Decentralization and Reform in Latin America
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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.
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Chapter 12: Fiscal rules for subnational governments? Evidence from Latin America

Veronica Grembi and Alvaro Manoel

Extract

Recently, decentralization has characterized the policy decisions of many countries both developed and developing. In this framework many countries perceived the implementation of fiscal rules for subnational governments (SNGs) as the solution for sometimes weakly defined institutional arrangements. In this context, the analysis of prerequisites for SNG fiscal rules is an essential component in order to evaluate the potential outcomes and their realistic effectiveness. This chapter will examine the institutional prerequisites of subnational fiscal rules and evaluate their effects with regard to a sample of Latin American countries: Argentina, Brazil, Colombia, and Mexico. We select this set of developing countries because they have experienced decentralizing issues in terms of both weakly defined competences and responsibilities, and lack of credibility of the central government’s commitment to fiscal discipline. For instance, several of them experienced systematic bailouts, particularly in the 1990s. Their central governments attempted to tighten the budget constraints especially via a contractual approach, that is, through a special agreement between the highest debt subnational entities and the central government. The chapter proceeds as follows. Section 2 presents the evidence on the institutional framework addressing two issues: (a) the characteristics of decentralization in both unitary-but-decentralized and federal countries; and (b) the main elements of the fiscal rules for SNGs.

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