From Right to Reality.‖ Page 6 April 2012 purchasing power of BPC beneficiaries. Família7. Unemployment insurance is the the increase in benefits was permanent. However, it did not have substantial ag- obvious ―automatic stabilizer‖ when the Mexico introduced an additional benefit gregate effect, given the low coverage of labor market is affected. It is the classic for Oportunidades‘ beneficiaries in 2008. this program. It is interesting to note that program for income replacement for indi- It was called ―Vivir mejor‖ and was in- despite BPC having a much lower number viduals losing their job, and a desirable tended to specifically compensate for the of beneficiaries (2.8 million individual instrument in the event of a temporary increase in the price of food and to be beneficiaries in May 2008) compared to crisis or shock, as it does not need spe- distributed only in June and December Bolsa Familia (11.1 million families bene- cific policy triggers. Indeed, the demand 2008. However, it is to this day one of the ficiaries in May 2008) the increase in the for unemployment insurance increased types of transfers of the program. For total cost of BPC and Bolsa Familia im- substantially towards the end of 2008 such large and well established programs plied by the increase in benefits were and the government increased its dura- in middle-income countries this may not equivalent because of the significantly tion by two months for the ―most affected be a problem. However, in other settings higher value of the BPC benefits. sectors‖, which were determined at the this could jeopardize the program‘s long state level. However, in countries with still run sustainability and governance8. Economic Slowdown in 2009 a large share of workers in the informal sector coverage of unemployment insur- The last four years have shown how the As food prices started decreasing over ance is low. While increasingly formalized, investment made to strengthen its social 2008, a global financial crisis led to a Brazil still has about 40 percent of its protection system has made Brazil well major recession in all regions of the labor force in the informal sector. More- equipped to face aggregate shocks. The planet. In 2009 GDP declined worldwide over, minimum length or density of contri- broad array of social protection programs on average by 2.65%, with large variation bution requirements further restricts eligi- at its disposal has provided the govern- across regions and countries. North-Africa bility. Thus, this program is more likely to ment of Brazil with useful tools to respond experienced a reduction in growth rates cover workers in the upper half of the to the adverse events that affected the while most other regions exhibited actual income distribution, leaving out workers country as well the rest of the World in negative growth rates. Average GDP 2008/09. A program like Bolsa Familia who are most likely to be more vulnerable. growth in Latin America and Caribbean represented an almost perfect instrument was negative 2.44% in 2009, with Mexico To protect the poorest, in July 2009 the to protect especially the rural poor as food experiencing the largest contraction in the government increased by 17 percent the prices increased. During the global eco- region with negative growth of 6.3%. While eligibility threshold for Bolsa Familia7. This nomic slowdown, the unemployment in- Brazil was not amongst the hardest hit in resulted in an additional 1.8 million fami- surance program protected the income of the region, GDP contracted by 0.6% in lies being included in the program. It also formal workers who lost their jobs. How- 2009. The first three quarters of 2009 increased benefits by 10 percent. How- ever, the recent crises also highlighted showed the worst performance, in terms ever, as we have seen in the case of the how some groups remain unprotected. of GDP growth, since 2002. Industry and food price increase, this program does not This is particularly the case for the poor in agriculture were the two most affected reach a large share especially of the ur- urban areas and for informal workers who sectors, while services only experienced a ban poor. In general, the use of CCTs in are not protected by the existing instru- mild deceleration response to this type of shock may be ments designed for the formal sector (e.g. limited for the following reasons. First of unemployment insurance). Clearly, a pro- This economic crisis had a negative im- all, they need to have the ability to expand gram like Bolsa Familia is aimed at ad- pact on labor markets across regions, with to include the non beneficiaries affected dressing chronic not transient poverty and the global unemployment rate increasing by the crisis or shock. This requires flexi- some of its characteristics may end up from 5.7 in 2007 to 6.3 in 20096. Brazil, ble targeting mechanisms and a continu- limiting the effectiveness of this instru- like most Latin American countries for ous open enrollment program. In the case ment in time of a crisis. In the case of which timely data are available, showed of Bolsa Família, eligibility is based on self unemployment insurance, the main prob- an increase in unemployment right as the -declared income and enrollment can be lem is that in a context of high informality slowdown started unfolding. Between done on a continuous basis. However, it is a large share of the population cannot December 2008 and March 2009 unem- not an entitlement program, since there benefit from it. Brazil, as countries across ployment experienced its largest increase are beneficiary caps at the municipality the World, is investing in increasing the ever, going from 6.8 to 9 percent. How- level that can prevent households from range of instruments available to protect ever, this increase in unemployment re- entering the program despite being eligi- different groups and different situations versed during the second quarter of ble. Second, in response to a temporary over time. In this context, it would be im- 2009. crisis programs should have well estab- portant to ensure that pre-established Also during this crisis, Brazil made use of lished triggers for returning to pre-crisis crisis-response procedures are in place so existing social protection policies to miti- benefits, coverage and rules. However, that programs can return to normal bene- gate the effect of the crisis: it extended scaling back programs or decreasing fits, coverage and rules once the crisis the duration of unemployment insurance benefits is not simple. Indeed, in Brazil has passed. for specific sectors and it raised the bene- 7 With Decree 6.917 the extreme poverty fits and increased coverage of Bolsa threshold went from R$60 to R$70 monthly per 8 As is the case in Guatemala, for example, capita income and the one for poverty from where the CCT program expanded excessively 6 ILO, Trends econometric models, October 201 R$120 to R$140. and it is now under restructuring. Qua r te r l y K n o w l e d g e R e po r t Page 7 T URN ING R I O A ROU ND Interview with Rio de Janeiro Municipal collection, and a policy of attracting pri- Finance Secretary Eduarda La Roque vate investment. By Mauro Azeredo In terms of control of personnel costs, the philosophy has been to control benefits W hen Mayor Eduardo Paes an- nounced that Eduarda La Roque was his choice for the key Finance Se- that could be incorporated into wages and promote meritocracy and bonus payments for achieving goals. In the area of debt, cretariat, in early 2009, many were the main highlight was the DPL loan from taken by surprise. La Roque, a young the World Bank, the first to any city world- star in the financial sector, had a stellar wide. The US$ 1 billion amount (received professional and academic profile, but in two installments in 2010 and 2011) no experience with the public sector. was used to repay part of our Federal debt, reducing rates. This operation has But in just a few months – in spite of the already allowed us to save R$ 560 million international economic crisis – she had (US$ 330 million) since the signing and lead the effort to turn around Rio‘s fi- the total current value of the benefit nances from a deficit to a sizeable sus- should reach R$ 2.0 billion. tainable surplus, enabling investments and helping prepare the grounds for the In terms of increased revenue, we can city‘s successful bid for the 2016 Olym- highlight initiatives such as the Nota Cari- pic Games. oca (electronic invoice), the Fiscal Intelli- gence System (crossing referencing of Her strategic handling of the city‘s his- several databases) and greater efficiency torically chaotic finances and fiscal ad- in the management of non-tax revenues. ministration culminated with the When we compare the budget for 2012 achievement two investment grade as- La Rocque: The public sector must know its (R$ 20.5 billion) and 2009 (R$ 11.8 bil- space and role in order to occupy it effec- sessments by Fitch and Moody‘s, reach- lion), there is an 87% nominal increase, ing Brazil‘s own sovereign ratings – the tively without hikes in the main ISS and IPTU only subnational entity to have done taxes on services and real estate. BET: What Rio did could be replicated by this. In the third axis, we sought out the private other cities? In your view, what would be Secretary La Roque spoke to the Brazil‘s sector as a partner to leverage develop- the greatest difficulties for this to hap- Economic Team from her office in Rio ment, with well-planned tax incentive pro- pen? de Janeiro. grams, improvement of the business envi- Eduarda La Roque: I believe that the ac- Brazil Economic Team: The city of Rio ronment with less bureaucracy, and the tions taken in the management side are recently became the only subnational development of public-private partner- replicable in other cities, considering, of unit with risk rating equal to the sover- ships, for which we also have the Bank‘s course, their characteristics (e.g. the eign rate. What was the strat- technical assistance. structure and size of the budget alloca- egy to make this possible? “Risk management This fiscal adjustment tion). That is, it is possible for the public allowed us to close 2011 sector to contribute by properly planning Eduarda La Roque: The main the allocation of its resources at the same task at the beginning of the was a natural devel- with almost R$ 4.0 billion time it on the productivity gains that will administration of Mayor Edu- in investments in the municipal budget, with- positively impact their budget constraints. ardo Paes was to increase opment of the ex- out considering partner From this perspective, it is essential for the investment capacity of the government to manage very carefully the city with no increase in investments through the incentive system that impacts its reve- tax rates or burdening future pected overestima- PPPs. Thus, we believe nues, expenses and the behavior of eco- generations with debt. Given that the outstanding nomic agents under its responsibility. the significant shortcomings tion of the municipal credit rating granted us Note that the system of incentives to in various areas of municipal by both agencies that evaluate us (Fitch and which I refer is not limited to taxation, but responsibility, especially budget� the set of rules that govern the relation- health and urban infrastruc- Moody's) reflects the sustainability of our fi- ship between economic actors – govern- ture, the amounts invested ment among them. Rules that induce up to 2008 had been extremely low. nances, whose highlight is the ability to invest in a sustainable manner. The city of desirable behaviors and are therefore With this primary objective, we identified essential for the objectives of the public three main fronts: the efficient manage- Rio de Janeiro is currently the only subna- tional entity with a credit note equal to the sector to be achieved. ment of personnel costs and debt col- lection, the modernization of revenue Union and that of companies like Banco BET: What are the next fiscal and financial do Brasil, BNDES and Petrobras. goals of the Rio? Page 8 April 2012 Our main goal is to keep the mandatory administration, always keeping in mind in exchange for public non-financial coun- tax spending (personnel and debt) under the cost- benefit concept. terparts (notably, real estate donations efficient management, allowing us to im- and construction permits). plement the City‘s investment priorities, In linking this development focus with the and allowing a profound transformation in concept of fiscal responsibility it is essen- Thus, the direct costs for the Municipal the lives of the citizens of Rio in the com- tial to mention the engagement of the Treasury (including new debt) will be di- ing years. Municipality of Rio de Janeiro, rected primarily to invest- in collaboration with the ments with long-term We also are committed to ensuring that World Bank, in the prepara- “The key strategy is benefit, such as trans- the Municipality will remain within the tion of its Medium Term Ex- ports, sanitation and slum framework of all existing debt limits in our penditure Framework. The legislation, and we believe that maintain- MTEF is a medium-term to preserve the treas- upgrading. ing the credit ratings equal to those con- budget that reconciles, in a It should be noted also ferred on the Union is an achievement clear and detailed manner, ury as much as possi- that the matrix of responsi- that needs to be maintained. fiscal resources with the bilities for the 2014 World spending priorities in the me- ble from the finan- Cup and the 2016 Olympic BET: Could the international financial dium term. Thus, develop- and Special Games de- crisis disrupt Rio‘s plans? ment of the MTEF is a process fines the specific duties of that involves a series of de- cial burden of the the City, State and Union, Eduarda La Roque: The crisis, if it wors- tailed discussions between both in terms of sports ens, could impact private investment. different actors in public ad- Olympics� spaces and urban infra- From the standpoint of public investment, ministration, gradually put structure. The physical the many different funding sources avail- together until its final form is approved by organization and the financial burden of able to us, including the fiscal space avail- the Mayor. It is important to note that the these events, thus, do not fall exclusively able for our own investments in the mu- MTEF adds itself to what was already be- on the municipality. Examples of impor- nicipal budget, ensures that the resources ing implemented by the City under its tant initiatives under the responsibility of for the planned investments will be avail- Strategic Plan, and it contributes to the other entities are the Maracanã sports able can be made and, just as impor- institutionalization of the processes of complex, the expansion of the subway tantly, maintained. Additional invest- network (both in progress by the State resource allocation and transparency. ments, which may not have been planned, Government), the Deodoro sports complex will be assessed against the current priori- BET: The World Cup and the Olympics can and the airports (under federal admini- ties and the expected evolution of both be a risk to fiscal sustainability in Rio? stration). the financing capacity and tax revenues. What is being done to prevent this? BET: One of your trademarks in the private BET: How to reconcile fiscal responsibility Eduarda La Roque: Ever since the City sector was risk management. Were you with investment and growth in a Brazilian won the right to host the Olympic and the able to transpose it to the public sector? city? Special Olympic Games in 2016, the phi- losophy and implementation of the proc- Eduarda La Roque: The issue of risk man- Eduarda La Roque: The main ess have been towards agement has emerged as a natural re- issue is that the public sector Games serve the City (and sponse in the context of an expected must know what is its space not vice versa), catalyzing "overestimation" of the budget at the be- and role, in order to occupy it “We are committed to the necessary resources to ginning of the administration of Mayor as best as possible, including improve living conditions Eduardo Paes, because revenue projec- through the careful manage- ensuring that the city tions for 2009 had been (by legal imposi- more broadly. ment of its system of incen- tion) made before the worsening of the tives. In this sense, the con- cern with development / will remain within all The key strategy is to pre- serve the Municipal Treas- global financial crisis in 2008. Faced with this problem, it was up to the new admini- economic growth that guides ury as much as possible stration to closely follow the new revenue the Municipal Finance Secre- the legal indebted- from the financial burden estimates that included the new set of tariat is an important change of the construction of the information - so that we could assess how in attitude. The idea is to ness limits� new spaces for competi- well they agreed with what was budgeted connect the Secretariat more tions under municipal re- in 2008. In this context, for the first time actively to the question of sponsibility (notably, the in Rio we developed a mapping of possi- development. Thus, availing Olympic Village and Olym- ble revenue scenarios, with their prob- himself of his own inducing capacity, the pic Park). These complement the sports abilities, the so-called "Risk Map". With it, Secretariat no longer has a mere revenue infrastructure network already built by the we could estimate the probable annual role to leverage this growth, working municipality for the 2007 Pan American budget revenue values line by line, de- seamlessly with other areas of municipal Games. The goal is to have them prefera- pending on the amounts already collected bly built and operated by private partners and the new projections, revised monthly. Qua r te r l y K n o w l e d g e R e po r t Page 9 T H E I M PA C T O F T H E I O F T A X O N C A P I TA L F L O W S By Fábio Bittar Figure 1: Foreign Portfolio Investments (12-months accumulated) Discussion on Capital Controls A s the global economy began recov- ering from 2008 financial crisis, capital started flowing back to emerging market economies. Capital flows enable countries with limited savings to attract financing for productive investments, foster risk diversification, promote in- tertemporal trade, and contribute to the development of financial markets. In this sense, the benefits of free flow of capital across boarders are similar to the benefits from free trade and restric- tions on capital mobility mean forego- ing, at least in part, these benefits ow- ing to the distortions and misallocation that controls give rise to. Moreover, the recent surge in capital flows has created With this in mind, members of the Interna- (FDI) were the main source of capital in- some new challenges to emerging tional Monetary Fund (IMF) suggested flows and also reached a historical record, economies. A large share of capital that under some circumstances capital amounting to US$ 66.6 billion. flows is perceived as temporary, reflect- controls could be an additional tool to ing interest rate differentials, which may handle sudden surges in inflows. More Notwithstanding, heavy capital inflows be at least partially reversed when pol- specifically, IMF staff suggested that when resulted in the appreciation of the Brazil- icy interest rates in advanced econo- the economy is operating near potential, if ian exchange rate and consequent loss of mies return to more normal levels. Cer- the level of reserves is adequate, if the competitiveness by Brazilian exports. The tain types of capital inflows, particularly exchange rate is not undervalued, and if Real appreciated 11% between the end of as opposed to equity flows, increase flows are likely to be transitory, then the 2009 and July 2011. Beginning in Octo- countries‘ vulnerability to financial cri- use of capital controls in addition to both ber 2009, the Government of Brazil (GoB) sis. Equity flows, on the other hand, prudential and macroprudential policy is started introducing capital controls in allow for greater risk sharing between justified. Nevertheless, any country‘s poli- order to moderate the continued appre- borrower and creditor. Massive inflows cies to control the inflow of capital should ciation of the Real. It began by raising the can also lead to strong exchange rate take into account potential adverse multi- tax on financial transactions (IOF) to 2% appreciation, which could significantly lateral consequences, especially in mo- for foreign portfolio investments (FPI), complicate economic management and ments of economic recovery. Furthermore, both for fixed and variable income. In harm domestic production competitive- evidence on the effectiveness of those October 2010, the IOF was raised to 6% ness. Concerns that foreign investors policies is somewhat limited. If anything, for fixed income and also for future mar- may be subject to herd behavior, and the evidence appears to be stronger for ket operations. Finally, in 2011, the GoB excessive optimism, have grown capital controls to have an effect over the introduced a 6% IOF for foreign loans stronger and may lead to collateral dam- composition of inflows rather than on maturing within 720 days. These meas- age, including bubbles and asset booms ures had a direct impact on foreign portfo- their aggregate volume. and busts. lio investments, which dropped to Developments in Brazil US$17.4 billion in 2011 after accumulat- Last year, the IMF and the Brazilian ing a US$67.8 billion surplus in the previ- government held a joint conference on Capital inflows to Brazil have increased ous year (Figure 1). It is important to note the management of capital flows. One of significantly in recent years and have be- that the 12-month figure starts dropping the main conclusions of this meeting come an important source of financing for already in the beginning of 2011, before was that we still have a long way to go in the recurrent current account deficits the European fiscal crisis worsened and order to better understand the costs reported since early 2008. In 2011, the still during a high confidence period, and benefits of capital flows. While current account registered a record deficit which began in the second half of 2009 benefits are relatively straightforward, for the Real Plan period (US$ 52.6 billion), as the Brazilian economy started recover- costs seem to be heavily dependent on heavily impacted by income transfers ing from the 2008‘s financial crisis. More- the institutional framework of each which amounted to a net outflow of US$ over, foreign investments in variable in- country: things like the exchange rate 47 billion. Nonetheless, financial and come responded sooner to the introduc- regime, the degree of dollarization of capital account surpluses were more than tion of the IOF (Figure 2). The continued the economy, and the credibility of the enough to offset the deficit and the over- increase in fixed income assets after the central bank. all balance reached US$ 58.6 billion in introduction of the IOF can be explained the same year. Foreign direct investments by high domestic interests. As developed Page 10 April 2012 Figure 2: Breakdown of Foreign Portfolio Investments (12-months period) explained by classified into either intercompany loans better growth or equity capital. The first refers to loans perspectives from multinationals to their subsidiaries in for the Brazil- Brazil and also to loans from subsidiaries ian economy. in Brazil to their headquarters abroad. The Fast growing second relates to the acquisition of a emerging minimum of 10% of a company‘s equity countries capital with voting rights in Brazil and also have become includes Brazilian subsidiaries‘ participa- increasingly tion in their headquarters‘ equity capital. attractive for foreign in- The first hypothesis would be that multi- vestments. A national companies are using resources prudent mac- from their subsidiaries to perform portfo- roeconomic lio investments. The subsidiaries would policy and allocate their capital into portfolio invest- consumption ments and, in exchange, they would re- growth due to ceive loans from headquarters in order to effective pov- cope with their investment‘s needs. The erty reduction Instituto de Pesquisas Economicas Aplica- economies sustain interest rates at a measures and credit expansion certainly das – IPEA, suggested a second hypothe- record low, the higher predictability and benefited Brazil, turning the country into sis through equity capital. As the require- lower risk of fixed income investment one of the major destinations for FDI. ment for FDI stands at a minimum partici- seems to compensate for the lower profit- pation of 10%, it would be feasible for ability caused by the IOF. The stronger Nonetheless, there have been some sus- investors to sell their shares once their resilience of fixed income motivated the picions that foreign investors could be capital is in the country, especially for increase on the IOF rate to 6% in October steering portfolio flows through FDI in those investing close to the minimum 2010. order to escape from the IOF taxation, required. This would compromise the long which would be contributing to the higher term nature of the investment and enable In December 2011 the Brazilian govern- FDI numbers. Olivier Blanchard even sug- investors to use those resources in the ment withdrew the 2% IOF tax over vari- gested Brazil may have to extend capital purchase of portfolio investments. able income portfolio investments in re- controls to foreign direct investments to sponse to the worsening global scenario, close down possible loopholes. Blanchard Suggested Evidence which caused the Brazilian Stock Ex- noted that Brazil‘s FDI number shot up change – BM&F Bovespa to report a 9% since the country imposed the IOF tax on In this context, we now turn to the data loss in the second half of 2011. The portfolio investments. Indeed, the total and try to assess whether the evidence measure had a positive effect and the volume of capital inflows seems to be indeed suggests that investors have made IBOVESPA index increased 13.8% in the unaffected by the IOF measure and we use of productive investments to continue first two months of 2012. However, this can only ob- cannot be attributed solely to the IOF with- serve a Figure 3: Financial Account Breakdown (12-months accumulated) draw: improvements in the external sce- change on the nario increased inflows to emerging coun- composition of tries and there has been a general appre- inflows in favor ciation of emerging markets‘ currencies of FDI, at least relative to the US dollar. Brazil led this until mid-2011 trend, with the Real appreciating more (Figure 3). than 8% from the end of 2011 until March 1st. On a recent move, the Brazilian gov- There are two ernment has extended the 6% IOF tax to possible hy- foreign loans maturing within 5 years (the potheses that previous measure was set to 2 years ap- explain how proximately). The government‘s intention portfolio in- is to limit exposure of domestic banks and vestments firms to exchange rate risk and to halt the could be continued appreciation of the Real. brought in the form of pro- Suspicions and hypothesis ductive invest- ments. Foreign FDI inflows have increased steadily in the direct invest- last years. Much of the increase can be ments can be Qua r te r l y K n o w l e d g e R e po r t Page 11 bringing portfolio inflows and escape tal in order to Figure 4: Foreign Investments (3-months moving average) the IOF taxation. convert it into portfolio flows Our first approach is to look at the evo- afterwards. lution of FDI and FPI since the beginning of 2008. The three-month moving aver- Three out of four age for FDI seems to increase signifi- categories under cantly between the end of 2010 and US$100 million beginning of 2011 (Figure 4). The timing reported higher of the change is also consistent with the growth in 2011 introduction of the 6% IOF for fixed in- (Table 1). Overall, come assets, which was followed by a inflows under the drop in portfolio investments. The graph US$100 million clearly shows an inversion in the volume threshold in- of the two kinds of flows, with FDI vol- creased 41.5% y-o ume increasing and replacing the loss in -y in 2011, com- foreign portfolio investments. However, pared to a 14.8% it is important to note that FDI was run- growth in the pre- ning below pre-crisis level and the in- vious year. None- crease in the three-month moving aver- theless, we can age might as well indicate a recovery in also observe a FDI due to better perspectives for the significant in- Brazilian economy. More than that, in- crease for trans- vestors‘ sentiment towards Brazil might actions with higher volume of inflows. The argument behind this approach is have improved as the country reported Transactions above US$ 100 million based on the fact that portfolio invest- a robust performance in 2010 after a amounted to 52% of the total increase in ments are characterized by higher volatil- mild recession in the previous year. equity capital inflows in 2011. Therefore, ity due to their speculative nature aimed Even though the Brazilian economy con- considering that higher investments in at short-term financial gains. Using a time tracted 0.3% in 2009, this result could equity capital also represent a stronger series approach for heterocedastic se- be interpreted as positive news when commitment to the performed operation, ries, they model the mean and the vari- compared to developed economies and it is hard to argue that the recent surge in ance for FDI flows. IPEA finds evidence even to previous crisis experiences, equity flows of FDI resulted mainly from that the volatility of FDI increases from when the country‘s economy suffered disguised portfolio investments. Indeed, December 2010 and this happens at the much more with challenging external the data indicates a significant increase in same time that we observe an increase in scenarios. transactions that are more likely to stem the volume of FDI. Then they run the from de facto productive investments. same analysis for the different categories We now look at foreign direct invest- of FDI (intercompany loans and equity ments through different perspectives. A third possible approach to address this flows) using gross figures. Their conclu- issue focuses on possible changes in sion is that the increase in FDI resulted The first comparison deals with equity volatility of FDI flows, which would be ex- capital inflows, classifying it according from both higher volumes of equity capital pected if FPI flows were being ―disguised‖ and intercompany loans. Regarding vola- to the volume of inflows. A significant as FDI. IPEA released a study where it increase in the lower categories would tility, IPEA points out that the higher vola- estimated the volatility of FDI flows prior tility in FDI results mainly from equity capi- be consistent with the idea that investor and after the introduction of the 6% IOF are bringing the minimum required capi- tal inflows. Inflows of intercompany loans for fixed income portfolio investments. and outflows of intercompany and equity Table 1: FDI – Equity Capital by Volume Page 12 April 2012 Figure 5: 12-month average FDI and standard deviation magnitude of the increase wasn‘t as im- pressive, barely overcoming volatility ob- that in Decem- served in previous years. Moreover, we ber 2011 the can observe that volatility started drop- standard devia- ping already during the second quarter of tion drops to 2011. Under the hypothesis that multina- nearly the same tionals are using their subsidiaries to per- level observed form portfolio investments, the worsening prior to October of the global economy, which led to more 2010. The tim- risk averse investors, and the inversion of ing coincides the monetary policy cycle during the sec- with the with- ond half of that year could have contrib- draw of the 2% uted to a reduction in FPI and, indirectly, IOF over vari- to decline in intercompany loans volatility. able income portfolio invest- Concluding Remarks ments. Evidence on volatility indicates that suspi- capital are at a high historical level but We then use the same analysis for the cions over FPI having been ―disguised‖ as volatilities have been higher during the components of FDI. Equity capital reports foreign direct investments could be con- very similar results (Figure 6), suggesting sistent with existing data. Nonetheless, by worst period of the crisis in 2009. that this was looking at the composition of equity flows On a different approach, IPEA estimated the channel Figure 6: 12-month average FDI – Equity Capital and standard deviation the standard deviation for FDI. We are most affected now using a similar method using data by the imple- until January 2012 and extending it to the mentation of components of productive investments. capital con- trols. Nonethe- Figure 5 confirms again that there was a less, it is im- substantial increase in FDI after the IOF portant to re- tax on fixed income portfolio investments member that was raised to 6%. The new evidence equity capital comes from the red line, which shows the responds for standard deviation for FDI in a 12-month nearly 84% of period. The standard deviation is used total FDI and, here as a measure for volatility. We can therefore, both observe that not just the volume of pro- measures ductive investments inflows increased, should follow but also its volatility. Moreover, the stan- similar paths. dard deviation becomes considerably larger than the one observed during the The analysis for intercompany loans we observe that large transactions corre- shows that this component reported 2008 crisis. It is also interesting to notice sponded to more than half of the total higher volatility increase in 2011, suggesting that there Figure 7: 12-month average FDI – Intercompany Loans and standard after the adop- has also been a considerable ―real‖ in- deviation tion of the 6% crease in productive investments in the IOF. However, last year. we can ob- serve two Going forward, it is not hard to imagine curious be- that the Brazilian government may adopt haviors further measures on capital controls in (Figure 7). order to sustain the exchange rate at a The first one reasonable level and protect domestic relates to the production. The Central Bank has indi- level of vola- cated it will continue decreasing the policy tility. The rate, which could provide some relief re- standard garding exchange rate pressures steam- deviation ing from carry-trade operations, at least increased as long as inflation continues on a declin- after October ing trend. 2010, but the Qua r te r l y K n o w l e d g e R e po r t Page 13 E A R LY C H I LD E D U C A T I O N : M A K I N G P RO G R A M S WO R K F O R B R A Z I L ’ S M O S T I M P O R TA N T G E N E R A T I O N By David Evans and all, whereas children in high-quality pre- years. Likewise, six states have creche schools perform much better. rates of under 10%, requiring a massive Katrina Kosec ECE matters most for the poorest chil- expansion to even reach the most vulner- An exhaustive analysis of literature and dren. ECE is likely to have the greatest able children. data on early child education in Brazil, positive impacts on children coming from coupled with consultations with key poorer and less-educated families where Poor children and rural children are being policymakers in municipalities and there is less cognitive stimulation at left behind in early child education. Bra- states across the country, revealed a home. In Brazil, a study of adults in the zil‘s poorest children are by far the least series of seven facts and seven implica- Northeast and Southeast regions demon- likely to be enrolled in creche or pre- strated that pre-school had bigger impacts school, and those poor children that are tions about early child education in Bra- on children with illiterate parents than on zil. enrolled are much more likely to rely on children with literate parents. Internation- ally, the strongest evidence for the value public schools than their richer peers. The The Facts of ECE comes from high-quality programs richest children are three times as likely closely targeting the most vulnerable chil- to be in creche as the poorest children Early child education (ECE) can have dren. and 24% more likely to be in pre-school lasting positive impacts on children, with benefits far exceeding the costs. (Figure 2). Not only are wealthier families There are stark disparities in ECE cover- But quality is crucial. Evidence from the much more likely to provide their children age across states, with some requiring United States, Argentina, Chile, and with early child education: they are much elsewhere has shown long-term positive massive expansions in the coming years more likely to use the private system. impacts of early child education. That to achieve intended universal pre-school More than 85% of the poorest children evidence is now complemented by data coverage by 2016. Achieving universal who are in ECE use public institutions, from Brazil showing positive impacts of enrollment in pre-school will require al- early child education – particularly pre- whereas only around 10% of the wealthi- most 1.6 million new spaces. Reaching school – on short-run cognitive develop- est children do. Because private institu- even thirty percent of children enrolled in ment, medium-run test scores, and long- tions tend to have higher quality, this gap run educational attainment and income. creches would require over 1.3 million further intensifies inequality of opportu- But simply enrolling children in ECE is new spaces. Behind these massive num- nity. no guarantee of success. Evidence from bers lies great variation across states Brazil shows that children who attend (Figure 1). Six states have pre-school en- Quality in ECE centers in Brazil has im- low-quality pre-schools perform the rollment rates of under 60%, meaning proved over time but is still weak, particu- same on literacy tests two years later as that universal coverage would require larly in activities to stimulate cognitive do children who attend no pre-school at development. In certain key indicators, close to doubling enrollment over five Figure 1: ECE coverage by state, 2009 Creche (age 0-3) Pre-school (age 4-5) Page 14 April 2012 Figure 2: ECE access by income quintile such as physical infrastructure and care- municipality hugely affects public ECE invests in ECE and use creative models giver-child ratios, ECE centers have im- investment. Given extra revenue, poor to reach the children. A 2009 Constitu- proved over the past decade. Good infra- and equal municipalities are more likely to tional amendment lowered the manda- structure is an essential but far from suffi- expand public ECE than are richer and tory school starting age to four years cient condition for a high-quality ECE ex- more unequal municipalities. old, and the nation has a stated goal of perience. A recent study of creches and achieving universal coverage by 2016. pre-schools in six capital cities around Much innovation in Early Child Education Given the 1.6 million children out of pre- Brazil found that ECE centers were strong- in Brazil is taking place at the municipal school, roll-out will have to be strategic est on interactions between caregivers level, providing models within the country even in that time period. In areas of and children, and weakest on activities to improve both access to and quality of lower population density, ECE centers and on a consistent program structure may need to be constructed on a ECE services. Many municipalities are that lends itself to cognitive, social, and smaller-than-typical scale, or home vis- emotional development. Overall, using a investing in their ECE programs, develop- its and other delivery modalities may scale that has been applied in several ing specialized curricula, monitoring sys- need to be used in order to cost- countries, 50% of creches and 30% of tems, improved training for caregivers, effectively satisfy needs for ECE. For preschools rated inadequate, and none and more. With over 5,000 municipalities example, in the municipality of São rated excellent. Quality outside capital across Brazil, there is great opportunity Paulo, 0.4 square kilometers of territory municipalities is likely to be even lower. for these municipalities to learn from each would be sufficient to fill an average- sized São Paulo pre-school with 4-5 year Municipalities with higher income and other, thus enhancing quality and effi- olds. However, in more rural Barra do more income inequality are less likely to ciency. For example, the Municipality of Turvo municipality, also in São Paulo expand investment in early child educa- Santarém (State of Pará) has developed state, over 320 square kilometers would tion. A study of Brazil‘s over 5,000 munici- the program Eco-Schools, and the Munici- be required to fill an average-sized São palities during 1995-2008 demonstrates pality of Rio de Janeiro has developed a Paulo pre-school. two key points about municipal character- curriculum to provide parent training to istics and ECE investment. First, public It would be important for municipalities creches and pre-schools do not benefit all parents which spans education, health, to aim at better targeting new centers citizens equally. They disproportionately and social assistance. These tools and and spaces at the poorest children benefit poorer citizens, since they are the others like them represent a potent edu- (whose parents are not able to self- most likely to use these public services. cational resource for other municipalities. finance ECE), opening new centers in Rich families tend to enroll their children areas that will achieve this purpose. In in private ECE, and therefore are less The Policy implications public creches, a full twenty percent of invested in the public education system. scarce spots are taken by children from Second, the distribution of income in a Brazil will need to be strategic in where it the richest fifth of families in Brazil (see Qua r te r l y K n o w l e d g e R e po r t Page 15 Figure 3: Fraction of Creche Students in Public vs. Private Institutions by Quintile of interested citizens actively share informa- Income (2009) tion. A second initiative launched by the National Forum for Early Child Develop- ment and the World Bank, called the Net- work for Cooperation in Early Child Devel- opment, seeks to provide a map of early child development services across Brazil as well as a social networking site more focused on sharing exactly the kinds of materials described above: information on innovative programs, experiences, and best practices. Integrating health services into creches and pre-schools can provide opportunities to improve child welfare in cost-effective ways, and would be facilitated by estab- lishing a cross-sectoral coordinating agency. Multi-sectoral programs allow parents to know about and access all of the services they need to help their chil- dren flourish in one place, rather than having to separately seek out services of figure 3). If those spaces were instead The federal government could consider which – in some cases – they may not allocated to the poorest fifth, then their encouraging strong municipal monitoring even be aware. The most established overall enrollment rate in creche would systems which keep ECE institutions ac- example of cross-sectoral collaboration in increase by 50%. This inefficient target- countable for their results, as well as in- early child development in Brazil is the Rio ing of scarce spaces has not improved troducing a standard observational tool, Grande do Sul program, Primeira Infância over time; it has hovered around twenty and providing licensing guidelines for Melhor. Brazil has also developed the percent for almost a decade, since minimum quality standards which munici- National Plan for Early Childhood, pre- 2002. palities can adapt. The Ministry of Educa- pared collaboratively by the National Net- tion has established minimum standards work for Early Childhood. But if the Gov- Teachers need specific guidance on the of infrastructure quality for creches and ernment of Brazil is serious about cross- best stimulation activities to use in the pre-schools. The next step will be to estab- sectoral collaboration on ECD, it will need classroom, to complement existing ECE lish an additional level of licensing guide- to establish a coordinating agency to over- curricular guidelines. Teachers at Brazil- lines, which will apply to child-caregiver see its implementation. ian ECE centers rate relatively high on ratios and caregiver qualifications. Munici- interactions, suggesting that these palities can greatly improve quality by Using participatory budgeting to distribute teachers are motivated to engage with introducing standardized observational educational resources has the potential to children. But Brazilian ECE centers rate tools, such as the ITERS-R and ECERS-R lead to more equitable outcomes and to very poorly on effective activities for instruments – among others – that allow target resources at the poorest children. stimulating children‘s cognitive and for regular, systematic monitoring of the social development. What teachers lack Participatory budgeting (PB) allows citi- quality of activities and program structure. zens to vote on how to use a share of is strong guidance on effective activi- ties. Building on the Ministry of Educa- Brazil could facilitate knowledge sharing municipal revenue designated for their tion‘s 1988 three-volume curricular across ECE providers so that they can neighborhood, and to elect neighborhood guide for ECE, a valuable next step will learn from one another's success stories. representatives to make municipality-wide be to provide practical workbooks or Given the great array of experimentation spending decisions. Additionally, policy- guides with lesson plans containing and innovation at the municipal level, the makers must publicize budgets and ex- specific activities in pre-reading, pre- Ministry of Education can encourage mathematics, and other areas, to help knowledge sharing on a number of levels. penditures to promote transparency. PB educators not only understand what are The National Network for Early Childhood increases political participation of margin- good activities, but also how to imple- focuses on improving national policy. Two alized groups and can lead to more pro- ment them. Some municipalities – such initiatives for more direct sharing of infor- poor expenditures, including public invest- as the Municipality of Rio de Janeiro – mation have also been launched. One is ment in ECE. are developing their own curricular the Network for Cooperation and Peace guides in the meantime, with specific for Children, which is a social networking guidance on program structure and site (a là Facebook) where policymakers, specific activities. non-profit workers, educators, and other EDITORIAL (CONTINUED FROM PAGE 1) The BET imposed itself as a natural need for the Bank‘s work in Brazil. Knowledge is a central dimension of the Bank‘s work in middle income countries, but Brazil is an über MIC whose experiences and work continuously push the envelope for the rest of the Bank and other developing countries. The Quarterly and the BET sought to bring the leading edges of economic thought of the Bank on Brazil to the broader public. The work we do here epitomizes the relationship with a sophisticated, highly demanding client – or cli- ents, as there are numerous from the Federal to the states to the large municipalities – that has access The Quarterly Knowledge to other leading sources of knowledge and funding. Whether through long term analytical contributions (such as the Low Carbon Study, or the Aging report), just-in-time non-lending technical assistance (as in Report is a publication of the the aftermath of the floods in 2011) or conferences (such as the Human Development series with Rio), World Bank the Bank‘s knowledge operations were complemented and supported by the BET products. Also, as a very decentralized country, with different demands from the federal, state and municipal lev- els, Brazil is a unique sounding board for middle income country innovation and service delivery, and the unifying factor is the knowledge agenda. To be relevant, the Quarterly and the BET had to reach these high standards. I think that it achieved this. For this reason, this experience is now known beyond Brazil. MIC clients and their sophisticated develop- ment and academic communities are looking up to the Bank not only to provide the traditional diagnos- Sign up to receive BET tics, but to help them devise own ways to fix development problems, export and adapt their solutions, reports: and upgrade their own analytical capacity, bringing in more than leading edge knowledge and experi- ence, but also impact evaluation, south-south links and the Bank‘s seal of approval and convening betmail@worldbank.org power. All of these have featured in these pages. From challenging the existence of a credit crunch in the country, to dissecting the financial future of Bra- Contact: zil‘s largest city – passing through the pros and cons of hosting the Olympics, the impact of the food crisis in Brazil and the dark side of financial integration – the Quarterly tackled topics that were at the Pablo Fajnzylber forefront of the development debate. WB Link: 5761-1077 So the BET and the Quarterly are really about much more than just one country. They are important and Ph.: +55 61 3329-1077 integral pieces of the knowledge agenda I sought to develop in Brazil, with much broader ramifications. I am sure that the two dimensions of these agenda – the knowledge generated in the Brazil context, and the strategy behind this knowledge generation, will be useful in many other contexts, and I will certainly encourage this type of knowledge products in my new capacity as World Bank Vice President for Africa. BET Publications BET Daily Report: the most Enjoy the reading! important daily economic Makhtar Diop news and indicators about the Brazilian economy [internal]. Brazil Monthly Report : updated information on economic developments, IN THE LOOP policy challenges, and Some of the quarter’s noteworthy events economic trends [internal]. Quarterly Knowledge Report: Events Projects Approved information about the Bank‘s  Quality of Labor Seminar in IPEA—September 12 META Energy and Mineral Strengthening analytical work and short  Fiscal Consolidation, Human Development and —$49.6 million knowledge pieces on policy Public Sector Management: The experience of the municipality of Rio de Janeiro—September 22 Piauí Green Growth and Inclusion relevant questions. —$350 million  Treatment as Prevention Debate—November 10 ----  Brazil‘s Middle Class Brown Bag Lunch with Ri- PE Opportunities and Equity Program cardo Paes de Barros (SAE)—November 18 —$500 million The Quarterly, Monthly and Daily Brazil reports are in the  Bridging the Atlantic—Brazil/Africa Cooperation— Amazon Region Protected Areas (ARPA) December 13 —$15.9 million (GEF grant) Brazil Internet and Intranet:  Exploring the economic and social impacts of São Bernardo Water Management http://www.worldbank.org/br mining in Brazil—February 29 —$20.8 million http://go.worldbank.org/EX2K94L7V0  Gender and Development in Brazil—March 6  International Workshop on Involuntary Resettle- Pernambuco Rural Project ment—March 27 —$100 million