Ecuador - A social sector strategy for the nineties

Report No. 8935EC Ecuador A Social Sector Strategy for the Nineties November 28,1990 Country Department IV Latin America and the Caribbean Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. lts contents may not otherwise be disclosed without World Bank authorization.  BASIC COUNTY DATA Currency Eauivalence Currency Unit: Sucre Si. US$1.00 - SI. 436 (Dec. 1988) - Si. 800 (April-May 1990) Fiscal Year January 1 - December 31 Population (1990) Total 10.7 million Annual Growth Rate 2.6% Main Social Indicators (1990) Per Capita GDP US$1150 (1989) Literacy Rate 902 Life Expectancy 65 years Infant Mortality Rate 55 per thousand Population Under Poverty Line 65% (1980)  FOR OFCAL USE ONLY ECUADOR A SOCIAL SECTOR STRATEGY FOR TlE UIVTIES TABLE OF CONTEINTS MP GLOSSARY OF ACRONYMS EXCUTsIE SU2QARY . . . . . . . ....*.*.*.*.*.*.*.. 1 I. THE SOCIAL SECTORs STATUS AND TRENDS . . . . . . . 1 A. Background . .... . . . . . . . . . . . 1 B. Economic Performance . . . . ..... 1 C. Evolution of the Social Sector and its Institutions . . . . . . . . . . . . . 2 D. Paoerty and Income Distribution Trends . . 4 E. The Government's Sectoral Policy and Programs . . . .. . . . * . . 9 it. INSTITUIIONAL AND POLICY ISSUES . . . . . . . . . . 13 A. Social Sector Expeniitures . . . . . . . . 1. S. Institutional Capacity to Manage Social Sector Development . . . . . . . . .18 -II. SUBSECTOR ISSUES . .... .... .44444..28 A. Education and Training . . . . . . . . . . 29 B. Health and Nutrition . . . . . . . . . 33 C. Social Infrastructure . . .. . . . . . . 40 IV. THE PROPOSED POLICY/STRATEGY PACKAGE . . . . . . . . 41 A. The Policy Package . . . . . . . . . . . . 41 B. The Strategies . . . . . . . . . . . . . . 45 C. Implementing the Strategies: Promoting Change and Sound Policy . . . . . . . . . 49 D. An Agenda of Priority Programs and Accompanying Policy Initiatives . . . . . 51 BIBLIOGRAPHY A This report is based on the findings of three missions conducted in May and September 1989 and in February 1990, and on the dialogue which has been conducted with the Government of Ecuador since 1988. This report has been prepared by Bernardo Rugler who also led the missions. Hernando Comes-Buendia prepared a basic general sector background paper with the ssistance of Libardo Sarmiento; Robert McMeekin contributed the sections on sector management and education; Jose Andreu updated the population, health, and nutrition subsector work, which was completed by Patricio Marques; valuable research assistance was provided by Naney Jessurum-Clements and Andres O'Byrne. Additional background papers were prepared by Carmelo Mesa-Lago (social security), Ernesto Schiefelbein (education), Marcelo Aztoreca and David Nelson (nutrition). Government staff provided abundant information. Secretatial support provided by Mrs. Patricia Villag6mez. This document has a restricted disttibution and may be used by reipients only in the performance of their oMca duties Its contents may not oftrwise be discosed without World Bank authozaton.  TEXS TABLES AND FIGURES TABLE 1.1 Public Expenditure in Social Sectore by Ministry and Main Insttutions .............. 5 FIGURE 1.1 Distribution of Incme. . 7 . . . . . . . . . . . . 7 TABLE 2.1 Share of Social Expenditures in GDP and in Total Public Budget (PB) .. 15 FIGURE 2.1 Incame Distribution and Public Social Subsidy Distribution 1985 . ...19 FIGURE 2.2 Public Subsidy Distribution 1985 21 FIGURE 3.1 Chronic and kbute Malnutrition Prevalence Among Children Under Age 5 . . . . . . . . . . . 37 TABLE 4.1 Policy Matrix . . a . . . 6 . . . . . . . 43 TABLE 4.2 Strategy - Policy Matrix . . . . . . . . . 47  GLOSSARY -O ACRONYMS 8Ev ECUATORIAN HOUSING BANK CEMEIN CENTER FOR THE PROCUREMENT AND DISTRIBUTION OF DRUGS CEPAL/ECLAC UNITED NATIONS ECONOMIC COMISSION FOR LATIN AMERICA CIEDEC CENTER FOR EDUCATIONAL RESEARCH CNS NATIONAL HEALTH COUNCIL CONADE NATIONAL PLANNING COUNCIL CONAUPE NATIONAL CORPORATION FOR THE SUPPORT OF THE POPULAR ECONOMIC UNITS CONUEP NATIONAL COUNCIL OF POLYTECHNIC SCHOOLS AND UNIVERSITIES FAO UNITED NATIONS FOWD AND AGRICULTURAL ORGANIZATION FONNIN NATIONAL FUND FOR THE PROTECTION AND NUTRITION OF THE INFANT MORTALITY IN ECUADOR FONUEP NATIONAL FUND OF POLYTECHNIC SCHOOLS AND UNIVERSITIES FOPINAR FUND FOR THE PROMOTION OF INDUSTRIAL SMALL ENTERPRISES _DB INTER-AMERICAN DEVELOPMENT BANK IEDS INSTITUTE FOR HEALTH DEVELOPMENT ,B08 SANITATION INSTITUTE lESS SOCIAL SECURITY INSTITUTE INEC STATISTICS NATIONAL INSTITUTE INEM NATIONAL EMPLOYMENT INSTITUTE INSOTEC SOCIOECONOMIC AND TECHNOLOGICAL RESEARCH INSTITUTE JNV NATIONAL HOUSING BOARD MOE (or MEC) MINISTRY OF EDUCATION AND CULTURE NOr MINISTRY OF FINANCE mmL MINISTRY OF LABOR MPH (or MSP) MINISTRY OF PUBLIC HEALTH xsW MINISTRY OF SOCIAL WELPARE NGO NONGOVERNMENTAL ORGANIZATION PAAMI MOTHER-CHILD FEEDING PROGRAM PEBDS EMERGENCY EMPLOYMENT PROGRAM PAHO PAN AMERICAN HEALTH ORGANIZATION PREALC REBGIONAL EMPLOYMENT PROGRAM FOR LAC (ILO) PUCE ECUADOR CATHOLIC UNIVERSITY SECAP VOCATIONAL TRAINING SERVICE SFI FAMILY HEALTH PROGRAM UNDP UNITED NATIONS DEVELOPMENT PROGRAM UNEPROM EXECUTIVE UNIT OF THE NATIONAL PROGRAM OF MICROENTERPRISES UNESCO UNITED NATIONS ORGANIZATION FOR EDUCATION, SCIENCE AND CULTURE UNICEF UNITED NATIONS CHILDRENS EDUCATION FUND USAID US AGENCY FOR INTERNATIONAL DEVELOPMENT WFP WORLD FOOD PROGRAM i  ii EXCUTIVE SUKE Social Sectors Statue and Trends 1. Evolution of the Social Sector and its Institutions. During the oil boom of the 19709 in Ecuador, priority was given by government to lmproving performance in the social sectors. This effort brought about major improvements in basic health and education indicators. For example, infant mortality was halved during the seventies, reaching a level of about 55 per thousand 5y 1988, while the primary school age group enrollment rate reached levels of about 90 percent. Also, life expectancy increased from 46 years In 1970 to 65 in 1988, with the illiteracy rate decreasing by more than half during that period from about 24 to 10 percent. 2. However, the increase in coverage of social sector programs set in motion in the 1970. was sustained during the 1980s despite the fall and subsequent flattening of expenditure curves. The increased resource constraints that marked the 1980. with the fall in oil prices led to declines in expenditure per student and per patient. While part of the reduction was due to lower costs based on productivity increases (per sucre spent), there is serious concern that the quality of some of the services has been eroded. Development of public sector institutional capacity remains limited, even though public employment grew at a rate of about 20 percent per year in the period 1974-82, and represented nearly 15 percent of total employment during the 1980s. Essentially, progress toward better public investment prcgramming mechanisms and their timely implementation continues to be inadequate. This issue now assumes a special preeminence in view of the likelihood of sustained resource constraints. 3. Poverty and Income Distribution Trends. In Ecuador, historically, poverty has been widespread and income distribution highly skwed. While as noted above a few benefits of the oil boom trickled down to the poor--mostly in the form of increased access to social services--poverty and income distribution problems persisted during the 1980s. The reduction of incomes that had accompanied the fall in oil prices hit the poor the hardest along with the lower-middle income groups. Average per capita income in 1989 was about the same as in 1978. The labor share of GDP decreased between 1983 and 1988, and the minimum wage in real terms by mid-1989 was about three-fourths its 1983 level. And while the urbanization process helped to increase access to social services, poverty measured by monetary income is pervasive in large cities, with most new entrants to the urban labor force absorbed in low- productivity jobs in the service sectors, including the public sector. Also the poor have lower education levels so they lack human capital; and their limited access to credit restricts their physical capital endowment. 4. Government Sectoral Policy and Protrams. The social sector played a prominent role during the campaign that brought the present Government into office. Under the label of "repayment of the social debt," priority was given to social sector programs. After three months in office, in November 1988, the Government created a Frente comprised of the four social sector ministries. Six priority programs were announced, but implementation began on only one, literacy. The other five--employment, informal sector, nutrition, rural development, and sanitation--remain in varying stages of design after 18  iii months in office. While a social sector policy was formally delineat6d in the 1989-92 Development Plan, this could be best characterized as an amalgam of projects developed by different government agencies rather than a comprehensive investment program. After issuance of t.he Development Plan, the original Frente Social initiatives evolved into a number of areas for action, that include the original ones. Because of competing priorities in an environment of fiscal austerity, and given that the 1989 budget had been defined prior to the design of social sector programs, allocation of resources to them in 1989 was limited. The Government now intends to substantially extend these programs and expand their coverage country-wide, although the source of financing for this proposed initiative is not clear. Institutional and Policy Issues 5. Social Sector Expenditures. Social sector expenditures in the Central Government budget stabilized around 5 percent of GDP for the period 1983-87 but following the pattern of the general budget decreased to 4.5 percent in 1988 and 4.2 percent in 1981. In general, allocation of resources within the public budget show the rigidities typified by the relative stability of sectoral shares over the last eight years. This is largely due to the incremental nature (in nominal terms) of the budgeting process and the widespread use of earmarked resources. Under the prevailing patterns, the redistributive effect of social public expenditure towards the poor has been limited. Absence of cost-recovery mechanisms aggravates the situation with respect to efficiency and equity. 6. Institutional Capacity to Manaae Social Sector Development. The Frente Social ministries have limited capacity to plan programs and make resource allocation decisions (a shortcoming found in Government agencies outside the Frente Social as well). Their capacity to implement programs and projects is also limited, although there are differences among ministries. They all suffer from the general difficulty of attracting, training and retaining high- quality staff on a permanent basis. The support for planning and programning activities provided to the Frente Social ministries by the Planning Council (CONADE) and the Ministry of Finance has been insufficient. In general, expenditures of the Frente Social ministries exceed the amounts originally budgeted by a substantial margin. The principal cause is inflation. However, in years of low inflation, expenditures may fall short of budgeted amounts when either the line ministries or MOF lack the capacity to implement the activities budgeted or fail to adjust the budget when expenditures fall. Neither the Annual Operational Plan nor the multi-year National Plan provide satisfactory operational procedures for evaluating and establishing priorities for capital expenditures. The effectiveness of the budgeting process is further impaired by the widespread practice of earmarked revenues. This has led in the past to overinvestment in areas of questionable economic merit which imposes a continuing burden of high recurrent costs. 7. Inadequate employment generation by the modern sector is attributable in part to institutional restrictions imposed on the labor market; moreover, the informal sector can usually bypass labor legislation and includes workers earning below the legal minimum. Poor workers are overrepresented in the informal economy, lack human capital, and include the highest percentage of women in total employment. After identifying efficient informal sector activities, remedies to improve productivity in them include training programs, access to technology and credit.  iv Subsector Issues 8. Education. Coverage is reasonably high at the primary education level in Ecuador, especially in urban areas, but quality has deteriorated. While the quality and management issues pervade all levels of the education system, efficiency and equity objectives indicate that priority be given to primary education. There is no assessment system to provide detailed information on education quality, but studies confirm that the system is ineffective and levels of learning are low. Quality is also an equity issue; it is the children of poor families that feel most strongly the effects of low quality. Public pre-school education is very limited. Its possible expansion would have to be carefully designed and targeted to keep costs at manageable levels. In the area of technical education there is a need for a rigorous review of the upper-secondary tier, including its goals, organization, and major problems. SECAP, the institution with oversight of training, is trying to expand its target population and improve resource utilization through the Programa de Capacitacion Popular. Higher education enrollment has grown rapidly. Policies with regard to this subsector are in need of review. 9. Health and Nutrition. The two main providers of public health services are the Ministry of Public Health (MPH) and the Social Security Institute (IESS). However, public sector programs reach only one-third of the population while about one-half of the population is not covered at all. About one-fourth of the population lacks access to water services and about one-third to sanitation. Most of them are low-income groups. The set of programs for the health subsector included in the Development Plan comprise the proposed Health Plan for 1988-92 based on a family health care model containing a strong mother-child health care component which includes family planning. Unfortunately, the degree of quantification of the resources needed for these programs is incomplete, including the Proarama de Alimentacion v Nutricion, which is part of the Health Plan. Moreover, most of its subprograms are still in a preparatory phase. TESS continues delivering relatively costly health care services to its members almost independently of any MPH action. Coverage of health services is low. Moreover, health and sanitation services are plagued by excessive centralization and weak regional organization. Nutritional deficiencies of newborn and children under age two are particularly disturbing. From the point of view of health care services delivery, appropriate coordination between MPH and IESS can lead to increased coverage with some cost-recovery and better sectoral effectiveness. 10. Social Infrastructure. The central administration have confronted limitations for providing appropriate maintenance to the existing infrastructure, and to reach the groups not covered yet by the basic education and health care services with properly equipped, yet low cost new infrastructure. The purchase of housing is becoming increasingly difficult for the lower-income families due to increased construction costs, interest rates (which were negative in real terms until early 1989, but should so9n reach reasonable market levels) and salaries which, under the adjustment process, have been _ncreasing at a rate under the inflation rate. Since access of the poor to the le"at expensive options ofiered by JNVIBEV is now, and will continue to be, more restricted than in previous years, efforts by JNV/BEV to move toward, low-cost programs (e.g., sites and services) using least-cost technologies, technical assistance for self-constrction, and community participation will require additional support.  v The ProDosedl Rolicv/Strategv Package 11. The Policy Packace. While improving the coverage and quality of scm basic social programs requires implementing specific actions, the most pressing needs require measures which would arrest deterioration in the delivery of priority social sector progsams. The policy package focuses ons (a) giving priority to social sector programs as the instrument for poverty alleviation; (b) establishing efficiency and equity in public social expenditures; (c) strengthening public sector decision-making and management; and (d) enhancing effectiveness of specific social progrsms. The most effective means readily available to public sector decision-makers for contributing to poverty alleviation is social expenditure. In this regard, short-term distributional impact of public expenditure in education, water and health, and social security should be enhanced by improved targeting. Moreover, increasing human capital investments araong the poor, including the Indian population, will enhance their future productivity and greatly diminish potential future expenditures needed to correct the negative effects caused by otherwise low investment levels. The more traditional areas for investing in human capital are education and training and nutrition and health. Although the current level of social expenditure is still insufficient to satisfy investment requirements in those areas, the present economic and fiscal situation does not offer clear a clear perspective for undertaking the desirable increases in public social expenditure. Resources for priority programs can be obtained by reducing wastage. This can be achieved by Improving the effectiveness of the resources used in the programs and/or cutting questionable programs. Resources for priority programs can also be obtained by making the necessary budget reallocations and by mobilizing new resources through cost-recovery policies and eventually foreign donors/lenders. 12. The Strategies. Four basic strategies have been devised to address the policy issues identifieds (a) strengthen the budgeting process; (b) decentralize social programs and project implementation; (c) reinforce social sector staffing; and (d) foster the role of the social sector in promoting economic growth and efficiency. It is recommended that the present budget system, which includes all the earmarking subsystem, should be replaced by a resource allocation process in which not only the role of aggregate intersectoral allocations by the Ministry of Finance is given substance, but more importantly, a substantive role is given to the sectors in preparing the budget starting with estimating the budget requirements of disaggregated specific programs and projects. Budget strengthening must be accompanied by an impact assessment of the various sectoral activities. 13. Effectiveness of social programs should be improved by transferring the authority and responsibility for management decisions and control from the central ministries of the Frente Social to decentralized entities or levels of government. The capacity of the provinces, which ;-e legally entitled to assume responsibilities in education and health, varies widely. Some functions should clearly remain the responsibility of the central Government, including standard-setting, oversight and control, auditing, research and some aspects of planning and budgeting. While a general overhaul of the civil service mill be necessary in the long-run, more immediate ways for improving the staffing In the social sector include training, local and expatriate technical  VI assistance, and use of non-public seetor expertise from W00. and consultants. Greater reliance will have to be placed on the private soctor for performing activities in which they have demonstrated cap6abltty. Moreover, having public and private deliverers competitg to provide social services con only result in improved cost-effectiveness to the benefit of final users. Given that human resources are the most important for securing societal vealth, then social sector programs should receive the highest priority for the role they play in the development of human capital. 14. l n the Strateaiess Promotina Chans and Sound Polgcl . Successful implementation of the recommended set of policies and strategies would require deep changes not only specific to social sector areas, but also in the budget process and public sector administration. In the long term a comprehensive public sector reform will have to be completed. In the short term policy change should be started and the strategies implemented by applying them to a targeted subset of social sector programs. Long-term policy and strategic objectives should guide the process of overall change. 15. An Agenda of Priority Prorramo/Policy. Initial actions should include implementing social sector programs in the following areas: (a) improving the quality of Primary Education. Activities already financed under the IDS US$60 million loan for rural areas, should be supplemented in lou-income urban areas with related activities in improvement of the supply of teaching and learning materials (including textbooku), training programs for teachers and schoo3 and local level administrators, development and introduc.ion of achievement testing, and targeted supplomental feedi-g programs. (b) Extending Basic Health Care on the basis of a Family Health Program centered around its maternal/child-care elements, such as delivery, pre- and post-natal care, and family planning. This should also include vaccinations, health education, nutrition and targeted feeding programs, as well as a malaria control program In the coastal region. In the area of nutrition particular attention should be given to programs that promote good health for mothers and young children, such as prevention of micronutrient deficiencies and of typical infections in children, nutrition supplemontation for pregnant women, growth monitoring programs, prenatal screening, education for improving family hygiene, food processing and feeding practices, including breastfeeding, and nutrition surveillance. Adoption of a feasible nutrition policy and improved coordination among agencies, including NGOs are needed to ensure success of the proposed interventions. (c) A Social Infrastructure program with strong community participation for provision of schools and health posts, and limited supplementary actions in water, sanitation, and housing. And, (d) a training progrsa for informal sector employees that would make use of the existing facilities of SEGAP. Iuvestment programs should be supported by policies that will: (a) facilitate the flow of national counterpart funds; (b) enhance targeting to the poor; (c) improve institutional coordination, Including that with NGOs; and (d) strengthen the sector$s financial position. To promote expansion of appropriate policies, new priorities will have to be Identified and appropriate monitoring and evaluation of progress of on-going operations should be conducted. Activities would center around the development of sectoral information systems and of new sectoral investment/expenditure programs. Successful implementation of these activities would constitute the pillars for social sector institutional strengthening.  I. SOCIAL SECTOR: STATUS AND TRENDS A. BackAround 1.1 The stimulus of an oil bonanza in the 1970. and subsequent accelerated economic growth that lasted until 1980 provided an environment for social sector programs to undergo considerable expansion. However, several sectoral problems persist and have been further exacerbated by the her h economic climate during the 1980.. Specifically, poverty is still a maj r problem in Ecuador, in an absolute sense and when compared to _-ountries in t4ia region. This report will: (a) analyze the current poverty situation and its immediate and future perspectives, (b) review the role of social sector services ir alleviating poverty in the short-term and reducing poverty in the long-tern, and (c) recommend policy measures and possible strategies to these ends. 1.2 Poverty is a complex, multidimensional issue. In a report of this type not all of its dimensions can be addressed. Instead discussion concentrates on those that relate to the impact of Ecuador's social sector programs on poverty. This will necessarily include a discussion of human capital formation. A special effort has been made to synthesize and process the abundant basic data scattered in different agencies and in several studies to overcome an apparent dearth of comprehensive and consistent sectoral information. 1.3 Several World Bank studies have highlighted the importance of social sector programs in addressing poverty alleviation, including the Ecuador Country Economic Memorandum (We-ld Bank, 1988) where the role of the sector in the country's medium-term deve3?pment strategy is considered as well. Emphasis is also given to the need for enhanced public responsibility in the sector and for improved public sector management. The Government has been actively engaged in sectoral dialogue with the Bank and has issued several policy statements, among them a Letter of Development Policy submitted to the Bank in January 1990, which along with CEM provides the discussion framework for this paper. In the remainder of this chapter a synopsis is given of economic performance, the evolution of the social sector, and the poverty dimension followed by the main features of the Government's proposed sectoral policies and programs. Institutional and policy issues are examined in Chapter II, while Chapter III focuses on the specific social subsectors. A set of policies that would be appropriate for addressing the issues identified in the previous Chapter and alternative strategies that could be followed are given in Chapter IV. B. Economic Performance 1.4 The oil bonanza was the main determinant of economic behavior of Ecuador during the seventies. It led to an average GDP annual growth rate of 9 percent and placed the country among the middle- income countries. However, the strategv followed by the Government during the period lacked a long-term perspective and thus was seriously flswed. Major portions of the Government's oil revenues were allocated to inefficient public expenditures and subsidies, and in the rnd financed consumption instead of productive investments. This  2 incre.sed a public deficit that was partly financed by external debt. (A thorough discussion of economi