Intergovernmental Fiscal Relations in Latin America: Policy Design and Policy Outcomes

By Richard Bird (01/01, SDS/SOC, En, Es)

Documents Intergovernmental Fiscal Relations in Latin America: (PDF, 239 Kb, En)
Policy Design and Policy Outcomes

Decentralization is an important phenomenon in an increasing number of Latin American countries (See IDB, 1994, 1997; Burki et al., 1999; ECLAC/GTZ, 1996, 1997; Lopez Murphy, 1995; Fukasaku and Hausmann, 1998). Subnational finance and intergovernmental fiscal relations have long been matters of concern in Brazil and, to a lesser extent in Argentina. These issues are now becoming increasingly important in other larger countries, whether formally federal, such as Venezuela and Mexico, or unitary, such as Colombia. Even smaller countries such as Paraguay, Uruguay, Ecuador, and Guatemala are increasingly considering decentralization. Decentralization is not only in the air, it is already on the ground and influencing policy outcomes throughout the continent in a major way. It is therefore critical to understand the actual and potential impact of intergovernmental relationships on such key questions as the ability of central governments to conduct sound macroeconomic policies, the incentives for subnational governments to behave in a fiscally responsible way, and the efficient and accountable delivery of public services.

This paper sets out some of the main factors determining the effects of intergovernmental fiscal relations on such matters. It represents not new research but rather an attempt to digest and reflect upon what we have learned to date about some of these complex questions. The balance of the paper is organized as follows. First, since the structure and to some extent the effects of intergovernmental fiscal relations depend largely upon the objectives and constraints of the country in question, Section 2 discusses some core general questions that arise with respect to decentralization issues ?o specifically, the objectives of decentralization, the related but distinct question of the underlying model of subnational finance, and the key role played by the central government in decentralization. Against this background, Section 3 briefly introduces the three key components of intergovernmental fiscal relations ?o expenditures, revenues, and transfers. Sections 4 through 6 review, under each of these headings, the implications of alternative arrangements for the efficient delivery of public services, emphasizing the importance of both enabling and requiring hard budget constraints at all levels of government. Some have argued that the outcome of recent decentralization in many countries will be unsatisfactory owing to local incapacity to handle the new tasks. Others have asserted that decentralization will result in macroeconomic problems. Section 7 considers briefly the question of local capacity, while Section 8 discusses subnational borrowing and the implications of decentralization for macroeconomic management. Section 9 sets out the critical need to develop both an adequate information base and an appropriate institutional forum if the dynamics of decentralization are to evolve in a constructive direction in any country. Section 10 summarizes some of the key conclusions of the paper.

Last updated: 06/08/07