Public Expenditure Policies in Southeast Europe

WORLD BANK WORKING PAPER NO. 134
Public Expenditure Policies in
Southeast Europe
Ivailo V. Izvorski
Satu Kahkonen
THE WORLD BANKWORLD BANK WORKING PAPER NO. 134
Public Expenditure Policies
in Southeast Europe
Ivailo V. Izvorski
Satu Kahkonen
THE WORLD BANK
Washington, D.C.Copyright © 2008
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ISBN-13: 978-0-8213-7450-4
eISBN: 978-0-8213-7451-1
ISSN: 1726-5878 DOI: 10.1596/978-0-8213-7450-4
Cover photo by Yosef Hadar.
Ivailo V. Izvorski is Senior Country Economist in the Poverty Reduction and Economic Man-
agement unit of the Europe and Central Asia Department at the World Bank. Satu Kahkonen
is Lead Country Economist in the Poverty Reduction and Economic Management unit of the
South Asia Department at the World Bank.
Library of Congress Cataloging-in-Publication Data has been requested.Contents
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Acronyms and Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Executive Summaryxi
1. Fiscal Developments and Government Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Government Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Level and Trend of General Government Expenditures. . . . . . . . . . . . . . . . . . . . . . . . 7
Expenditure Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Lessons Learned from EU Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2. Ensuring Social Welfare: Social Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Public Social Protection Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Reforming the Pension System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Reforming Social Welfare Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Reforming Labor-Market Support Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3. Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Institutional Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Health Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Health Outcomes and Utilization of Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Health Financing and Expenditures Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4. Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Education Expenditures and Sources of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Education Outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Institutional and Policy Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Efficiency Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Equity Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
5. Size, Structure, and Remuneration of the Public Service . . . . . . . . . . . . . . . . . . . . 71
Comparative Analysis of Public Sector Wage Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Trends in Public Sector Staffing and Wage Levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
iiiiv Contents
Wage Setting Mechanism and Pay Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Ongoing Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
6. Infrastructure: Fiscal Space and Public Investment Management. . . . . . . . . . . . . 85
Infrastructure Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Macroeconomic Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Fiscal Space. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Public Investment Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
LIST OF TABLES
1.1. Income Levels in Most SEE Countries Are Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2. The Countries of Southeast Europe: Relations with the EU . . . . . . . . . . . . . . . . . . . . 4
1.3. SEE, Decomposing Fiscal Adjustment, 2000–054
1.4. General Government Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.5. Fiscal Developments in SEE, 1997–2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.6. General Government Interest Payments and Primary Expenditures, 1997–2006 . . . . 9
1.7. General Government Expenditures, Economic Classification. . . . . . . . . . . . . . . . . . 12
1.8. General Goveres, Functional Classification . . . . . . . . . . . . . . . . . 15
1.9. Expenditure Adjustments in Select EU Countries in 1990s . . . . . . . . . . . . . . . . . . . . . 17
2.1. Public Revenues and Expenditures on Social Protection . . . . . . . . . . . . . . . . . . . . . . 20
2.2. Public Expenditures on Social Protection: A Breakdown, 2005 . . . . . . . . . . . . . . . . . 22
2.3. Payroll Contribution Rates in SEE and Selected CEE Countries, 2006. . . . . . . . . . . 23
2.4. Basic Features of Reformed PAYG Systems in SEE . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.5. Second Pillar Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.1. Sources of Healthcare Financing, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.2. Health Expenditure in SEE, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.3. Health Spending as Percentage