The Social Sectors from Crisis to Growth in Latvia


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Presentation by Peter Harrold, Indhira Santos and Emily Sinnott (World Bank) at Country workshop: "EU Balance-of-Payments assistance for Latvia: Foundations of Success" organized by the European Commission, Directorate General for Economic and Financial Affairs, and the Bank of Latvia.
Brussels, March 1, 2012

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The Social Sectors from Crisis to Growth in Latvia

  1. 1. The World BankThe Social Sectors from Crisis to Growth in Latvia March 1, 2011Peter Harrold, Indhira Santos and Emily Sinnott, The World Bank, Brussels
  2. 2. Overview1. World Bank involvement in stabilization program2. Demographic challenges and social spending during the boom3. What happened to education, health and social protection during the crisis?4. Remaining challenges5. Lessons learned 2
  3. 3. World Bank participation in Latvia’sstabilization program Latvia graduated from World Bank borrower status in 2007Lending support Social sector reforms  Emergency social safety net, including the public works program (simtlatnieku programma)  “Funds follow the student” education financing reform aimed at increasing efficiency and quality given shrinking school-age population  Protection of primary health care services during adjustment and support of reforms aimed at substituting expensive inpatient services by outpatient and alternative care Financial sector strengthening Small share of overall financing (EUR 400 ml), the focus was on providing technical assistance for reform and crisis protection measures 3
  4. 4. BOOM
  5. 5. Demographic challenge: Decreasing andaging population Declining population: Overall population fell by 5.6% in the past decade and is expected to fall by 19% over 2010- 2060 Age-dependency ratio to increase substantially: Cohort of those aged 65 and over expected as a share of the working-age Dramatic fall in school-age children: 5-14 year population projected to old population fell by 40% over 2000-2010 increase from 26% in 2000 to 66% by 2060 Effective retirement age was 59.3 in 20085 Source: World Bank staff calculations based on data from UN Population Division.
  6. 6. Social sector spending boomed in Latvia over 2004-2008 Real growth in social spending and Social Sectors as a share of total social sector contribution (percent), government expenditure 2004-2007 (percent), 2008 Bulgaria Slovenia Slovenia Education Lithuania Health Hungary Poland Social Protection Poland EstoniaCzech Republic Czech Republic Estonia Slovakia Health is But social Latvia Hungary responsible for protection— Romania nearly half this i.e. pensions— Latvia growth is the most Slovakia Bulgaria important component Lithuania Romania -10 0 10 20 30 40 0 20 40 60 80 6 Source: World Bank staff calculations based on Eurostat data.
  7. 7. Increased health spending was driven byrising inpatient unit costsResponse of the health system to budget Cost per inpatient episode and inpatient increase (percent), 2005-2008 cases, 2005-2010140 400 600,000120 350 500,000100 300 Constant 2003 Lats 400,000 Number of Cases 80 250 60 200 300,000 40 150 200,000 20 100 100,000 0 50 Inpatient Secondary General Oupatient Practitioner 0 - 2005 2006 2007 2008 2009 2010 Real change in expenditures (est.) Change in volume (patients) Cost per Inpatient Episode Inpatient Cases 7 Source: World Bank staff, based on data from Ministry of Health and the State Compulsory State Agency News.
  8. 8. Despite spending increases, Latvia lagging in health outcomes • 1970-1990: EU10 life Life expectancy at birth, in years81 expectancy stagnant and separated by79 only a few years (68 EU pre-May 2004 vs. 71).77 Slovenia • 1990-2009: Sudden Czech Republic75 Croatia increase in variance Poland with Latvia, the other73 Slovakia Baltics, Bulgaria, Estonia Romania worsening71 Hungary Romania and the rest69 Bulgaria improving. Latvia Lithuania • By 2000 all began to67 improve; but65 persistent gap with pre-2004 EU members. 8 Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011
  9. 9. … in particular due to circulatory system diseases and external causes Mortality Rates for Diseases All Causes and of the Circulatory System, 2009 Coronary heart diseaseSwitzerland (2007) 161 490 503 All Causes explains a large part of the Italy (2008) 174 Spain Iceland 143 173 504 507 difference in mortality France (2008) Sweden 125 187 518 520 between Latvia and the Diseases of the Cyprus Norway 194 158 532 537 Circulatory average EU country. A high 540 EU (15 Countries) Luxembourg 173 186 545 549 System incidence of motor vehicle Netherlands 150 Austria United Kingdom 213 169 563 563 All Causes with Circulatory accidents deaths also Malta Germany 212 217 572 576 Diseases Reduced to EU27 Average contributes. Greece 245 577 Finland 218 580 Ireland 190 587 EU (27 Countries) 217 600 Portugal 178 612 Slovenia 232 626 611 Denmark Czech Republic 160 357 605 644 745 Matching Finland’s progress Poland Estonia 355 424 634 671 809 840 on cardiovascular disease between1990 and 2009 Slovak Republic 450 865 632 Hungary 421 915 711 951 would bring Latvia closer to Latvia 480 689 Romania 548 959 628 Lithuania 497 964 convergence. 685 Bulgaria 605 965 577 0 200 400 600 800 1000 Age-standardized rates per 100,000 population 9 Source: World Bank staff, based on data from WHO/Europe Health for All Database, 2011
  10. 10. Did Finbalt health indicators improve from 2006 to2008? Focus on blood pressure screening Health results Diagnosed or Treated • Generally, data show smallfor High Blood Pressure Last Year Age 55-64 improvements for Latvia – as with Diagnosed or Treated Latvia 2006 Men comparators.for High Blood Pressure Latvia 2008 Men Last Year Age 45-54 Lithuania 2006 Men Diagnosed or Treated Estonia 2006 Men Blood Pressure Screeningfor High Blood Pressure Last Year Finland 2006 Men • Strokes and heart attacks account for much of Latvia’s health deficit. 0 10 20 30 40 50 Percent • Serious shortfall in diagnosis and Used Medicine for High treatment of high blood pressure. Blood Pressure Age 55- 64 Last Week • High blood pressure more likely to Used Medicine for High Latvia 2006 Men be diagnosed and treated in 2008, Blood Pressure Age 45- Latvia 2008 Men but still quite low, especially for 54 Last Week Used Medicine for High Lithuania 2006 Men men 45 and above. Estonia 2006 Men Blood Pressure Last Finland 2006 Men • Use of medicine for high blood Week pressure, also improving, but still 0 10 20 30 40 50 Percent unusually low, especially for men 45-54. 10 Source: World Bank staff calculations, based on Finbalt.
  11. 11. Spending was not focused on the mostvulnerable Social assistance programs as a share of GDP small in Latvia compared to EU countries, 2008 Poland Estonia Old age assistance Bulgaria Latvia Disability assistance Croatia Portugal Family and child allowances Lithuania Romania Housing assistance Czech Republic Spain Other (incl. income support) Slovakia percent of GDP Slovenia Greece Italy Ireland Belgium Germany Austria Hungary Netherlands France United Kingdom Luxembourg Finland Sweden Denmark 0 2 4 6 8 1011 Source: World Bank staff calculations based on OECD, Latvia SILC 2007, ESSPROS and World Bank Europe and Central Asia Social Protection Database.
  12. 12. Crisis
  13. 13. Social sector spending adjustmentfrontloaded Year-on-year change in millions of current Lats Frontloaded: Social sector1200 spending cuts were large and Other important to overall 20091000 adjustment: health and 800 Social education cuts accounted for protection 600 61% of overall cuts,. Education 400 Social protection 200 Health spending increase in 2009: Earlier pension policy changes 0 2008 2009 2010 coming into effect played a Total -200 government large role. SP spending did -400 spending not fall until 2010 and the cuts were only one-fifth of -600 those in education and health -800 over crisis .-1000 13 Source: World Bank staff calculations, based on Eurostat and Latvian Ministry of Finance.
  14. 14. In health, spending shifted from inpatient to outpatient and GP careComposition public health spending, 2008-2010 •Real health spending fell by 26%.100% 23 27 •Inpatient spending, the largest80% 32 category, had the largest cuts, 12 14 falling by 57%.60% 7 17 8 15 9 •Inpatient stays fell by 32%.40% 14 17 42 •Outpatient, emergency20% 36 24 services, and services for 0% children and mothers were prioritized. 2008 2009 2010 •Health safety net introduced Inpatient Care Secondary Outpatient for the first time. General Practitioners Patient Pharmaceuticals 14 Source: World Bank staff, based on data from Ministry of Health
  15. 15. Stopped investing in buildings and started investing in people Inpatient contracted hospitals and beds fell, 2008-2010 Hospitals 100 •Changed input-mix by reducing the 78 72 number of hospitals with inpatient 39 contracts by 50%. 0 Beds (end of the year) • When hospitals’ inpatient contract20,000 removed, Ministry finds that 30% of 17,001 15,121 inpatient cases disappear. 11,920 0 •GP visits increased. 1000 Beds per 100,000 •Day care or day surgery patients also increased. 749 669 575 0 2008 2009 2010 15 Source: World Bank staff, based on data from Ministry of Health.
  16. 16. Large upfront reduction in educationspending in Latvia Decomposition of Change in Education Sector Spending in 2009, Latvia introduced across- 200 decrease(-)/Increase(+) the-board spending cuts (as 150 Other did Estonia). Other Compensation countries had less 100 Good and services sustained cuts across 50 Capital education categories. 0 Per student financing wasin percent Estonia Latvia Lithuania Hungary Romania -50 introduced in Latvia, assisting in the adjustment -100 to over-capacity in the -150 system resulting from a decreasing school-age -200 population. -250 -300 16 Source: World Bank staff, based on data from Ministry of Education and Science.
  17. 17. In education, many schools were closed and teacher workloads reduced Contracted Schools and Teachers in Latvia, 2007/08-2010/11 2000 All Schools Between 2007/8 and 2009/10: •Enrollment fell by 10%. 958 948 846 830 •Reduction in the number of 0 1000 schools (and staff) was Primary Schools concentrated at the primary level (-21%). 516 508 409 400 •Teaching workloads fell by 24%, 0 so many teachers were able to 100 Special Schools keep their jobs but with reduced hours or lower hours counted towards pay. 63 63 63 63 050,000 In 2010/11: Teacher Workloads •Pace of adjustment slowed. •Enrollment fell by 4%, but only 1% 31,960 32,331 27,884 24,210 of schools were closed and 0 teacher workloads increased. 2007/08 2008/09 2009/10 2010/11 17 Source: World Bank staff, based on data from Ministry of Education and Science
  18. 18. In contrast, targeted social assistanceprograms were enhanced over the crisis200 Last resort social assistance programs180 Needy People increased: Guaranteed160 (thousands) minimum income (GMI)140 beneficiaries peaked at 80120 GMI beneficiaries thousand (3.9% of population) (thousands) in March 2011.10080 Social assistance spending60 more than doubled over the crisis, but this is still made40 miniature by the increase in20 pension spending. 0 Sep-09 Sep-10 Jul-09 Jul-10 Mar-09 Mar-10 Jan-09 Nov-09 Jan-10 Nov-10 Jan-11 May-09 May-10 18 Source: World Bank staff, based on data from Ministry of Welfare.
  19. 19. Emergency social safety net introducedrapidly; protected by IMF-EC program Latvia’s social assistance programs too small to protect households at the onset of the crisis Government rolled out quickly an emergency social safety net (2009-2011) to protect those who lost their jobs as well as the poor:  Eased unemployment insurance eligibility requirements and extended duration  Expanded Guaranteed Minimum Income (GMI)  Introduced an emergency public works/workplace with stipends program (WWS, simtlatnieku programma)  Covered transportation for students affected by school closures  Maintained pre-primary education programs for 5- and 6-year olds  Exempted needy households from health co-payments and subsidized pharmaceuticals  Improved access and use of alternatives to inpatient treatment for the poor  Improved primary health care services and access Cost was not large: 0.5-0.6% of GDP per annum WB supported and EC-IMF stabilization program protected temporary measures by including an adjustor to fiscal targets to allow additional safety net spending if necessary 14
  20. 20. Emergency public works program (WWS) was well-targeted Distribution of WWS beneficiary households % of households that belong to % of households belong to top bottom two quintiles two quintilesQuintiles based on asset indexCurrently Participating 65 18Currently on waiting list 59 24WWS Completed 73 13Quintiles based on predicted consumptionCurrently Participating 56 18Currently on waiting list 50 18WWS Completed 62 14Quintiles based on predicted incomeCurrently Participating 69 12Currently on waiting list 70 13WWS Completed 70 14Note: The WWS survey covers only a part of population and thus it is not representative of population. To createquintiles, data from Household Budget Survey (HBS) 2009 is used. The quintile cut offs are derived from HBS. To createasset index in WWS, factor-loadings from HBS are used. Similarly a model is fitted using HBS based on commonvariables in WWS and HBS. The coefficients derived from HBS are used to predict consumption and income in WWS. 20 Source: Ferre, Azam and Ajwad (forthcoming).
  21. 21. Challenges
  22. 22. Limited further savings in education andhealth; old-age spending pressures Need for further reallocation of resources in the education and health sectors as part of continued structural reforms, but strong arguments for increasing overall sector envelopes  Adapt education sector to decline in student population Under 0.2% of GDP over 2010-2020  ...could shift freed resources to other needs, e.g. early childhood interventions or higher education  Resources for poverty-targeted programs severely limited (safety net spending cut in 2012 adjustment) Health challenge is to constrain spending pressures and reallocate within sector to improve health outcomes  Range of estimates for health pressures. 0.3-1% of GDP over 2010-2030 ...brings us to the question of old-age spending Reforms reversible—particularly where there is scope to re-roll out infrastructure (e.g. beds closed but hospital infrastructure remaining) 22
  23. 23. Pension age increase will bring initial, butnot sustained, savings Simulation of Projected Fiscal Savings from Proposed Retirement Age Increase (Percentage of GDP) 3.0% 2.5% 2.0% effect on pension scheme 1.5% effect on all social insurance 1.0% effect on consolidated gov. 0.5% finances pension deficit (subsidised by 0.0% 2%) 2010 2020 2030 2040 2050 2060 -0.5% -1.0%23 Source: World Bank staff projections.
  24. 24. Lessons Learned
  25. 25. Lessons learned Prioritize and make trade-offs in social sector spending. In Latvia, this was facilitated by:  Depth of crisis  Social spending relatively low as a share of GDP, but large reform gaps in education, health and social protection going into the crisis  Reforms based on analysis of where efficiency gains were highest Take rapid action where initial weaknesses in social protection systems exist Pension reform proved really difficult even during crisis.  Pension spending increased by 27% in real terms over 2008-2010  Large cuts in education and health were politically feasible, whereas it was not possible to make pension reforms with a short-term fiscal impact. 25
  26. 26. Thank you!