Principal investigator: Angelo Cruz do Nascimento Varella
Article title: The Socio-environmental ICMS of Pernambuco: An evaluation of the socioeconomic components of the policy based on the Markov process.
Article authors: Luiz Honorato da Silva Júnior and Eryka Fernanda Miranda Sobral
Location of the Intervention: Pernambuco, Brazil
Sample sizeSocioeconomic data for the municipalities of Pernambuco from 2004 to 2009
Sector: Economic Policy and Governance
Type of intervention: Effects of the Socio-environmental ICMS on the redistribution of resources
Primary variable of interest: Municipalities' adherence to the Socio-environmental ICMS (Tax on Circulation of Goods and Services)
Evaluation method: Another – Markov Process
Policy Problem
One of the biggest challenges in Brazil is improving the low health and education indicators that are related to environmental problems and difficulties in financing municipal management. In particular, the Northeast region has localities with worrying results and, consequently, is the target of several public policies that seek to mitigate these negative characteristics.
However, solving these problems is a complex and long-term challenge, involving various sectors of society and government, and possessing distinct regional characteristics. The authors highlight the case of Pernambuco, which, according to Silva Júnior et al. (2010), presents, like other Brazilian states and those in the Northeast region, a serious inefficiency in the management of public spending, aggravated by social and environmental problems.
Assessment Context
Scholars argue that addressing the problem of inefficient public management through financial incentives for municipalities that manage to improve their socio-environmental conditions can be an effective strategy. In fact, several initiatives tackling 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 (Tax on the Circulation of Goods and Services), established in 1991. This public policy consists of offering financial rewards, based on the redistribution of revenue from the ICMS, to municipalities that implement good environmental practices such as maintaining conservation units and water sources.
Pernambuco was the ninth Brazilian state and the first northeastern state to implement a public policy modeled after the ecological ICMS (Tax on Circulation of Goods and Services). In 2000, the state put into practice the Socio-environmental ICMS Law, inspired by the pioneering model in Paraná and similar legislation established in Minas Gerais in 1995.
Policy Details
The purpose of the ICMS Socioenvironmental public policy is to generate healthy competition among municipalities in the region, so that improvements in priority areas such as education, health, and efficiency in the management of public resources are economically rewarded through the redistribution of state ICMS transfers. In this way, municipalities with lower state transfers can work to increase specific legal requirements, improving social and environmental aspects while simultaneously gaining in state transfers, generating local benefits in regions with a wide variety of geographical and socioeconomic challenges.
It is worth noting that, for this to be true, municipalities will have to respond to the incentives proposed by the law, and the municipalities involved will have to strive to maximize the gains from the redistribution of these state funds, either by improving their resource management or by investing in social and environmental initiatives. These characteristics create a certain meritocracy in the sense of more efficient public management focused on social benefit issues.
Assessment Method
In order to ascertain whether the policy brought benefits to the municipalities and the state of Pernambuco, the researchers collected socioeconomic and environmental data from the Pernambuco State Finance Secretariat (SEFAZ-PE), the Brazilian Institute of Geography and Statistics (IBGE), and the Institute for Applied Economic Research (IPEA), for the years 2004 to 2009.
Based on the database, the researchers used a method called the "Markov process," which allows them to analyze the reactions of municipalities in Pernambuco to the criteria of the Socio-environmental ICMS (Tax on Circulation of Goods and Services), from its implementation, as well as to make long-term predictions regarding the adoption of municipal measures related to the legislation.
According to the Markov process methodology, three criteria were selected: Education, Health, and Own Tax Revenue. For each criterion, the municipalities were divided into four groups, according to the respective percentages received in each criterion.
Main results
Between 2004 and 2009, transfers originating from the Socio-environmental ICMS (Tax on Circulation of Goods and Services) to municipalities in Pernambuco exceeded 400 million reais. As a consequence, the amounts transferred by legislation represent significant contributions to municipal revenues in localities with less economic power. In fact, as can be seen in the following graph, smaller and poorer municipalities have a greater financial dependence on socio-environmental criteria.
It is possible to see that the law has a function of income redistribution, also observed in other Brazilian states, such as Minas Gerais, a state in which the practice became known as the "Robin Hood Law". Regarding the dependence of municipalities, it is possible to observe from the following map that the poorest regions of the state are also the localities most dependent on state transfers.
Regarding the other results of the analysis, the authors' findings can be summarized as follows:
- Education Criteria
This criterion showed a low probability of group changes, such that after the implementation of the Socio-environmental ICMS (Tax on Circulation of Goods and Services), 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 Criteria
Unlike the Education criterion, there is significant observable mobility between groups in the Health criterion, mainly due to actions to combat infant mortality. During the period, only 30% of municipalities did not change groups, meaning that 69 municipalities moved to a better group than their initial position and 59 worsened. The authors highlight that there was a relative worsening of the poorest municipalities.
3. Own Tax Revenue Criterion
For this criterion, it was observed 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, such that the legislation benefits those who manage to improve aspects of financial management. Conversely, there is an observable penalty for inefficiency.
4. Long-term forecasts
Regarding long-term projections, the authors state that, if the characteristics of the legislation are maintained, more than half of the municipalities in the state would move to higher groups, both in terms of education and health criteria. Therefore, it can be affirmed that the existence of the Socio-environmental ICMS (Tax on Circulation of Goods and Services) generates beneficial and positive incentives regarding individual efforts for improvement.
Lessons in Public Policy
The Socio-environmental ICMS (Tax on Circulation of Goods and Services) proves to be an efficient and low-cost tool in the pursuit of social, environmental, and public resource management improvements. By rewarding good practices, it creates positive incentives that lead managers and mayors to seek improvements in their respective municipalities, generating wealth from the adoption of the legislation's requirements. It thus characterizes a modern and well-planned public policy.
However, it should be noted that rewarding efficiency penalizes inefficiency, meaning that poor municipalities may struggle excessively to surpass the indicators of wealthy regions. Therefore, it is necessary to monitor the results and adapt the rules to the regional and socioeconomic characteristics of each region.
ReferenceSOBRAL, Eryka Fernanda Miranda; DA SILVA JUNIOR, Luiz Honorato. The socio-environmental ICMS of Pernambuco: an evaluation of the socioeconomic components of the policy based on the Markov process. Planning and public policies, n. 42, 2014.
