Minas Gerais Partnership for Development

The operation would support three pillars - fiscal management, public sector management, and private sector development - in two stages, with the initial disbursement made conditional on progress to date at the time of negotiations, and the second disbursement tied to clearly defined future goals in each area. The benefits of the operation can be divided into three levels. At the first level, the operation brings benefits in terms of reinforcing the Fiscal Responsibility Law and Brazil#s system of fiscal federal checks and balances. As discussed elsewhere in this document, this system has been fundamental to assuring Brazil#s national macroeconomic stability since the Real Plan, and by reinforcing the successful adjustment of Brazil#s second largest state, the operation has considerable significance at the national level. Second, within the state itself, the fiscal adjustment combined with improved economic performance will lead to poverty reduction both through higher incomes and through increased spending available for direct poverty-reducing spending, such as education, health, and basic local infrastructure. Work at the national level suggests that the elasticity of poverty with respect to economic growth in Brazil is about one, and Minas is unlikely to be a significant exception to this statistical regularity at the level of the country. Furthermore, there is a 25% headcount ratio of poverty in the state. This implies that a one percent increase in economic growth is likely to reduce poverty in Minas by about a quarter of a percentage point per year, or one percent every four years. Third, the improvements in the quality of public management in Minas will bring better service delivery to the poor. Efforts such as results-based management and performance-based human resource management are key in this regard.