Development Finance and Inequality: Good practice in Ecuador, Rwanda and Thailand | Economic Inequality

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Inequality is central to Oxfam
  OXFAM CASE STUDY AUGUST 2013  DEVELOPMENT FINANCE AND INEQUALITY Good practice in Ecuador, Rwanda and Thailand Inequality is central to Oxfam’s mission to fight poverty. While growth is good for poverty reduction, its effectiveness is severely reduced in places where high levels of inequality persist and privileged elites are able to hoard the rewards. In those cases, marginalized groups will see little of the positive benefits from high growth rates. However, governments, donors, and NGOs (both domestic and international) can do much to help redress these imbalances, particularly in places where development finance (defined as both overseas development aid and domestic resource mobilization targeted towards development) makes up part of the national budget. This report explores how reforms to the way that development finance is provided and administered in developing countries can help to reduce inequality and, as a result, create growth that benefits all. The three case studies focus on education in Rwanda, fiscal policies and revenue collection in Ecuador, and universal health care in Thailand.  2 1 INTRODUCTION This report examines reforms in Rwanda, Ecuador, and Thailand that may be contributing to reduced inequality. In Rwanda , aid reform led to a better financed education sector. Fiscal policies in Ecuador   have become more progressive and targeted to the poor, and tax revenues are more efficiently collected. Thailand , already a health leader in South East Asia, instituted a policy of universal health coverage in 2002 and, since then, has significantly improved access to health services. Inequality often entails exclusion and marginalization. High income inequality is an outcome of multiple, intersecting inequalities that reproduce conditions of political and economic disparity. In highly unequal societies, those at the bottom of income distribution experience overlapping inequalities based upon ethnicity, gender, religion, cultural practices, and geography. 1  The overlay of multiple inequalities excludes certain groups from social and economic networks and means that those at the bottom lack access to opportunities for economic mobility. Inequality is central to Oxfam’s mission to fight poverty. While growth is good for poverty reduction, its effectiveness is mediated by inequality. The impact of growth on poverty is weaker in countries with high inequality, and its power declines when inequality rises during growth periods. 2  Inequality, therefore, makes the fight against poverty even harder. Rapid economic growth across developing countries has significantly reduced extreme poverty. However, at the same time, inequality has risen dramatically because too much growth has been unevenly distributed. Despite the impressive gains in poverty reduction, more equitable growth would most likely have produced greater poverty gains.  Achieving the Millennium Development Goal of eradicating extreme poverty requires national government to seriously address inequality within their borders. Government policy, together with the careful allocation of financial resources, can potentially make a difference. For example, education has long been considered a crucial equalizer and the basis for ensuring equality of opportunity; and the capacity to raise revenue to spur growth and provide social insurance is fundamental to effective governance, and instrumental for poverty and inequality reduction. Likewise, access for all citizens to health services mitigates the divide between the haves and the have-nots. The three case studies that follow offer good examples of countries that are mitigating inequality through health, education, and tax policies, although more data is necessary to fully ascertain their impacts. The stakes are high. Countries with high levels of inequality often suffer a host of social ills  –  including higher rates of crime, violence, disease and depression. 3  Economists have suggested that chronic inequality may   3 limit a country’s capacity for long term growth. 4  Inequality also injects vulnerability and risk into financial systems. 5  Importantly, inequality is not   a developing country issue. Today, inequality is truly a global phenomenon, and countries at all levels of development are looking for ways to curb its effects. Despite the successes of the Ecuadorean, Thai and Rwandan policies, challenges remain. Rwanda’s high enrollment rates obscure  persistent inequality across gender, geography, and household income at the secondary level . While Ecuador’s fiscal reforms increased health and education spending, total social expenditure remains below the Latin  American average. In Thailand, funding for universal health care is underspecified and sometimes uncertain. The following case studies were produced through a combination of document analysis, semi-structured interviews, and focus groups. Interviews were conducted in all three countries between June and October 2012.  4 1 BETTER AID CO-ORDINATION IN THE EDUCATION SECTOR IN RWANDA ‘Economic growth alone is not sufficient to bring about the necessary rise in the standard of living of the population. To vanquish hunger and poverty, growth must be pro-poor, giving all Rwandans the chance to gain from the new economic opportunities. ’   H.E. Paul Kagame, President of the Republic of Rwanda, Vision 2020 (2000)   CONTEXT AND ACHIEVEMENTS Rwanda is highly dependent on external aid, which represents about 40 per cent of its national budget. However, it has broad control over the management of these funds, with 65 per cent of the aid received being spent by government agencies. In 2008, 48 per cent of the education budget was provided through sector budget support (SBS), up from zero in 2005 and 11 per cent in 2006. This represents the highest percentage across all sectors of government. 6  The Rwanda Aid Policy 7  drawn up in 2006 listed the problems encountered in the co-ordination of aid as: i) a lack of delegation of authority to local offices by donor organizations; ii) incomplete reporting of aid to government; iii) some donors’ unwillingness to meet with gove rnment’s requests for information; iv) the country’s Poverty Reduction Strategy Paper gave broad objectives, but did not discuss the approach and co-ordination of stakeholders, leading to donors promoting their own programmes, which were not included in th e government’s planning and budget; and v) the potential for large vertical funds (funds targeted at specific issues on a global basis) to disturb the Government of Rwanda ’s  (GoR) allocation of resources across sectors and sub-sectors. The Aid Policy was designed by the GoR to address these issues. It ensures that the GoR sets its own development priorities and reduces transaction costs by aligning donors’ strategies with national policies.
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