Decentralization and Reform in Latin America

Decentralization and Reform in Latin America

Improving Intergovernmental Relations

Edited by Giorgio Brosio and Juan P. Jiménez

Decentralisation and Reform in Latin America analyses the process of intergovernmental reform in Latin America in the last two decades and presents a number of emerging issues. These include the impacts of decentralization and the response of countries in the region to challenge such as social cohesion, interregional and interpersonal disparities, the assignment of social and infrastructure expenditure, macrofinancial shocks, fiscal rules and the sharing of natural resources revenue. The main aim of the book is to assess the effective working of decentralized arrangements and institutions, with a view of suggesting corrections and reforms where the system is not working according to expectations.

Chapter 5: Fiscal decentralization and public investment

Luiz de Mello

Subjects: development studies, development economics, economics and finance, development economics, public finance

Extract

Latin America’s investment-to-GDP ratio is low by international comparison. Although it has trended upwards in recent years, the region’s average share of gross fixed capital formation in GDP – the national accounts’ standard gauge of investment activity – is somewhat lower than that of the high-income countries in the OECD area and much lower than that of the fast-growing emerging Asian economies, such as China and India. Latin American governments also invest relatively little by emerging-market and developing country standards, a feature of Latin American public finances that can be attributed to macroeconomic volatility in the 1980s and 1990s and subsequently fiscal duress. The private sector accounts for the bulk of investment, but its participation in infrastructure development and upgrading is held back by institutional and regulatory constraints. At the same time, the state of existing infrastructure in most Latin American countries suggests that spending on operations and maintenance is equally low. The region fares relatively poorly in international comparisons on the basis of a host of indicators of infrastructure quality and in terms of surveys of business sentiment. Arguably, a combination of low investment and poor infrastructure quality is holding back growth. In addition, access to infrastructure is unequal among the different social groups, which acts as a drag on social development.

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