Inefficiency worsens inequality in Latin America

Outlook

Public spending reaches an average of nearly 30% of GDP in Latin America and the Caribbean, although this rises to nearly 50% in Argentina -- which also has the highest level of ‘wastage’ according to a new Inter-American Development Bank (IDB) report.

“Leakage” in procurement (both overruns and corruption), bloated public sector wages and transfers equals some 16% of total spending, or 220 billion dollars, enough to eliminate extreme poverty according to the IDB.

While greater efficiency could free up funds for education, better targeting will also be crucial. Many countries focus on tertiary rather than primary education, and there is a persistent mismatch between training and skills required. This entrenches inequality and competitiveness woes.

Impacts

• Wasteful public spending exacerbates widespread reluctance to pay taxes, cementing inequalities in the tax burden shouldered by the wealthy.
• High levels of inequality will encourage redistributive spending, potentially to the detriment of public investment.
• Rising pension demands will further cut into the funds available for education, hitting efforts to increase skills and productivity.
• Public pressure to maintain spending with immediate effects, over infrastructure and education, will obstruct long-term productivity gains.