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World Bank Staff Occasional Papers

No. 1. Herman G. van der Tak, The Economic Choice be-tween Hydroelectric and Thermal Power Develop-ments, with a Note on Joint Costs in MultipurposeProjects, $3.00

No. 2. Jan de Weille, Quantification of Road User Savings,$3.00

No. 3. Barend A. de Vries, The Export Experience of De-vQloping Countries, $3.00

No. 4. Hans A. Adler, Sector and Project Planning in Trans-portation, $3.00

No. 5. A. A. Walters, The Economics of Road User Charges,$5.00

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No. 8. Jack Baranson, Automotive Industries in DevelopingCountries, $3.00

No. 9. Ayhan ,7ilingiroglu, Manufacture of Heavy ElectricalEquipment in Developing Countries, $3.00

No. 10. Shlomo Reutlinger, Techniques for Project Appraisalunder Uncertainty, $3.00

No. I l. Louis Y. Pouliquen, Risk Analysis in Project Ap-praisal, $3.00

No. 12. George C. Zaidan, The Costs and Benefits of FamilyPlanning Programs, $3.00

No. 13. Herman G. van der Tak and Anandarup Ray, TheEconomic Benefits of Road Transport Projects, $3.00

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No. 15. Anthony Churchill, Road User Charges in CentralAmerica, $5.00

No. 16. Deepak Lal, Methods of Project Analysis: A Review,$3.00

No. 17. Kenji Takeuchi, Tropical Hardwood Trade in the Asia-Pacific Region, $4.00

No. 18. Jallade, Jean-Pierre, Public Expenditures on Educa-tion and Income Distribution in Colombia, $4.00

WORLD BANK STAFF OCCASIONAL PAPERS NUMBER EIGHTEEN

This paper may not be quoted as representing the viewof the Bank and its affiliated organizations. They do not accept

responsibility for its accuracy or completeness.

WORLD BANK STAFF OCCASIONAL PAPERS NUMBER EIGHTEEN

Edited by

Ian Bowen

Jean-Pierre Jallade

Public Expenditureson Educationand Income Distributionin Colombia

S,CTOROAL LiBRARY

l11lRNATIONAL UAI4

RECO4SSTM'ON AND DEVeLO

UMORA11OWAL MONETAR UND

WASIIU4ojroN71).C

Distributed by The Johns Hopkins University PressBaltimore and London

Copyright © 1974by the International Bank for Reconstruction and Development

All rights reservedManufactured in the United States of America

Library of Congress Catalog Card Number 74-4216ISBN 0-8018-1628-9

Library of Congress Cataloging in Publication datawill be found on the last printed page of this book.

1A

/C&)

Foreword

I would like to explain why the World Bank Group does research work,and why it publishes it. We feel an obligation to look beyond the projectswe help to finance toward the whole resource allocation of an economy,and the effectiveness of the use of those resources. Our major concern, indealings with member countries, is that all scarce resources, includingcapital, skilled labor, enterprise and know-how, should be used to their bestadvantage. We want to see policies that encourage appropriate increases inthe supply of savings, whether domestic or international. Finally, we are re-quired by our Articles, as well as by inclination, to use objective economiccriteria in all our judgments.

These are our preoccupations, and these, one way or another, are thesubjects of most of our research work. Clearly, they are also the proper con-cern of anyone who is interested in promoting development, and so we seekto make our research papers widely available. In doing so, we have to takethe risk of being misunderstood. Although these studies are published bythe Bank, the views expressed and the methods explored should not neces-sarily be considered to represent the Bank's views or policies. Rather theyare offered as a modest contribution to the great discussion on how to ad-vance the economic development of the underdeveloped world.

ROBERT S. McNAMARAPresident

International Bank forReconstruction and Development

Table of Contents

FOREWORD . ............................................... v

LIST OF TABLES AND FIGURES ................ .I x

GLOSSARY ................................................. xiii

INTRODUCTION ........................................... xv

I. DESCRIPTION OF THE PROBLEM ....... ............... 3

II. THE FINANCING OF EDUCATION IN COLOMBIA:MAIN CHARACTERISTICS .............................. 8

Basic Facts on Colombian Educational Finance ............ 10Implications for the Income Redistributive Aspects

of Public Expenditures on Education ................... 17

111. PUBLIC EXPENDITURES ON EDUCATION INCOLOMBIA: THE REDISTRIBUTIVE IMPACT AMONGINCOME GROUPS ...................................... 20

The Distribution of Income among ColombianHouseholds in 1970 ........... ....................... 20

The Distribution of the Tax Burden among IncomeGroups ...................... ...................... 21

The Distribution of Public Subsidies for Educationamong Income Groups ......... I ...........I......... 28

Comparing the Distribution of Tax Burdens and PublicSubsidies for Education among Income Groups .......... 37

IV. CENTRAL GOVERNMENT TRANSFERS FOREDUCATION: THE DISTRIBUTIVE IMPACTAMONG REGIONS ............ ......................... 42

The Distribution of National Taxes among Departments .... 42The Distribution of Central Government Transfers

among Departments ........... ....................... 46Comparing the Distribution of Taxes and the

Distribution of Transfers ........ ..................... 48Allocating the Transfers for Education among

Departments ......... .............................. 51Conclusions ......... 68

Vil

V. A SUMMARY OF FINDINGS .. ......................... 69

ANNEXES1. Table of Educational Expenditures and Total

Expenditures by Level of Government ...... .......... 712. Table of Public Expenditures per Pupil in Colombia ....... 72

SELECTED BIOGRAPHY .................................... 73

Vill

List of Tables and Figures

TABLES

2.1 Colombia: Expenditures on Education as a Proportionof Total Expenditures by Government Level ..... ..... 12

2.2 Colombia: Public Expenditures on Education byLevels of Government Finance ...................... 13

2.3 Colombia: Enrollments by Level and Type ofEducation in the Public and Private Sectors ..... ...... 15

2.4 Colombia: Revenue Structure by Levels of Government .. 183.1 Distribution of Income among Urban Households ........ 223.2 Distribution of Income among Rural Households ..... ... 223.3 Distribution of Income among Colombian Households .... 233.4 Urban Areas: Allocation of Taxes according to

Alternative I ...................................... 263.5 Urban Areas: Allocation of Taxes according to

Alternative 2 ...................................... 263.6 Rural Areas: Allocation of Taxes according to

Alternative 1 ...................................... 273.7 Rural Areas: Allocation of Taxes according to

Alternative 2 ...................................... 273.8 Total Colombia: Allocation of Taxes according to

Alternative I ...................................... 273.9 Total Colombia: Allocation of Taxes according to

Alternative 2 ...................................... 283.10 Urban Colombia: Enrollments by Level of Family

Income ........................................... 303.11 Urban Colombia: Enrollments by Level of Family

Income in Public and Private Schools ................. 323.12 Rural Colombia: Enrollments by Level of Family

Income .......................................... 323.13 Total Public Expenditures per Pupil ....... ............. 333.14 Primary Education (Public): Teachers' Costs in

Urban and Rural Areas ............................. 353.15 Urban Colombia: Public Subsidies for Education by

Level of Income ................. .................. 36

ix

3.16 Rural Colombia: Public Subsidies for Education byLevel of Income .......... ....................... 36

3.17 Urban Colombia: Allocation of Taxes and PublicSubsidies for Education among Income Groups ........ 38

3.18 Rural Colombia: Allocation of Taxes and PublicSubsidies for Education among Income Groups ........ 39

3.19 Total Colombia: Allocation of Taxes and PublicSubsidies for Education among Income Groups ........ 40

3.20 Total Colombia: Public Subsidies for Three Levels ofEducation as a Proportion of Taxes Distributedamong Income Groups .......... ................... 40

4.1 Distribution of Central Government Taxes amongDepartments .45

4.2 Transfers from the Central Government to theDepartments .47

4.3 Structure of Transfers and Total Taxes Collected byDepartments .49

4.4 Transfers for Education and DepartmentalExpenditures on Primary Education .54

4.5 Transfers for Education and Departmental andMunicipal Expenditures on Primary Education .58

4.6 Transfers per Primary School Teacher .614.7 Transfers per Child Enrolled and per Teacher as

Compared to Departmental "Effort" on Education . 644.8 Transfers per Teacher and per Child Compared with

Enrollment Ratios .... ........ ....... 65

FIGURES

4.1 Total Transfers as a Proportion of Taxes Collected;Taxes Paid per Capita ............................... 52

4.2 Transfers for Education as a Proportion of TaxesCollected; Taxes Paid per Capita ....... .............. 53

4.3 Transfers as a Proportion of DepartmentalExpenditures on Primary Education; DepartmentalExpenditures on Primary Education per Capita ........ 56

4.4 Transfers as a Proportion of Departmental andMunicipal Expenditures on Primary Education;Departmental and Municipal Expenditures onPrimary Education per Capita ........................ 57

4.5 Transfers per Primary School Teacher (Public SectorOnly); Expenditures on Primary Education as aProportion of Total Expenditures ....... ............. 62

x

4.6 Transfers per Child Enrolled in Public PrimaryEducation; Expenditures on Primary Educationas a Proportion of Total Expenditures ...... .......... 63

4.7 Transfers per Primary School Teacher (Public SectorOnly); Enrollment Ratios ......... .................. 66

4.8 Transfers per Child Enrolled in Public PrimaryEducation; Enrollment Ratios ....... ................ 67

xi

Glossary

DANE Departamento Administrativo Nacional de Estadistica (Co-lombian Statistical Office)

ICCE Instituto Colombiano de Construcciones Escolares (Colom-bian Institute for School Construction)

ICETEX Instituto Colombiano de Credito Educativo y Estudios Tec-nicos en el Exterior (Colombian Institute for EducationalCredit and Technical Studies Abroad)

ICFES Instituto Colombiano para el Fomento de la Educaci6nSuperior (Colombian Institute for the Development of HigherEducation)

INANDES Instituci6n Andina de Estudios Sociales (Andean Institutionfor Social Studies)

SENA Servicio Nacional de Aprendizaje (National ApprenticeshipService)

xiii

Introduction

In the field of educational finance, a feature common to many countriesis that the costs of education are usually shared by the government and thestudents or their families. The cost burden accruing to each party doesdiffer very widely among countries, over time within a single country, oraccording to the type or level of education concerned. Any kind of situationcan be found, ranging from, say, private universities wholly financed by thefees paid by the students, to public vocational training programs which arenot only tuition-free but also provide compensation for the incomeforegone by the trainees

However, these extreme situations are not to be found very frequently,at least on a large scale. The bulk of educational activities is, in fact, jointlyfinanced by the government and the families. There is little point in review-ing here the various arguments for providing public finance for education,simply because the debate is no longer about the existence but about thedesired extent of public subsidies to education which, in turn, will deter-mine the charges accruing to private persons.

Economists once believed they were able to provide an adequate solu-tion to this problem. During the early sixties, they started to developanalytical tools such as rates of return to education, hoping that standardcost-benefit analyses could provide an appropriate answer to the in-creasingly heard question: How much "should" a given country spend oneducation?

The existing literature on this subject is abundant and no attempt toreview it will be made here. Rates of return calculations consider only theeconomic benefits of education and governments and educationalauthorities must pay attention to the psychological, sociological and politi-cal benefits as well. This has engendered a large gap between the univer-sities and research institutions where these calculations are made, and thedecision-making bodies where the future of educational systems is actuallydecided upon.

xv

Another shortcoming of current economic thinking in this area has beenthe lack of attention paid to the closely related question of how to shareeducation expenditures between the government, i e., to a large extent thetaxpayers, the families and other potential contributors. The economic ap-proach to the problem has been far too global, limiting itself to such broadalternatives as investing more or less in a given type of education, while thedecision-makers are governed largely by the more down-to-earth issue ofwho is going to bear the burden of additional expenditures.

As a result, it is only fair to say that despite a decade of rates of returncalculations, both the amount of money that is spent on education and thearrangements for sharing the burden of educational expenditures are stillthe result of the free play of social and political forces in the country underconsideration. In any case, the contribution of the economists to the deci-sion-making process has been marginal. It is believed that this situation hasdeveloped largely because economists have paid too much attention to theproblem of the amount of educational expenditures-which they cannotpretend to solve alone anyhow-while showing too little concern for thedistributional impact of these expenditures. The impact will be defined hereas the combined effect on the distribution of income resulting from the fi-nancing of educational expenditures and the allocation of educational sub-sidies. In other words, the discussion will be centered around the two basicquestions: Who pays for education? Who receives the educationalsubsidies?

As a result, the present study will focus not on the desired extent ofpublic education expenditures but on their impact on income distribution.Although the empirical question of how a given government expendituresprogram affects different population groups is an interesting one per se, thisstudy will not restrict itself to the allocation of educational benefits amongvarious population groups, but will also consider the distributional effectsof the taxes that pay for public subsidies in general.

Because public expenditures on education are, in most cases, financedout of general revenue, the ultimate purpose of the present analysis is tospell out the joint incidence of both the taxation system and public educa-tion expenditures on the distribution of income.

The country under study is Colombia at the end of the sixties. A briefdescription of the problem and a reminder of the existing literature will bepresented in Chapter 1. Chapter 1I will deal with some basic facts on the fi-nancing of education in Colombia, and Chapter III will analyze the impactof public educational expenditures on the householddistribution of income.A similar analysis will be carried out in Chapter IV in order to pinpoint theimpact of central government finance for primary education on the regionaldistribution of income.

xv'

Public Expenditureson Educationand Income Distributionin Colombia

I. Description of the Problem

The question of how government policies affect the distribution of in-come in a given country has always aroused interest. The redistributive im-pact of, say, taxation policies has long been a matter of concern for bothacademics and politicians. More recently, attention has shifted towards theimplications of government spending policies for the distribution of in-come. Who benefits from government expenditures on housing, healthcare, recreational facilities, education and so on? These services, providedto the public at a price sometimes far below their cost, have an obvious im-pact on incomes. Were they unequally distributed among populationgroups, the distribution of income would be altered.

Comprehensive studies identifying the redistributive impact on incomeof both aspects of government activities, i.e., taxation and spendingpolicies, are still scarce. A recent attempt to allocate both taxes and benefitsby income level has been carried out by Gillespie with U.S. data for the year1960.' The difficulties, both theoretical and empirical, encountered in carry-ing out such a study should not be underestimated. While many fiscal econ-omists still express doubts about the feasibility of developing meaningfultax incidence studies, Gillespie concedes that "the empirical estimation ofexpenditure incidence is much less precise than the tax incidence, primarilybecause any hypotheses about the distribution by income class of the bene-fits from government expenditures are less well developed."2 He then pro-ceeds to make a clear distinction between "those government expendituresthe costs of which are incurred on behalf of clearly delineated beneficiarygroups" and the "general" expenditures3 which are distributed according to

1W Irwin Gillespie, "Effect of Public Expenditures on the Distribution of Income," inEssays in Fiscal Federalism, ed Richard A. Musgrave (Washington, D.C the Brookings In-stitution, 1965). See also Tax Foundation, Tax Burdens and Benefits ofGovernment Expendituresby Income Class, 1961 and 1965, Research Publication no 9 (New York, 1967)

2Gillespie, "Effect of Public Expenditures," p 1303Expenditures on national defense, international affairs, general safety and so forth

3

a set of alternative assumptions: equally per family, similarly as income,capital income or disposable income. According to Gillespie, "all four alter-natives give rise to extremely similar conclusions concerning the generalpattern of expenditures incidence"

Oddly enough, very few studies of this kind have ever been made in thedeveloping world. Despite the fact that income and wealth are very un-equally distributed in developing countries-disparities of all kinds existboth between regions and between rural and urban areas-despite also thepresence of a "strong" and rapidly growing public sector often advocated asthe only remedy at hand to alleviate these disparities, it is astonishing thatthe impact of taxation and public spending policies on income distributionhas been worked out only in a very few instances.4 To be sure, tax econo-mists have lately been issuing warnings about the difficulties and the limita-tions of such studies.5 These warnings, which are certainly justified in viewof the often very crude approximations adopted by researchers, havehowever failed to stop the growing interest of agencies and individuals inthis area 6

The literature of the redistributive impact of one single type of govern-ment expenditure is more abundant. In particular, the incidence of govern-ment spending on education alone seems to have awakened the interest ofmany researchers.' In all these studies, the analysis consists of the follow-ing steps.

4A rather rough attempt at assessing the impact of taxation and public spending policies onincome distribution in Colombia is presented in Miguel Urrutia Montoya and Clara Elsa deSandoval, "Politica fiscal y distribucion del ingreso en Colombia," Revista del Banco de la Re-piiblica XLIV (July 1971) 1072-87 See also Gian Sahota, "Public Expenditures and IncomeDistribution in Panama," mimeographed (Panama City USAID, 1972)

5For an excellent and skeptical appraisal of the research works carried out in Latin Amer-ica, see R M Bird and L de Wulf, "Taxation and Income Distribution in Latin America ACritical Review of Empirical Studies," IMF Fiscal Affairs Department, DM/73/8 (Wash-ington, D C , 1973)

6An examination of the three-year, USAID-financed research project initiated in 1972 bythe Program of Development Studies of Rice University helps to assess, among other things,the redistributive impact of the government taxation and expenditure policies in threedeveloping countries See "A Proposal for Research on Distribution of Gains. Wealth and In-come from Economic and Political Development," mimeographed (Houston, Texas, 1971) Aless ambitious project has recently been launched by the United Nations, concerning whichsee K J Charles, "The Distribution and Utilization of Public Services," mimeographed (NewYork UN Income Distribution Project, n d )

7See W Norton Grubb, "The Distribution of Public Costs and Private Benefits in an Ur-ban Public School System," National Tax Journal XXIV (March 1971) 1-12, Douglas MWindham, The Redistriburional Effects of Public Higher Education in Florida, University ofNorth Carolina, Department of Economics and Business Administration, Monograph SeriesF, no I (Greensboro, 1969), Richard W Judy, "The Income Redistributive Effects of PublicAid to Education in Canada," in Canadian Economic Problems and Policies, ed Lawrence HOfficer and Lawrence B Smith (New York McGraw-Hill, 1970), pp 302-17, and W LeeHansen and Burion A Weisbrod, Benefits, Costs and Finance of Public Higher Education(Chicago Markham, 1969)

4

(i) define population groups: income groups, sometimes broken downby race, are generally used;

(ii) allocate total tax payments to each income group;(iii) compute the benefits arising from government expenditures accru-

ing to each income group;(iv) compare the distribution of tax burdens and benefits to arrive at the

"net" incidence of government taxation and spending policies.The present analysis will use the same methodology. However, the follow-ing additional points will be considered. In the first place, dealing with Co-lombia, which is a country with wide geographic disparities and a strongregional life, any analysis of the incidence of government expenditures onthe various income groups should be complemented by a similar analysis,using regions as units of observation. Consequently the tax burdens and thebenefits will be distributed successively among income groups (Chapter III)and regions (Chapter IV).

Secondly, the study is restricted to the distribution of benefits arisingfrom government expenditures on education alone, excluding all other ex-penditures. It considers only the benefits accruing to students or theirfamilies as expenditures that need not be made because of the public sub-sidies to education. They include that portion of educational costs which isborne by the public. Other benefits such as those arising from the consump-tion value of education or an enhanced earning power are excluded. Inother words, the analysis will be restricted to the immediate impact onfamily income arising from subsidized education, thus excluding the long-term changes in personal income distribution resulting from public invest-ment in education.8

Thirdly, the decision to restrict the study to the redistributive impact ofpublic expenditures on education alone has important consequences on thefourth step of the analysis, namely the comparison of the distribution of taxburdens with that of benefits. These consequences are shown below.

It is sometimes argued that the distributional aspects of government ac-tivities can be dealt with only if all areas of government expenditures arecovered by the analysis, the argument being that the "net" incidence can becomputed only if the distribution of all taxes is compared with the distribu-

8These two types of benefits from education are sometimes referred to as short-term andlong-term benefits To assess the distribution of the latter type of benefits presents importantempirical difficulties One needs to know, for instance, the exact distribution of the presentgeneration of students among future income classes If both types of benefits are to be con-sidered together, the analysis becomes extremely intricate because the recipients of the bene-fits are not the same in both cases short-term benefits are received by the parents who alsopay the taxes, while long-term benefits accrue to the educated child who does not now pres-ently pay taxes See Judy, "The Income Redistributive Effects," for an attempt along theselines

5

tion of all expenditures. If only one given type of government expenditureis considered, the distribution of the resulting benefits cannot be comparedmeaningfully with the distribution of taxes, simply because there is no wayof knowing which taxes are used to finance these particular expenditures.

This problem can be dealt with in a variety of ways. First, the problem isless acute in the case of a government program financed exclusively by theproduct of a special tax. A well-known example in the field of educationalfinance is the frequent use of a tax on payrolls earmarked for financingvocational training programs. However, the bulk of public expenditures oneducation is financed from the government general revenue and, here, theproblem remains.

A customary approach is known professionally as the "proportionality"assumption; it assumes that the proportion of total taxes paid by each in-come group or geographical unit for a particular program is the same as theproportion of the government's total expenditures on this program. Thus, ifexpenditures on education amount to 20 percent of government's total ex-penditures, it is assumed that 20 percent of the total taxes paid by each pop-ulation group is spent on education.

The arbitrariness of this assumption has given rise to a long, probablyunfinished, controversy 9 between those who hold that the equiproportionalallocation assumption has no logical or theoretical foundation and,therefore, should not be used,10 and those who maintain that this assump-tion has to be made, given our ignorance of distributional impacts of manypublic programs."

The "proportionality" assumption will not be made in this study. As aconsequence, it will not be possible to compute the exact amount oftransfers from one population group to another arising from governmentexpenditures on education However, the distribution of educational bene-fits can be usefully compared to the distribution of total taxes paid, by pre-senting education subsidies as a proportion of tax payments in each income

9 W Lee Hansen and Burton A. Weisbrod, "The Distribution of Costs and Direct Benefitsof Public Higher Education The Case of Cahifornia," Journal of Human Resources IV (Spring1969) 176-91 This article is taken from Section IV of the same authors' Benefits, Costs and Fi-nance See also Elchanan Cohn, Adam Gifford and Ira Sharkansky, "Benefits and Costs ofHigher Education and Income Redistribution Three Comments," Journal of HumanResources V (Spring 1970) 222-36; Joseph A Pechman, "The Distributional Effects of PubiicHigher Education in California," Journal of Human Resources V (Summer 1970) 361-70,Robert W Hartman, "A Comment on the Pechman-Hansen-Weisbrod Controversy," Journalof Human Resources V (Fall 1970) 519-23, and W Lee Hansen and Burton A Weisbrod, "Onthe Distribution of Costs and Benefits of Public Higher Education Reply," Journal of HumanResources VI (Summer 1971) 363-74

10W Lee Hansen and Burton A Weisbrod, "Who Pays for a Public ExpenditureProgram 9" National Tax Journal XXIV (December 1971) 515-17

fljames T Bonnen, "The Absence of Knowledge of Distributional Impacts an Obstacle toEffective Policy Analysis and Decisions," in Public Expenditures and Policy Analysis, edRobert H Haveman and Julius Margolis (Chicago Markham, 1970)

6

group or geographical unit. The impact of public educational expenditureson income distribution will appear when comparing these proportions withthe average for the country as a whole or across income groups orgeographical units. Obviously, a group which receives an above-averageproportion of its taxes back in the form of education subsidies has its in-come positively affected by the public financing of education, and vice-versa.

7

II. The Financing of Education in Colombia:Main Characteristics

The most important feature of public education finance in Colombia canbe summed up in one single word: decentralization. To start with, each ofthe three levels of government, namely the central government, the depart-ments and the municipalities, have traditionally shared the financialburden of educational activities provided free-of-charge to the public,' bymaintaining their own schools or transferring funds to each other for thesame purpose. Moreover, a fourth "government level," namely the de-centralized agencies of the education sector, has emerged during the sixtiesas a significant contributor to higher education and vocational training fi-nance. Further, Colombia is also referred to as the country with the largestprivate education sector in Latin America. As a consequence, the amountof private finance that goes towards education is probably bigger thanelsewhere, although it is unknown.

Clearly, the existing arrangements made to share the burden of educa-tional costs are the result of a host of historical and political facts that neednot be reviewed here. It will suffice to say that the financial responsibilitiesof each of these financing bodies are not always in line with their adminis-trative responsibilities. This situation has engendered a complicated arrayof transfers of funds between the various financing bodies, with the resultthat double, if not triple, counting is current practice 2 The divorce betweenadministrative and financial responsibilities is probably more dramatic atthe central government level than anywhere else. In 1967, 48 percent oftotal public expenditures on education in the country originated from thebudget of the Ministry of Education, while the schools administered by theMinistry accounted for less than 10 percent of enrollments in primary andsecondary education respectively.3 The funds going to the universities,

ISome public universities do charge very small fees2 For instance, the same sum of money may be counted once in the budget of the Ministry

of Education, twice when it is transferred to a decentralized institution, and a third time whenit reaches a university While there exist data on transfers from the central government to thedepartments, the exact amount oi funds for education transferred to the municipalities is notrecorded by official statistics.

3 Departmental and municipal schools enroll 80 percent of pupils in primary education and40 percent of pupils in secondary education The remaining proportions are enrolled in privateschools

8

though recorded in the budget of the Ministry, largely escape its control assoon as they are transferred to the decentralized agency responsible forhigher education finance, or to the autonomous universities themselves. Asa result, while the central government is, by far, the most important sourceof educational finance, its actual administrative and coordination powersare minimal. Needless to say, this situation is bound to be an importantobstacle on the road to educational reforms on a countrywide basis.

Three decentralized agencies contribute significantly to the financing ofeducation in Colombia. At the higher education level, the Colombian In-stitute for the Development of Higher Education (ICFESP is the adminis-trative body responsible for the coordination and distribution of centralgovernment finance to public and private universities. While its functionsare potentially very wide, its actual powers have so far been greatly reducedby the political turmoil aroused in the universities.

The Colombian Institute of School Construction (ICCE)5 is responsiblefor carrying out Ministry of Education plans for school construction andfor providing school equipment and teaching materials to primary and sec-ondary schools. A significant part of the capital costs at these levels is nowfinanced through this institute.

Lastly, the National Apprenticeship Service (SENA)6 is responsible forproviding vocational training programs servicing the industrial and servicessector. This institution, which does not receive funds from the government,is nearly wholly financed by a 2 percent tax on the payrolls of all firmsemploying more than fifty workers.

While these three decentralized agencies operate at the central govern-ment level, the departments play a key role in the financing of primary andsecondary education. They are responsible for building and maintainingschools and paying the teachers. They also pay the salaries of teachers atdepartmental universities. The extent of the departments' autonomy inconducting their own educational policies is quite real, despite recent at-tempts by the Ministry of Education to introduce some guidelines for theuse of funds transferred to them.

The municipalities' financial contributions to education are restricted tothe provision of land for school building and to the maintenance of schools.These contributions are, in absolute value, very limited in the overwhelm-ing majority of municipalities which are simply too small and too poor toafford even minor maintenance expenditures. The situation is of coursedifferent in big cities: the three biggest municipalities of Bogota, Medellinand Cali are responsible for 70 percent of the total amount of expenditures

4 lnstituto Colombiano para el Fomento de la Educaci6n Superior.5Instituto Colombiano de Construcciones Escolares6Servic,o Nacional de Aprendizaje.

9

on education made by the one thousand municipalities of the country in1967.

The four levels of government-central government, decentralized agen-cies, departments and municipalities-also contribute to the financing ofprivate education. Although the exact amount of transfers of public funds tothe private sector is unknown, it is generally accepted that about 10 percentalone of the budget of the Ministry of Education is spent on helping privateschools.

The above considerations should be kept in mind when dealing with Co-lombian educational finance statistics. Evidently, the lack of clear and pre-cise definition of responsibilities at each government level is one of themain causes of the poor quality of these statistics, which can provide but avery approximate image of the reality.

Basic Facts on Colombian Educational Finance

Public Expenditures on Education

Detailed statistics on total public expenditures and public expenditureson education broken down by government level are shown in Annex 1.Although these data refer to the whole decade 1960-70, the last year forwhich public finance statistics for the departments and municipalities areavailable is 1969; the figures shown for these government levels in 1970 arebased on our own estimates. Transfers from one government level toanother have been, as far as possible, excluded. However, some doublecounting resulting, for instance, from minor transfers between the depart-ments to the municipalities and vice-versa, is still possible. In Colombia asin most countries, budget figures based on initial appropriations are oftenpoor approximations of actual expenditures during the fiscal year. Allfigures presented in Annex I and below are based on the actual expen-ditures statistics collected by the controller's office of the Finance Ministry.

In 1969, total spending of the four government levels amounted to 3.7billion pesos, which represents 10.6 percent of their total expenditures and3.4 percent of the gross domestic product. In absolute terms, the amount ofpublic expenditures on education has been multiplied by eight (in currentpesos) between 1960 and 1969.7 However, because total public expenditureswere 9.5 times higher in 1969 than in 1960, there has been a slight decreasein the proportion of total public expenditures devoted to education duringthis period. 8 Progress over the period looks more decisive when one con-

71n constant terms, it has been multiplied by three over the same period8Ot is fair to say that total public expenditures have increased sharply in 1968, especially at

the decentralized-agencies level, and in 1%9 at the departmental level, thus causing a drop inthe proportion of total public expenditures devoted to education In both cases, educational ex-penditures did not "tfollow" the sharply rising trend of total public expenditures.

10

siders that educational expenditures as a proportion of the gross domesticproduct have doubled over the period. However, according to the interna-tional standards set by Unesco for Latin American countries, in 1970 Co-lombia was still below the target of 4 percent of its gross domestic productto be spent on education.

Expenditures on education are obviously not given the same considera-tion at all levels of government, as shown in Table 2.1. Their share in thecentral government total expenditures increased from 9.4 percent to 13.6percent over the period 1960-70. However, most of this increase took placeearly in the decade. Between 1962 and 1970 the proportion of education ex-penditures in the budget remained fairly stable. Within the central govern-ment's contribution, the bulk of this increase could be attributed to thefunds transferred to the departments, whose share in the total centralgovernment budget more than tripled between 1960 and 1967.9 The de-centralized agencies, whose educational expenditures were negligible in theearly sixties, devoted close to 5 percent of their budget to education in 1970.The departments make by far the biggest budgetary "effort" in education,by devoting to it between 30 and 40 percent of their total expenditures. Inspite of two peaks in 1966 and 1967, it can be said that roughly one-third ofdepartmental budgets has gone towards education during the decade.Education has obviously been a small and decreasing item on the munici-palities' spending list: its share in total municipal expenditures has nowstabilized at a little more than 5 percent during the 1967-69 period.

To sum up, by the end of the sixties, both the municipalities and the de-centralized agencies spent about 5 percent of their budget on education,with a downward tendency for the former and an upward tendency for thelatter. While the proportion of departmental budgets devoted to educationhas remained roughly stable, it has increased at the central governmentlevel. This is largely due to the development of a transfers policy in favor ofthe departments inaugurated at the beginning of the decade.

The concern for education shown by the various government levels hasresulted in a changing pattern of their respective contributions to totaleducational expenditures during the period. Table 2.2 confirms the decreas-ing role of the municipalities as a source of education finance-6 percent ofthe total in 1969 as against 10.4 percent in 1960-and the increasing role ofthe decentralized agencies: 13.5 percent in 1969 as against 6.9 percent in1964. By 1969 the central government had become the biggest single sourceof finance, accounting for about half of the total. However, its importanceas a spending body has remained roughly the same, with slightly more than40 percent of the total, the funds originating from the central government

91n absolute value, these transfers have been multiplied by twelve between 1960 and 1967.They represent 37 percent of central governrment finance in 1967, against 12 percent in 1960.

11

Table 2.1: Colombia: Expenditures on Education as a Proportion of Total Expenditures by Government Level(Transfers are Netted out)

(%)Central Transfers to Total Central Decentralized All Levels of

Government Departmentsl Government Agencies Departments Municipalities Government

1960 8.4 1.0 9.4 - 29.2 6.7 12.61961 8.4 1.2 9.6 - 34.0 6.9 12.61962 11.1 2 8 13.9 - 33.5 5.5 15.01963 8.9 4.2 13.0 - 32.3 5.1 14 21964 10.6 4.9 15.5 2.8 30.5 5.2 11.91965 9.5 4.0 13.5 4.5 34.4 5.1 11.91966 9.0 3.4 12.4 5.4 39.4 6.3 12.01967 9.5 3.5 13.0 3.8 39.2 5.3 11.01968 9.7 2.8 12.5 3.4 39.8 5.3 10.21969 10.4 2.3 12.7 3.9 31.5 5.3 10.61970 n.a. n.a. 13 6 4.4 33.0 5.3 10.9

lYvon Lebot, "Organizaci6n y funcionamiento del sistema educativo colombiano," in Boletin Mensual de Estadistica no. 243 (October, 1971).Tables 721 and 724.Source See Annex 1.

Table 2.2: Colombia: Public Expenditures on Education by Levels of Government Finance (in %)

Central Transfers to Total Central DecentralizedGovernment Departments Government Agencies Departments Municipalities Total

1 2 3 4 51 62 7 8

1960 41.4 5.2 46.6 - 43.0 (48.2) 10.4 100.01961 46.3 6.4 52.7 - 38.5 (44.9) 8.8 100.01962 45.4 11.6 57.0 - 34.5 (46.1) 8.5 100.01963 38.5 18.1 56.6 - 35.2 (53.3) 8.2 100.01964 38.5 17.6 56.1 6.9 30.0 (47.6) 7.0 100.01965 36.3 15.1 51.4 10.5 31.5 (46.6) 6.6 100.01966 34.4 13.1 47.5 13.6 31.7 (44.8) 7.2 100.01967 35.0 13.0 48.0 12.3 32.4 (45.4) 7.3 100.01968 38.7 11.3 50.0 12.7 30.3 (41.6) 7.0 100.01969 41.0 9.2 50.2 13.5 30.3 (38.0) 6.0 100.01970 n.a. n.a. 51.0 15.8 27.8 (n.a.) 5.4 100.0

'Excluding the transfers from the central government.2lncluding the transfers from the central government.Source. See Annex I and Table 1.

and transferred to the departments accounting for the difference. Thedepartments, whose role as a source of finance has decreased from 43 per-cent to 30 3 percent over the 1960-69 period, managed to maintain theirpreeminent role as spending bodies until 1968, thanks to the funds receivedfrom the central government.

In spite of the drop recorded in 1969, the transfers for education fromthe central government to the departments thus appear to have been arapidly growing source of educational finance during the sixties.'0 Whilethe development of this transfer policy illustrates the divorce between theadministrative and financial responsibilities mentioned earlier, it is notclear whether it reflects more the reluctance of the central government totake over further administrative chores, or the willingness of the depart-ments to maintain their traditional responsibilities in this area in spite oftheir financial inability to meet increasing expenditures. In any case, thetransfers policy provides the central government with a clear opportunity tointervene more actively in the shaping of an education policy valid for thecountry as a whole.The Importance of the Private Sector

As mentioned earlier, there is no way of knowing exactly the amount ofprivate finance going into education in Colombia. However, it is possible toget a clear picture of the extent of the private education sector in Colombiaby looking at the enrollment data shown in Table 2.3.

Private education accounted for more than half of total enrollments inpreprimary (85.2 percent) and secondary education (53.6 percent) in 1968. Itcan also be said that preprimary education has developed through privateinitiative, since enrollments in public schools were still negligible in 1960As far as secondary education is concerned, the proportion of pupilsenrolled in private schools decreased from 60.5 percent to 53.6 percent be-tween 1960 and 1968. However, in 1968, public schools enrolled a clear ma-jority of pupils (71.2 percent) only at the primary school teacher traininglevel (escuelas normales).

Before 1950, primary education was virtually a state monopoly, withclose to 94 percent of the pupils enrolled in public schools. The last tenyears have witnessed an increase in private participation at this level, whichaccounted for 19 percent of total enrollments in 1968

The same evolution took place at the higher education level. In 1950,more than 70 percent of the students were enrolled in public universities.This proportion has decreased steadily over the last twenty years It may besaid that, at the beginning of the seventies, the public and private sector arenow on the same footing, with 50 percent of the student body.

'0Unpubiished data show that this trend is continuing the amount of transfers practicallydoubled in current value between 1966 and 1971

14

An important feature of the private education sector is its distribution:broadly speaking, private schools are to be found mostly in urban areas.Thus, in 1968, only 11 percent of total private enrollments were in ruralschools, as against 42.4 percent of public enrollments. The bias of privateeducation towards big cities is even stronger in the case of bachilleratoeducation, which accounts for 70 percent of total secondary education: in1968, private enrollments in the provinces of Antioquia, Atlantico, Cun-dinamarca and Valle-which include the four biggest cities, namely Mede-llin, Barranquilla, Bogota and Cali-represented 73 percent of total private

Table 2.3: Colombia: Enrollments by Level and Type of Education in thePublic and Private Sectors

1960 1968 1940 1950 1960 1968Levels of Education (Thousands) (Thousands) (%) (%) (%) (%)

PrePrimaryPublic 1 9 16.3 - - 4.5 14.8

Private 40.5 94.2 - - 95 5 85.2

PrimaryPublic 1,432.2 2,213.4 92 9 93.8 84.7 81 0Private 258.1 520.0 7 1 6.2 15.3 19.0

Secondary: TotalPublic 100.3 272.8 - - 39.5 46.4

Private 153.5 313.9 - - 60.5 53 6

BachilleraloPublic 50.7 177 6 33 0 39.3 36.1 43.8Private 89.6 228.2 67 0 60 7 63.9 56.2

Teacher TrainingPublic 18.2 38.6 80.1 83.0 64 9 71.2Private 9 8 15.6 19 9 17.0 35.1 28.8

OthersiPublic 31.3 56.7 - - 36.7 44.7Private 54.12 70.1 - - 63.3 55.3

Higher EducationPublic 13 2 35.6 68.0 71.8 58.4 52.7Private 9.4 31.9 32.0 28.2 41.6 47.3

llncludes all kinds of secondary education but baclullerato and teacher training, i.e.,vocational, commercial, agricultLiral education, schools for nurses and arts21ncluding religious education

Sources Boleti, Mensuat de Estadistica 243 (October, 1971) 144-46. The data for 1940and 1950 are drawn from Miguel Urrutia and Clara Elsa de Sandoval, "Reforma de laeducaci6n publica y sus implicaciones fiscales," mimeographed, (Universidad Nacional deColombia, 1970). "La educaci6n en Colombia, 1960-1968," Anexo Estadist,co, (Bogota.Mmnisterio de Educaci6n Nacional, 1970). Ceoso de establecitie,itos educanivos (Bogota:DANE, 1968).

15

enrollments at this level. The corresponding data for the public educationsector is 48 percent.

By far the main source of private education finance Is the families' con-tribution in the form of fees and gifts. No exhaustive data exist on theformer which, in any case, are believed to vary widely. The importance ofthe latter may increase periodically whenever a temporary freeze on the tui-tion level is ordered by the government. Many private schools then attemptto maintain their real income by asking parents to increase their voluntarycontributions.

The private education sector also receives financial help from the fourlevels of government, although available data do not presently permit theamount of public subsidies going toward private education to be computedwith any reasonable degree of accuracy.

While the bulk of the income of private schools and universities comesin the form of fees paid by the pupils and gifts, these institutions do receivefinancial help from the central government, the departments and the mu-nicipalities. At least one decentralized agency, namely ICFES, contributesby channeling public funds into private institutions of higher education.Broadly speaking, private education receives public subsidies under thefollowing forms:

(i) direct "cash" grants to schools or universities;(ii) teachers en comisi6n, which means teachers working in private

schools but paid by the government;(hi) scholarships to pupils enrolled in private schools;(iv) legal tax-relief arrangements.

While there is absolutely no way of computing the amount of public moneythat goes into private education at the departmental and municipal level, itis theoretically possible to present a crude evaluation of the amount of cashgrants originating from the central government. The ICFES series onuniversity finance also permit some reasonable speculations about theamount of public finance supporting private universities.

The absence of any statistics on the number of teachers en comisi6n isparticularly troublesome, given the importance of teachers' pay in the totalcosts of education at the primary and the secondary level. As to the volumeof scholarships to pupils enrolled in private schools, it is probable thatICETEX," to whom the responsibility for managing scholarship funds andselecting suitable candidates was transferred from the Ministry of Educa-tion in 1971, will be able to provide some reliable data in the near future.

At the central government level, the bulk of direct financial help toeducational institutions is spelled out in "Program 327" of the budget of the

lnstituto Colombiano de Credito Educativo y Estudios Tkcnicos en el Exterior

16

Ministry of Education."2 Though the data are broken down by department,level of education and individual school, there is no immediate way ofdeciding which schools are private or public.'3 In addition, the statisticsshown in the budget are of little help because they refer to initial appropria-tions. Execution budget data broken down in the same way and sufferingfrom similar shortcomings are provided by the Contraloria General de laRepublica.'4

Keeping these shortcomings in mind, it was decided to adopt the alreadymentioned rule-of-thumb that 10 percent of the Ministry of Education bud-get goes into private education. The calculations have been made for theyear 1970 and are presented in Annex 2. While the margin of error affectingthese rather crude data is likely to be very large, it is safe to say that theyprobably underestimate the actual amount of public help to private educa-tion, since they refer to some central government subsidies only, thus ex-cluding subsidies under the form of tax relief and scholarships and the sub-sidies from the departments and the municipalities. At the higher educationlevel the situation is more satisfactory, thanks to the unpublished ICFESseries on the financing of public and private universities.

Implications for the Income Redistributive Aspectsof Public Expenditures on Education

The foregoing considerations have important implications for the studyof the impact of public educational expenditures on income distribution.First, on the financing side of these expenditures, the fact that the variousgovernment levels contribute significantly to the financing of educationmakes it necessary to study the various taxation systems of the country inorder to determine the overall incidence of all tax payments.

Secondly, considering the benefits side of public educational expen-ditures, the existence of an important private education sector, partiallysupported by public funds, may introduce a strong and biased correctivefactor in the allocation of public education subsidies, insofar as privateeducation is unequally distributed among income groups.

Thirdly, the vigorous policy of transferring funds from the centralgovernment to regional units, namely the departments, may have an impor-tant distributional impact on the allocation of educational expenditures be-tween departments. Clearly, the expenditures incurred by the departmentsthemselves and the municipalities do not have any geographical redistribu-tive impact since they are made within their own respective administrativelimits.

'2Presupuesto de Colombia (Bogotai: Direcci6n General del Presupuesto, 1970), p. 24513ICFES has published a code of educational institutions which may be used for this

purpose'41nforme Financiero, vol III (Bogotb: Ejecuci6n Presupuestal, n.d.).

17

Table 2.4: Colombia: Revenue Structure by Levels of Government (1967)

Government Levels/ CentralRevenue Sources Government Departments Municipalities Bogota

Total Revenuc 100.0 1000 100.0 100.0Total Capital Revenue 16 7 6 7 15.2 19.3Total Current Revenue 83 3 93.3 84 8 80 7Total Fiscal Revenue 81 0 46 2 23 5 18 2Direct Taxes 40 1 2.7 17.3 14 9(of which Income Tax) 38 3 - - -Indirect Taxes 40.9 43 5 6 2 3.3Other Revenue - 27.7 53 1 51.3Transfers 2 3 19.4 8 2 11.2

Source Anuario de Fiscales y, F,,ialicieras clel DANE, 1966-67 (Bogota: DANE).

The three preceding points will now be reviewed in turn. The generalstructure of taxation and its role as a source of revenue for the centralgovernment, the departments and the municipalities are shown in Table2.4. First, it should be noted that fiscal revenue represents 81 percent of thecentral government's total revenue as against 46.2 percent in the depart-ments and 23.5 percent in the municipalities.is Second, about half of thecentral government's total fiscal revenue is attributed to directtaxes-which are, presumably, more progressive than indirect taxes-asagainst 6 percent in the departments As a consequence, while indirect taxesaccount for more than 40 percent of both the central government's anddepartments' total revenue, they account for 50 percent and 94 percent oftheir respective fiscal revenue As to the municipalities, less than a fourthof their total revenue comes from taxation, while more than 50 percentoriginates in the provision of services such as electricity, water, publictransportation and the like

At first glance, it can be said it is very unlikely that these three fiscalsystems have the same degree of progressivity. The level of government fi-nancing education will, therefore, have implications for equity. Moreover,any switch in their relative contributions to the country's total fiscalrevenue is bound to have an impact on the overall incidence of the threetaxation systems and, therefore, on the distributional effects of public sub-sidies to education. A practical consequence of this state of affairs is that itwill be necessary to carry out a different tax incidence study for each of thethree levels of government.

As mentioned earlier, one of our hypotheses is that the presence of alarge private education sector, partially financed by public funds, is boundto introduce an important bias in the distribution of public subsidies amongincome groups. In Colombia, as in many other countries, children of higher

i5This last proportion is even smaller in the case of big cities, as evidenced by the datashown for the municipality of BogotA

18

income groups have a higher propensity to enroll in private fee-payingschools than children from lower income groups. This will, of course, betruer for the children living in the larger urban areas where private educa-tion facilities are concentrated than in other areas, and for those enrolled insecondary education where private initiative is important than for thoseenrolled in primary education. In the case of the rural families in the lowestincome brackets, the choice does not even exist, since the overwhelmingmajority of private and secondary schools are concentrated in urban areas.The amount of educational subsidies received by each income group is afunction of its enrollments in public and private education, and of theamount of public subsidies received by both the public and private educa-tion sectors. Higher income groups in Colombia will, therefore, all elsebeing equal, receive relatively smaller subsidies than in countries wherethere is no private education.

The two above points will have important consequences on the actualimpact of public educational expenditures on the distribution of income:see Chapter III.

Turning now to the question of the transfers from the central govern-ment to the departments, it has been argued that these transfers merelyreflect the inability of the departments' fiscal systems to raise enoughrevenue to finance their educational expenditures. More specifically, thelack of income elasticity of many departmental taxes has been emphasized.Whether and how the departments' fiscal systems should be overhauled inthe sense of both more elasticity and more equity, to enable them to financetheir expenditures in an appropriate way, is surely an important question.However, it is hard to argue that all transfers will or should disappear in theprocess. Given the already very limited powers of the central governmentin educational matters, this would be tantamount to giving up the idea ofany countrywide educational policies or reforms. In any case, the transfersto the departments are presently an important source of geographicalredistribution of educational opportunities.

These transfers, which clearly represent educational subsidies from thecentral government to the departments, are financed out of central govern-ment revenue. The distribution of central government taxes according totheir departments of origin will be considered here as equivalent to theregional incidence of national taxation, on the grounds that these taxes, ifnot levied by the government, would be levied by the departments them-selves. In other words, they can be considered as transfers of revenue fromthe departments to the central government. By combining the distributionof central government transfers for education among departments, and thedepartmental distribution of central government taxes, the overallgeographical impact of the transfers policy carried out by the governmentwill be assessed (see Chapter IV).

19

III. Public Expenditures on Education inColombia: The Redistributive Impact amongIncome Groups

This chapter attempts to assess the "net" incidence of public educationalexpenditures on the distribution of income for the year 1970. The analysisconsists of three stages: first the distribution of the tax-burden among in-come-groups will be determined; second, education subsidies will be allo-cated among the same income-groups; and third the ratios of subsidies re-ceived over taxes paid will be computed for each income-group, in order toarrive at an overall picture of the impact of public educational expenditureson the distribution of income. The unit of analysis is the family which isconsidered as a more appropriate tax-paying and subsidies-receiving unitthan individuals in the present study.

The Distribution of Incomeamong Colombian Households in 1970

The data on the distribution of income used in this study are those col-lected by DANE, the Colombian Statistical Office, in two recent householdsurveys,' and adjusted by McLure2 at the request of this study's author.

In urban areas the original data provided by the DANE household bud-get surveys refer to the distribution of household incomes among fourteenincome classes in the seven largest Colombian cities. These data wererather crudely blown up so as to give a rough approximation of the distribu-tion of household incomes in urban Colombia. According to this distribu-tion which is reported in Table 3.1, the lowest 30 percent of urban house-holds receive 8 percent of income accruing to all urban households, and the

'The various DANE surveys are described in P Cordoba, La encuesta nacional de hogaresde Colombia (Bogota DANE, 1971) Data on the distribution of income in rural areas comefrom Project EH-1 and are reported in P Cordoba, Distribucion de ingresos en Colombia y sucont rbuct6n al proyecto de Naciones Unidas sobre el sistema complementario de estadisticas de ladistribicion del ingreso (Bogota DANE, 1971) Data on the distribution of income in urbanareas come from Project EH-2 and were provided in unpublished form by DANE

2See Charles McLure, "The Incidence of Colombian Taxes 1970," Discussion Paper no41, mimeographed Program of Development Studies, Rice University Houston, Texas, 1973,pp 3-12

20

top 10 percent of households about 40 percent of total urban income.Because this income distribution refers to households, there is no way ofknowing whether it is more or less equitable than past income distributions,which all refer to the economically active population. 3 However, it is, as ex-pected, slightly less unequal than the 1970 income distribution among eco-nomically active persons.4

In rural areas, data for income distribution among economically activepersons come from an earlier DANE survey. The problem was thus to con-vert this distribution among individuals into a distribution among house-holds. Although there is no fully satisfactory way of doing this, it wasdecided to use an approach based upon data on incomes of heads of house-holds, reported by income brackets for each educational level in ruralareas.5 The results of the calculations are reported in Table 3.2. Accordingto this income distribution, which includes only seven income classes, thelowest 40 percent of rural households receives approximately 10 percent ofrural income and the top 10 percent about 35 percent to 40 percent of in-come. As pointed out by McLure, the distribution of income in rural areasis roughly similar to that of urban areas, but the average urban income ismore than four times higher than the average rural income.6

The income distribution for all Colombian households was obtained bycombining the distributions of urban and rural areas. The results are re-ported in Table 3.3. According to this estimate, the lowest 40 percent of allColombian families receive about 8 percent of all income, and the top 13percent about 50 percent of all income. Average income per household wasroughly 30,000 pesos in 1970.

The Distribution of the Tax Burden among Income-Groups

The next step consists in allocating the major direct and indirect taxes tothe income groups likely to pay them. We thereby arrive at an overall pic-ture of the incidence of the taxation system as given by the effective ratesof taxation, i.e., the ratio of taxes paid over total income in each incomegroup.

This process of assessing the incidence of taxation, which was carriedout separately in urban and rural areas, is rather delicate. The final resultsdepend largely on the availability of reliable tax data and on a number of

3See Miguel Urrutia Montoya, "Resetia de los estudios de distribuci6n de ingreso en Co-lombia," Rewista del Banco de la Repilbihca XLIII (February 1970). 180-91.

4According to C6rdoba, D,strrbuciin de ingresos en Colombia, the lowest 30 percent of activepersons in urban areas receive about 6 percent of urban income, and the top 10 percent about44 percent of income.

5lbid , pp 80, 84, and 95, see also McLure, "The Incidence of Colombian Taxes," Table 3,Estimate 3

643,800 pesos against 10,300 pesos per year.

21

Table 3.1: Distribution of Income among Urban Households (1970)(Number of Households in Thousanids, Income in Billions of Pesos)

Income Bracket Number of Total Cumulative % of(Pesos/Year) Households Income Households Income

0- 6,000 43.3 0 20 2.1 0.26,000- 12,000 257.8 2.38 14.7 2.9

12,000- 18,000 308.9 4 56 29.9 8.018,000- 24,000 309.2 6 39 45.0 15.124,000- 30,000 204 9 5 44 55.0 21 230,000- 36,000 153.6 5.03 62.5 26.836,000- 48,000 193.1 7.91 72.0 35 648,000- 60,000 148.3 7.87 79.3 44.460,000- 72,000 89.7 5 87 83 6 51.072,000- 84,000 74.9 5 76 87.2 57.484,000-120,000 121.0 12.10 93 1 70.9

120,000-180,000 75:2 10 65 96 8 82.8180,000-240,000 38.1 6.51 98.7 90.1Over 240,000 24 6 8 81 100.0 100.0Total 2,042 6 89.52

Sources. DANE, Special Tabulations of Household Survey (EH2) and McLure, "TheIncidence of Colombian Taxes," Table 2.

Table 3.2: Distribution of Income among Rural Households (1970)(Number of Households in Thousands; Income in Billions of Pesos)

Income Bracket' Number of Total Cumulative % of(Pesos/Year) Households' Incomel Householdsl Income'

0- 6,000 595.7 1 79 45.1 13.26,000- 12,000 421.3 3.80 77.0 41.2

12,000- 18,000 217 9 3.92 93.5 70.118,000- 24,00024,000- 30,000 67.3 2.37 98.6 87.630,000- 36,00036,000- 48,00048,000- 60,00060,000- 72,000 9.3 0 92 99.3 94.472,000- 84,00084,000-120,000

120,000-180,000 1.3 0 31 99.4 96.7180,000-240,000Over 240,000 1 3 0.37 99 52 99.42Total 1,320.8 13.48 - -

'Wider income bracket for rural households than for urban households were dictatedby the format of the original data. Figures are given in the top Iine for the severalnarrower brackets included in the wider ones.2 Small numbers of persons and amounts of income were not allocated among incomeclasses

Sources C6rdoba, Disiribuct6n de ingresos en Colombia and McLure, "The Incidenceof Colombian Taxes," Table 3, Estimate 3.

Table 3.3: Distribution of Income among Colombian Households (1970)(Number of Households in Thousands; Income in Billions of Pesos)

Income Bracket Number of Total Cumulative % of(Pesos/Year) Households Income Households Income

0- 6,000 6390 1 99 19 0 1.96,000- 12,000 679.1 6.18 39.2 7 9

12,000- 24,000 8360 1487 64.1 22.424,000- 60,000 767.2 28.63 87 0 50.260,000-120,000 294.9 24.66 95.8 74 1

120,000-240,000 114.6 17.48 99.2 91 1Over 240,000 25.9 9.18 100.0 100.0Total 3,356 7 102.99 -

Soioces See Tables 3.1 and 3.2.

hypotheses concerning tax-shifting, that is to say, the fact that the personswho pay the taxes are not necessarily those who bear the actual burden. Inthe case of Colombia, this field has already been pioneered by variousresearchers and the data, although still far from excellent, are adequate. Thethorny question of tax-shifting was dealt with by presenting alternative andextreme assumptions whenever necessary in order to bracket the "true" in-cidence of the tax system.7

The various taxes will now be treated separately:Direct Taxes. The allocation of the personal income tax among income

groups was made on the basis of unpublished tax-return data for 1967, sup-plied by the Ministry of Finance and adjusted to the year 1970. It wasassumed that the personal income tax was actually borne by those who paidit. The data, which were supplied on an individual tax-payer basis, had to beadjusted to bring them on a household basis. All these calculations led toeffective tax rates under the personal income tax, ranging from zero for thelowest income group, to 15 percent for the top income group.8 It is impor-tant to mention that these results refer to liabilities and not to actual taxpayments. Taxation rates may thus be overestimated to the extent that ac-tual tax collections do, in fact, fall short of tax liabilities.

Three assumptions concerning the incidence of the corporation incometax were made, namely: that it is borne entirely by upper income Colom-bian shareholders, that it is shifted by Colombian consumers, and that it isborne by foreign shareholders. Because of the arbitrariness of a choice

7 This section draws heavily on McLure, "The Incidence of Colombian Taxes" Thispaper- which was originally specially commissioned to Professor McLure by the author of thepresent study-represents a very thorough updating of McLure's earlier work on the subject,"The Incidence of Taxation in Colombia," in Fiscal Reformfor Colombia: The Final Report andSraff Papers of rhe Colombian Commission on Tax Reform, ed Richard A Musgrave andMalcolm Gillis (Cambridge, Mass. Harvard Law School International Tax Program, 1971)

8See McLure, "The Incidence of Colombian Taxes," Table 12

23

among these alternatives and of the sensitivity of actual tax incidence tosuch a choice, it was decided to present two alternatives: alternative I basedon the least progressive assumption about the incidence of the corporationtax, i.e , the assumption according to which the tax is shifted to consumersroughly in proportion to their non-food expenditures; and alternative 2based on the most progressive assumption about the incidence of the cor-poration tax, i.e., the assumption according to which the tax is borne by Co-lombian shareholders who are assumed to be concentrated in the top threeincome brackets. Alternative I leads to a taxation rate of roughly 3 percentfor all income groups and alternative 2 to taxation rates of 6.7 percent, 10percent and 13.3 percent for the top three income groups (from bottom totop).9

Coffee export duties were responsible for about 22 percent of centralgovernment tax revenue in 1970. It is not clear, however, whether therevenue raised went to general revenue or to finance the activities of thecoffee sector. In the former case, coffee duties should be treated as anyother tax, whereas in the latter they could reasonably be ignored. This is aserious problem from the point of view of tax incidence because coffeeduties constitute a strongly progressive element of taxation within the ruralsector. If they are excluded, the taxation system will appear to be much lessprogressive than it is when they are included. Here too it was decided to usetwo polar alternatives-alternative I (minimum progressivity) according towhich coffee duties are excluded, and alternative 2 (maximumprogressivity) according to which they are included-in order to bracket theactual incidence of taxation in Colombia in an appropriate manner.

The property taxes levied at the municipal level have been allocatedamong income groups according to actual household payments for this tax,as reported in the DANE household budget survey (Project EH-2). Formost urban households, property taxes amount to less than 0.5 percent ofincome. Only in income groups above 120,000 pesos per year does theburden of these taxes rise to I percent to 2.5 percent of income. In ruralareas, the rate of taxation is insignificant (less than 0.1 percent of income).To summarize, the effective rates of direct taxes range from 4.6 percent ofincome in the poorest income group to 18.8 percent of income in therichest, according to the least progressive hypothesis,'0 and from 5.7 per-cent to 29.3 percent in the most progressive hypothesis."

Indirect Taxes. Indirect taxes were allocated among income groups in ac-cordance with the consumption patterns reported in the DANE household

91bid ,Table 130Corporation income tax borne by shareholders and coffee export duties excludedilCorporation income tax borne by shareholders and coffee export duties included See

McLure, "The Incidence of Colombian Taxes," Table 18

24

budget survey. The various national,'2 departmental' 3 and munici-pal'4 taxes were allocated separately, according to consumption of taxeditems. The overall rate of indirect taxation is roughly 6 percent to 7 percentof income and varies very little among income groups.'5 In other words, in-direct taxation is roughly proportionate to income in Colombia. Further-more, its burden is roughly the same in urban and rural areas. These globalconclusions are not the result of strongly offsetting patterns betweentaxes'6 and deviations from the pattern of proportionality are small.

When both direct and indirect taxes are combined, effective rates of tax-ation imposed by all Colombian taxes can be computed. These rates are re-ported separately for urban and rural areas, using two alternatives in eachcase: alternative 1 of minimum progressivity which assumes that the cor-porate income tax is borne by consumers and which excludes coffee exportduties, and alternative 2 of maximum progressivity which assumes that thecorporate income tax is borne by shareholders and which includes coffeeexport duties. The results are shown in Tables 3.4 through 3.9.

In urban areas, according to alternative 1, the tax system is roughly pro-portionate to income for low and middle income households, and mildlyprogressive for the top two income groups, which comprise 3.2 percent ofall urban households. In the case of alternative 2, the tax system is still pro-portional for the lower ten income groups, but it becomes more stronglyprogressive for the top four income groups, which comprise 6.9 percent ofall urban households.

In the rural sector, the tax structure is proportionate to income if coffeeexport duties are excluded (alternative 1), but shows considerableprogressivity if they are included (alternative 2). Total taxes paid by ruralhouseholds amount to 9.5 percent of their income in the first case, asagainst 22.6 percent in the second case. The proportion for all urban house-holds is 13.3 percent.

For the country as a whole, according to alternative I which yieldsminimum progressivity, the incidence of taxation is roughly thesame-around 1I percent of income-for all incomes under 120,000 pesos,that is to say for 95.8 percent of all Colombian households. For incomesover 120,000 pesos, that is for less than 5 percent of all households, theaverage rate of taxation is 18 percent, while the average for the country as awhole is 12.8 percent (see Table 3.8).

'2Tax on gasoline, customs, stamps and sales tax3Tobacco, alcohol, beverages and departmental sales tax

14 Automobile registration, tax on industry and commerce' 5See McLure, "The Incidence of Colombian Taxes," Table 2216There is no strongly progressive tax the influence on total indirect taxation of which is

offset by another very regressive tax

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Table 3.4: Urban Areas: Allocation of Taxes according to Alternative I(Minimum Progressivity)

Income Bracket Income Effective Rates of Allocation of Taxes(Pesos/Year) (Billions of Pesos) Taxation (%) (Mtllions of Pesos)

(1) (2) (1) x (2)0- 6,000 0.20 11 5 23

6,000- 12,000 2 38 7 7 18312,000- 18,000 4 56 9.6 43818,000- 24,000 6 39 10 3 65824,000- 30,000 5 44 10.3 56030,000- 36,000 5 03 10.9 54836,000- 48,000 791 120 94948,000- 60,000 787 105 82660,000- 72,000 5 87 11 5 67572,000- 84,000 5.76 10.7 61684,000-120,000 12 10 12.4 1,500

120,000-180,000 11.50 12.2 1,405180,000-240,000 7 36 14 2 1,048Over 240,000 10 52 27.5 2,894Total 92.89 13 3 12,323

Soiotce McLure, "The Incidence of Colombian Taxes," Tables 7 and 23

Table 3.5: Urban Areas: Allocation of Taxes according to Alternative 2(Maximum Progressivity)

Income Bracket Income Effective Rates of Allocation of Taxes(Pesos/Year) (Billtons of Pesos) Taxation (%) (Millions of Pesos)

(1) (2) (1) x (2)0- 6,000 0.20 7 1 14

6,000- 12,000 2 38 5 0 11912,000- 18,000 4.56 6.7 30618,000- 24,000 6.39 7.1 45424,000- 30,000 5 44 7.2 39230,000- 36,000 5.03 7.6 38236,000- 48,000 791 8.7 68848,000- 60,000 7 87 7.5 59060,000- 72,000 5.87 8 8 51772,000- 84,000 5.76 7.9 45584,000-120,000 12.10 9.4 1,137

120,000-180,000 12.32 15 4 1,897180,000-240,000 8 18 19.9 1,628Over 240,000 12.14 34 8 4,225Total 96.15 13.3 12,804

Somice McLure, "The Incidence of Colonmbian Taxes," Tables 7 and 23.

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Table 3.6: Rural Areas: Allocation of Taxes according to Alternative 1(Minimum Progressivity)

Income Bracket Income Effective Rates of Allocation of Taxes(Pesos/Year) (Billions of Pesos) Taxation (%) (Millions of Pesos)

(1) (2) (1) x (2)0- 6,000 1.79 11.2 200

6,000- 12,000 3.80 8.6 32712,000- 24,000 3.92 9.5 37224,000- 42,000 1.94 95 5 22542,000- 60,000 0.43 1 160,000- 90,000 0.53 9 890,000-120,000 0.39

120,000-240,000 0.31 9.9 31Over 240,000 0.37 10.3 38Total 13.48 9 5 1,280

Soutice See McLure, "The Incidence of Colombian Taxes," Tables 9 and 24

Table 3.7: Rural Areas: Allocation of Taxes according to Alternative 2(Maximum Progressivity)

Income Bracket Income Effective Rates of Allocation of Taxes(Pesos/Year) (Billions of Pesos) Taxation (%) (Millions of Pesos)

(1) (2) (1) x (2)0- 6,000 1.91 13.5 258

6,000- 12,000 4.03 11.2 45112,000- 24,000 4.31 14.8 63824,000- 42,000 2 24 2 842,000- 60,000 0 85 1 l60,000- 90,000 0 89 (90,000-120,000 0.55 1 4

120,000-240,000 0.70 58.6 410Over 240,000 0.81 57.4 465Total 16.29 22.5 3,670

Source See McLure, "The Incidence of Colombian Taxes," Tables 9 and 24.

Table 3.8: Total Colombia: Allocation of Taxes according to Alternative 1(Minimum Progressivity)

Income Bracket Income Effective Rates of Allocation of Taxes(Pesos/Year) (Billions of Pesos) Taxation (%) (Millions of Pesos)

0- 6,000 1 99 11.2 2236,000- 12,000 6.18 8.3 510

12,000- 24,000 14.87 9.9 1,46824,000- 60,000 28.62 10.9 3,10860,000-120,000 24.65 11.7 2,878

120,000-240,000 19.17 12.9 2,484Over 240,000 10.89 26.9 2,932Total 106.37 12.8 13,603

Soutrce See Tables 3.4 and 3.6.

Table 3.9: Total Colombia: Allocation of Taxes according to Alternative 2(Maximum Progressivity)

Income Bracket Income Effective Rates of Allocation of Taxes(Pesos/Year) (Billions of Pesos) Taxation (%) (Millions of Pesos)

0- 6,000 2 11 12.9 2726,000- 12,000 6.41 8.9 570

12,000- 24,000 1526 9.2 1,39824,000- 60,000 29.34 10.0 2,92060,000-120,000 25.17 10.7 2,689

120,000-240,000 21 20 18.6 3,935Over 240,000 12.95 36.2 4,690Total 112.44 14.7 16,474

The discrepancies between the income distributions shown in Tables 3.1-3.3 and thoserecorded in Tables 3.4-3.9 are due to:-an adjustment for corporate retained earnings which have been allocated to the three

top income brackets in Table 3.4 in which, it is recalled, corporation taxes are shiftedentirely to Colombian consumers;

-an adjustment for both corporate retained earnings and income tax which have beenallocated to the three top income brackets in Table 3.5 in which corporation tax isborne entirely by Colombian shareholders;

-the inclusion of coffee export duties in Table 3.7.

Source. See Tables 3.5 and 3.7.

According to alternative 2, the average taxation rate for the country as awhole is 14 7 percent, slightly higher than recorded under alternative Ibecause of the inclusion of coffee export duties. Here too, the incidence ofthe tax system is proportionate to income-around 10 percent-for all in-comes under 120,000 pesos. Over 120,000 pesos, the average rate of taxationreaches 25 percent of income

The taxes that contribute most to progressivity are, at the national level,the personal income tax and the corporate income tax if it is attributed toshareholders. Alcoholic beverage taxes at the departmental level and prop-erty taxes at the municipal level are also progressive at the upper end of thetncome scale.

The Distribution of Public Subsidies for Educationamong Income Groups

In order to allocate the public subsidies for education to the various in-come groups, it is necessary, first, to determine the structure of enrollmentsin each level of education by level of income, then to distribute enrollmentsin the public and private sector and, lastly, to compute the amount of publicexpenditures per pupil and per level in each sector. The total subsidies re-ceived by each income bracket will be obtained by multiplying the number

28

of pupils enrolled in each level and sector by the corresponding public ex-penditure per pupil.

Data on enrollments by income levels in urban areas were provided inunpublished form by the Colombian Office of Statistics. The source of thedata is the same household survey already used previously to extract dataon the distribution of income.'7 The questionnaire used in this survey in-cluded data on levels of educational attainment and on the present schoolsituation of each member of more than twelve years of age in each house-hold. The level of educational attainment of members of households whodeclare at the same time that they are still attending school was adopted as aproxy for the structure of enrollments by income levels. For children be-tween five and twelve years of age, only the level of educational attainmentassessed by the number of grades passed in primary education was avail-able. In order to determine whether a person declaring, say, three years ofprimary education was still attending school or not, the number of gradespassed was compared with age and the following rules-of-thumb wereadopted for all income groups: (i) whenever a child was four years or morebehind in his school career, he was considered as having dropped out; (ii) 50percent of children who were three years behind were considered as havingdropped out; (iii) all other children were considered as still attending pri-mary school except (iv) children who declared they had passed the fifth andlast grade of primary education; those children were considered as enrolledin lower secondary education.

These rules clearly imply an assumption about the age at which childrenare supposed to start primary school. In order to take into account the well-known problem of late entry into Colombian education, it was assumedthat the age corresponding to the first year of schooling was seven. Thus, aten-year-old child who should be in the fourth grade but declares that hehas not yet passed the first grade was considered a drop-out.

The assumption of seven years of age for children enrolled in the firstgrade is not equally true for all income groups. According to the survey, 38percent of all seven-year-old children in urban areas are already enrolled ingrade 2 or 3; however, this proportion drops to 15 percent to 25 percent forthe low income groups, and rises to 50 percent to 60 percent for the high in-come groups. In other words, high incomes are associated with early entryand a low probability of a large age/grade discrepancy, that is with a lowdrop-out rate; on the contrary, low incomes are associated with late entryand a high probability of a large age/grade discrepancy, that is with a highdrop-out rate.

All in all, though these assumptions remain arbitrary, they seemreasonable enough in a country like Colombia. A final adjustment was

' 7Project EH-2, in DANE terminology.

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Table 3.10: Urban Colombia: Enrollments by Level of Family Income

Number of Enrollment in allIncome Bracket Children Levels Primary Secondary Higher

(Pesos/Year) Age 5-25 (N) (%) (%)(Thousands) % Thousands

0- 6,000 III 48 5 54 88.0 11.5 -6,000- 12,000 443 43 1 191 96.2 3.6 0.2

12,000- 18,000 670 45.4 304 90.3 9.4 0.318,000- 24,000 745 48 2 359 80.6 18.7 0.724,000- 30,000 600 48.7 292 78 4 21 4 0.230,000- 36,000 423 47 6 201 76.3 21.9 1.836,000- 48,000 549 52.0 285 66.3 31.1 2.648,000- 60,000 358 544 195 52.7 42.0 5.360,000- 72,000 283 52.9 149 54.2 38.1 7.772,000- 84,000 217 56.8 123 55.3 40.2 4.584,000-120,000 278 58.3 162 47 5 45.1 7.5

120,000-180,000 213 64.9 138 45 9 43.3 10.8180,000-240,000 107 66.2 71 39.1 52.2 8.7Over 240,000 114 61 9 70 40.7 48.3 11.0(%) 50.8 100.0 10.0 26.8 3.2Total (Thousands) 5,1101 2,596 1,8162 6963 843

'Approximately 50 percent of all Colombians between five and twenity-five are assumedto live in urban areas.21t is assumed that 60 percent of pupils enrolled in primary education are enrolled inurban areas No adjustment was made for the fact some children from rural familiesmay attcnd schools located in urban areas.31t is assumed that all enrollments in secondary and higher education are in urban areas.Souirce See Text Unpublished tabulations based on the DANE Household Survey(Project EH2).

made to "blow up" the results yielded by the survey tn order to make themrepresentative of urban Colombia as a whole. The expansion factors usedfor primary, secondary and higher education were 1.37, 1.78 and 2.07respectively; it was 2 19 for the total number of children. The results ofthese calculations are shown in Table 3 10.

About half of the five to twenty-five age group is enrolled in some levelof education. While enrollment ratios are below 50 percent for the lowestsix income groups, they are above 60 percent for the top three. The struc-ture of enrollments by level of education also differs according to income.In the lowest five income groups, more than 80 percent of the students areenrolled in primary education, and close to 20 percent in secondary educa-tion. Enrollments in higher education represent less than 1 percent of thetotal. In the top five income groups, enrollments in primary and secondaryeducation account for 90 percent of the total (half in primary and half insecondary); the share of higher education is close to 8 percent to 10 percent.

It is thus clear that the children coming from families with higher in-

30

comes are enrolled in greater proportions than their less privileged counter-parts. Furthermore, these children are more likely to be enrolled in second-ary and higher education than the children from low income groups.

The next step is to determine the relative shares of the public and privatesector in enrollments at each level of education and for each income group.In this connection, the only information available in Colombia is that of theNational Testing Service. It refers to the bachilleres, the students enrolled inthe last year of secondary education. Their application forms for the testsinclude data on family income and the type of educational institu-tions-public or private-in which they received their secondary education.This information, once processed, shows very clearly that the share of thepublic sector in enrollments, preponderant in low income groups, declinessteadily as income rises with a corresponding increase of the share of theprivate sector.'"

This information was "blown up" to total enrollment in secondary, pri-mary and higher education successively, subject to the constraint of theoverall shares of the public and private sectors in each level. The results ofthese calculations are recorded in Table 3.11.'9 The emerging pattern ofenrollment is clear: public educational institutions in Colombia are mainlyattended by the "poor" and an overwhelming proportion of children com-ing from upper income families are educated in the private sector.Moreover, the propensity of Colombian families to send their children toprivate schools rises steadily with income. All in all, the private sector isnearly as important as the public sector for secondary and higher education,and accounts for close to 28 percent of urban primary education. Needlessto say, this is going to have an important impact on the pattern of subsidiesreceived by the various income groups, since private education is far lesssubsidized than public education.

The DANE household survey mentioned above provides very little in-formation on enrollments by level of family income in rural Colombia. Afew families living in the rural "belt" around the big cities were included inthe sample, but they are clearly not representative of the rural world as awhole. There is an obvious data problem here which the "guesstimates"recorded in Table 3.12 do not pretend to solve. The distribution of childrenbetween five and twenty-five years of age among income groups is assumedto be the same as the distribution of households shown in Table 3.2.20 Less

18See Jean-Pierre Jallade, "The Financing of Education an Examination of Basic Issues,"IBRD Staff Working Paper no 157 (Washington, D C. World Bank, 1973), p 34

19There is obviously some arbitrariness in this procedure since it impiies that the relativepropensities of the various income groups to enroll their twelfth-grade children in pubiic orprivate schools are repeated throughout the education system.

20This assumption obviously implies that family size is the same for