Improving Intergovernmental Relations
Edited by Giorgio Brosio and Juan P. Jiménez
Chapter 11: Macroeconomic challenges of fiscal decentralization
In Latin America (LA), as in other parts of the world, decentralization has increased in recent decades, reflecting primarily political pressures, partly linked to the democratization process. As a result, subnational governments (SNGs) now account for substantial shares of public expenditures, in particular social and investment ones. This in turn has created growing challenges for macro-fiscal management. On the one hand, it has become more important, as well as more difficult, to ensure that SNGs do not accumulate unsustainable debts and/or contingent liabilities, ultimately requiring either bailouts from the central government (CG), or abrupt and socially disruptive adjustment programs. On the other hand, the traditional view that short-term macroeconomic stabilization should be the exclusive purview of the CG is becoming increasingly unrealistic. This chapter seeks to contribute to a reflection on how fiscal decentralization affects macroeconomic management in the main Latin American countries; and on which reforms in the existing intergovernmental fiscal systems of those countries could help strengthen their fiscal sustainability, minimize the risk of pro-cyclicality at all levels of government, and create ‘fiscal space’ for active countercyclical responses to economic shocks.
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