Studies in Fiscal Federalism and State-local Finance series
Chapter 7: Comparing institutional reform success in Argentina and Brazil
Subnational fiscal indiscipline, which often comes as a negative consequence of decentralizing fiscal authority, can indeed become a source of fiscal instability, affecting an entire country. However, under the condition that national-level budget decisions are centralized and based on rules that aim at maintaining long-term stability, allowing a larger degree of vertical fiscal decentralization need not be a recipe for disaster. Brazil’s successful fiscal stabilization over the second half of the 1990s makes this point very clear. Today, Brazil combines strong central-level budgetary institutions and a more transparent budget process with the granting of a high degree of fiscal autonomy to subnational governments. In contrast, the evidence on Argentina suggests that the country never succeeded in reforming its budgetary institutions to a similar degree. Subnational common pool resource problems in Argentina persist, leaving the government in a weaker position to balance potential economic shocks. To be sure, the extreme fiscal and macroeconomic imbalances in both countries at the end of the 1990s cannot and should not be described as purely endogenous. Nevertheless, the governments in Argentina and Brazil before and even during the crisis were given choices. Based on the evidence presented above, much speaks for the view that policy makers in Brazil successfully changed the country’s economic destiny by reducing institutional problems that inhibited fiscal stability and effective crisis management. Argentina went down a different road, jeopardizing the trust of financial investors and throwing the country far back in its economic development.
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