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Decentralization is key for development
Macroeconomic stability, democracy and private sector participation are all part of the development process of Latin America and the Caribbean, but a broader issue analyzed recently by governmental authorities, economists and researchers is decentralization. During the International Forum on Decentralization for Local Economic Development, held on July 9-10 at IDB headquarters, high-ranking officials from national and subnational governments, recognized academics and economists from the international agencies, explored new ideas to find solutions for the development challenges in this field.

According to Rafael de la Cruz, senior economist of the IDB’s Division of Fiscal and Municipal Management, the process of decentralization strengthens the institutional management capacities of subnational governments, which results in better public expenditures at the subnational level, more democracy at the local level, and better conditions for private sector participation in investment opportunities and economic local development.

The dialogue on decentralization and subnational development is very advanced in the region, indicated Carlos Pineda, a specialist in urban and municipal development at the IDB. “But we still have to better understand the relation between this process and the economic development of our countries,” he said. The Forum facilitated a dialogue on decentralization among the Bank and a group of key actors in the region, including members of the academic and donor communities.

Pineda announced that the IDB will soon publish a book on decentralization, based on the presentations and discussion panels at this Forum. This book will help establish guidelines for updating the Bank’s frame of reference for strategies, policies, financial products, and non-financial products for subnational development and local development.

IDB supports subnational governments

Since 1990, close to 30% of the Bank’s portfolio, or US$30 billion, has involved subnational governments as implementors, co-implementors or direct borrowers. In the last five years, the share of IDB operations involving subnational government increased to 35% to 45%.

The Bank offers diverse financial instruments and technical assistance to support subnational governments and local economic development. The most recent instruments include loans that do not require sovereign guarantees, local currency loans and various forms of guarantees and certifications to support subnational governments’ access to capital markets. In addition, the recent internal reorganization of the Bank has improved its ability to meet the demand for technical assistance and investments for subnational governments.

Borrowing by subnational governments may create concerns about the ability of the national Ministries of Finance to effectively control subnational debt and fiscal performance. But given the trends toward increasing decentralization in the region, the demand for subnational lending is likewise rising. The Bank works closely with the Ministries of Finance and subnational governments to preserve macroeconomic stability gains and support national and local programs in improving fiscal policies, public investment, financial management, results-based management, and urban development and planning.

The Bank’s programs aim to support subnational governments in reaching institutional maturity in order to effectively serve their constituencies, improve their access financial markets and create investment opportunities for the private sector. One example is Procidades, a lending mechanism that finances integrated development programs for Brazilian municipalities, with a credit line of up to US$860 million. In order to access the program, which offers local currency loans, municipalities have to sign a consultation letter with the Federal Government and maintain fiscal responsibility.

The Bank has also approved explicit loans for municipal programs, as in the case of a US$72 million loan to Argentina to improve the management capacity of municipal governments. This program, currently under implementation, consists coordinated activities among the three levels of government (federal, provincial and municipal). The program emphasizes municipal management challenges, in particular those related to the development of information technologies to improve services for the citizens. “The program shows that the improvement of municipal management is a topic of interest among the different levels of government, as it is designed by all of them,” Pineda said.

On a smaller scale, the IDB’s Multilateral Investment Fund has developed similar technical cooperations and projects. In addition, the Bank’s Business Climate Initiative supports subnational governments in the diagnosis and financing of activities to improve their business environment.

As of today, six agreements have been signed with subnational governments; and seven more are under development as part of this initiative. In the case of the province of Mendoza in Argentina, the initiative has led to simplified procedures related to business operations, the establishment of an agency to attract investment, and regulatory changes to facilitate the creation of companies.