Fiscal Decentralization and Budget Control

Fiscal Decentralization and Budget Control

Studies in Fiscal Federalism and State-local Finance series

Laura Von Daniels

Fiscal Decentralization and Budget Control explores possible institutional solutions to fiscal instability in countries that have traditionally been caught up in problems of over-expenditure and over-indebtedness. How can governments control spending pressure from influential groups, often representing historically grown regional interests? Drawing on a mix of statistical analyses and case studies in institutional theory, the book provides new insights on previous stabilizations in Latin America and facilitates a better understanding of common dynamics of deficits and debt accumulation.

Chapter 4: Fiscal imbalance in Latin America and the Caribbean

Laura Von Daniels

Subjects: development studies, development economics, economics and finance, political economy, politics and public policy, political economy, public policy

Extract

This chapter presents a discussion of my three initial working hypotheses on the effect of budget process decentralization (Chapter 3) in light of the available empirical data for Latin American and Caribbean emerging market nations. A number of previous empirical studies, relying on data for economically advanced countries, found a negative empirical relationship between the decentralization of national-level budget processes and fiscal outcomes (see e.g. Hallerberg et al. 2009 for an overview). A lack of transparency in the budget process was also found to be associated with an increase in public debt. Looking beyond advanced countries, a few empirical studies focusing specifically on Latin American and Caribbean countries came to similar conclusions about the role of budget institutions (Alesina et al. 1999, Filc and Scartascini 2007). Taking their findings as a point of departure, I argue that increases in budget process centralization and improvements in transparency in the past few decades have had a positive effect on fiscal accounts in the countries at hand. To explain why we observe this beneficial effect of strengthening national-level budget institutions, I suggest a multi-level theoretical approach. Going beyond the above-mentioned studies, my approach incorporates institutional effects on budget actors at different levels of government. As suggested in Chapter 3, the effect on general government balances may be twofold. First, in line with the above studies, we would expect a stabilizing effect of strengthened budget institutions on the central government fiscal account.

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