Improving Intergovernmental Relations
Edited by Giorgio Brosio and Juan P. Jiménez
Chapter 9: Intergovernmental transfers: a policy reform perspective
A number of Latin American countries have now accumulated several decades of experience with fiscal decentralization reforms. Although considerable progress has been made on many fronts, that experience has not helped to avoid some serious common pitfalls in the assignment of revenue sources to subnational governments in the region. Subnational finances in Latin America are generally characterized by relatively small shares of own-revenue collections and non-existing or – with some rare exceptions – poorly designed equalization transfer programs. In this chapter we argue that the use (and abuse) of revenue-sharing schemes in the region has prevented the development of sound financial structures at the subnational level. The comparative advantages of subnational governments with respect to the central government are usually concentrated on the expenditure side of the budget. Because of this, expenditure decentralization is usually more pervasive than revenue decentralization, and intergovernmental transfers play a crucial role in the fiscal balance of almost all fiscally decentralized systems. The main challenge for an intergovernmental transfer system is the computing and timely delivery of the right amount of transfers to each subnational government. Failing to do this well can result in sending out the wrong signals regarding the efficient level of public expenditures at the subnational level, thus eroding the efficiency gains expected from the decentralization process itself. These are, in our opinion, some of the risks currently faced by many Latin American countries. Their heavy reliance on revenue-sharing schemes and the lack of clarity about the role and proper composition of the transfer system has in many cases led to an inefficient distribution of revenues combined with significant horizontal fiscal imbalances.
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