Is it possible to redistribute wealth and improve society?

Responsible researcher: Angelo Cruz do Nascimento Varella

Title of the article: THE SOCIO-ENVIRONMENTAL ICMS OF PERNAMBUCO: AN ASSESSMENT OF THE SOCIO-ECONOMIC COMPONENTS OF THE POLICY BASED ON THE MARKOV PROCESS

Authors of the article: Luiz Honorato da Silva Júnior and Eryka Fernanda Miranda Sobral

Intervention Location: Pernambuco , Brazil

Sample size : Socioeconomic data from the municipalities of Pernambuco from 2004 to 2009

Sector: Economic Policy and Governance

Type of intervention: Effects of ICMS Socio-Environmental on the redistribution of resources

Variable of main interest: Adherence of municipalities to ICMS Socio-environmental

Assessment method: Other – Markov Process

Policy Problem

One of Brazil's biggest challenges is to improve the low health and education indicators that are related to environmental problems and difficulties in financing municipal management. In particular, the Northeast region presents locations with worrying results and, consequently, is the target of several public policies that seek to mitigate such negative characteristics.

However, solving these problems is a complex and long-term challenge, which involves different sectors of society and government, in addition to having distinct regional characteristics. The authors highlight the case of Pernambuco, which, according to Silva Júnior et al. (2010), presents, like other Brazilian states and the Northeast region, a serious inefficiency in the management of public expenses, aggravated by social and environmental problems.

Assessment Context

Scholars argue that solving the problem of inefficiency in public management, through financial incentives for municipalities that manage to improve their socio-environmental conditions, can be an effective strategy. In fact, several initiatives that face public management problems with economic incentives have already been implemented in Brazil over the last few decades.

Paraná was the first Brazilian state to create a governmental system of economic incentives through the ecological ICMS, established in 1991. The public policy consists of offering financial rewards, based on the redistribution of Tax collection on Operations related to the Circulation of Goods and on Provisions of Interstate and Intermunicipal Transport and Communication Services (ICMS), to municipalities that practice good environmental practices such as maintaining conservation units (UCs) and hydrological springs.

Pernambuco was the ninth Brazilian state and the first northeastern state to implement a public policy along the lines of the ecological ICMS. In 2000, the state put into practice the Socio-Environmental ICMS Law, inspired by the pioneer model from Paraná and similar legislation established in Minas Gerais, in 1995.

Policy Details

The purpose of the ICMS Socioambiental public policy is to generate healthy competition between the region's municipalities, so that improvements in areas of priority interest, such as education, health and efficiency in the management of public resources, are economically rewarded by the redistribution of state transfers from the ICMS. In this way, municipalities with smaller state transfers can work to increase the specific requirements of the legislation, improving social and environmental aspects simultaneously with gains in terms of state transfers, which generates local benefits in regions with the most varied geographic and socioeconomic difficulties.

It is worth noting that, for this to be true, municipalities will have to react to the incentives proposed by the law and that the municipalities involved will have to make an effort to maximize the gains arising from the redistribution of these state transfers, either by improving their resource management, or whether investing in social and environmental initiatives. Such characteristics create a certain meritocracy in the sense of more efficient public management and more focused on issues of social benefit.

Assessment Method

In order to find out whether the policy brought benefits to the municipalities and the state of Pernambuco, the researchers collected socioeconomic and environmental data from the Pernambuco Finance Department (SEFAZ-PE), the Brazilian Institute of Geography and Statistics (IBGE) and the Institute of Applied Economic Research (IPEA), for the years 2004 to 2009.

From the database, the researchers used a method called “Markov process”, in which it is possible to analyze the reactions of Pernambuco municipalities in relation to the ICMS Socio-environmental criteria, from its implementation, as well as make long-term forecasts. deadline regarding the adoption of municipal measures related to legislation.

According to the Markov process methodology, three criteria were selected: Education, Health and Own Tax Revenue. For each of the criteria, the municipalities were divided into four groups, according to the respective percentages received in each criterion.

Main Results

In the period between 2004 and 2009, transfers originating from ICMS Socioambiental to municipalities in Pernambuco exceeded 400 million reais. As a consequence, the amounts transferred by legislation represent significant contributions to municipal revenues in locations with less economic power. In fact, as you can see in the following graph, smaller and poorer municipalities are more financially dependent on socio-environmental criteria.

It is possible to see that the law has an income redistribution function, also observed in other Brazilian states, such as Minas Gerais, a state in which the practice became known as the “Robin Hood Law”. Still regarding the dependence on municipalities, it is possible to observe from the map below that the poorest regions of the state are also the locations most dependent on state transfers.

Regarding the other results of the analysis, it is possible to summarize the authors’ findings as follows:

1. Education Criterion

This criterion presented a low probability of changing groups, so that after the implementation of ICMS Socio-Environmental, 84% of municipalities did not change groups, with 17 municipalities moving to a better group and 13 municipalities moving to a worse group. Based on this criterion, the authors state that there was little merit in the application of the legislation, a fact that was corrected by changes in the law after 2009.

2. Health Criterion

Unlike the Education criterion, there is great mobility observable between groups in the Health criterion, mainly due to actions to combat infant mortality. During the period, only 30% of the municipalities did not change group, so that 69 municipalities moved to a better group than their initial position and 59 showed a worsening. The authors highlight that there was a relative worsening of the poorest municipalities.

3. Own Tax Revenue Criterion

For this criterion, it was possible to observe that 50% of the municipalities remained in the same groups, with 53 improving in relation to their initial position and 39 worsening. The authors indicate that there are simultaneous benefits between poor and rich regions in the state, so that the legislation benefits those who manage to improve aspects of financial management. In contrast, there is an observable penalty for inefficiency.

4. Long-term forecasts

With regard to long-term forecasts, the authors state that, if the characteristics of the legislation were maintained, more than half of the state's municipalities would move to the higher groups, both in the education and health criteria. In this way, it can be stated that the existence of the Socio-Environmental ICMS generates beneficial and positive incentives regarding individual improvement efforts.

Public Policy Lessons

ICMS Socio-Environmental proves to be an efficient and low-cost tool in the search for social, environmental and public resource management improvements. By rewarding good practices, positive incentives are created that lead managers and mayors to seek improvements in their respective municipalities, in order to generate wealth from the adoption of the legislation's requirements. This characterizes a modern and well-planned public policy.

However, it is worth noting that, by rewarding efficiency, inefficiency is penalized, so that poor municipalities may suffer too much to surpass indicators from rich regions, making it necessary to monitor the results and adapt the rules to the regional and socioeconomic characteristics of each region.

Reference : SOBRAL, Eryka Fernanda Miranda; DA SILVA JUNIOR, Luiz Honorato. The socio-environmental ICMS of Pernambuco: an assessment of the socio-economic components of the policy based on the Markov process. Planning and public policies, n. 42, 2014.