Subnational Development

Why the Bank promotes subnational development:

Over the last couple of decades Latin America has undergone a process in which power and resources have been increasingly transferred to sub-national levels. Today, most of the countries of the region have committed themselves broadly and deeply to a model of decentralized governance, in both the political and fiscal policymaking arenas. Successfully carried out, decentralization reforms are strengthening democratic processes, empowering civil society to take a greater interest in the performance of regionally and locally elected officials, increasing the competitiveness of local areas, and improving the quality and coverage of local public services. Representative democracies are present at the local level in the majority of countries, resulting in local governments now being directly accountable to their constituencies rather than just to the central government. Hand in hand with the latter, local governments have also been given greater responsibility and resources to meet the demands and preferences of their inhabitants. This is evident from the significant increase in the share of subnational expenditures in total governmental expenditures. Subnational expenditures have climbed from 13.1% in 1985 to 19.3% in 2004, moving closer to the level found in the more developed OECD countries (29.1%). Subnational governments have also become central players in the management of public investments and public services in their countries. In Colombia, Brazil and Argentina for example, state, provincial and municipal governments are now responsible for the majority of their countrys total public investment activity.

Nevertheless, while a significant amount of progress has been made in many countries of the region in transferring responsibilities and resources to subnational governments, work remains to be done. Many reform initiatives are incomplete, often putting pressure on the fiscal balance of national governments while not always coming through on their promises to improve governmental transparency and the quality of public services. In addition, another common problem in many countries is that the regulatory and fiscal framework under which the reform process is taking place is often highly imperfect, and the subnational institutional capacity to discharge the new responsibilities is not up to par.

The Bank can play a significant role in supporting these reforms through its lending and technical cooperation activities. Bank lending in support of subnational development represents a sizable portion of the Bank's portfolio. A review of this portfolio since 1990 indicates that an estimated 27.8% of the Bank's lending volume over this period, equivalent to US$28.5 billion, has been in operations dealing with regional or local governments either as executors, co-executors or direct borrowers. In three of the last five years, moreover, this percentage has climbed to the 35-40% range.

Priority Action Areas:

In this context, the Bank supports programs and projects that contribute to: (i) well-ordered processes of decentralization, paying attention to fiscal implications and protecting the balance of authority and accountability between different levels of government; (ii) the establishment of a normative and institutional framework for decentralization that clarifies the division of responsibilities between different levels of government; and (iii) the development of the institutional capacity of subnational governments to provide public services effectively and efficiently and a strengthened fiscal capacity through the ability to collect revenue locally and the existence of a framework for budgetary discipline and fiscal co-responsibility on behalf of the regional entities.