- Studies in Fiscal Federalism and State–local Finance series
Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 13: Subnational Insolvency and Governance: Cross-country Experiences and Lessons
13. Subnational insolvency and governance: cross-country experiences and lessons Lili Liu and Michael Waibel* 1 INTRODUCTION The effectiveness of decentralization depends in part on the design and operation of subnational access to credit. Three factors have propelled the growth in subnational capital markets in developing countries since the 1990s and will continue to drive their future growth.1 First, decentralization in many developing countries has given subnational governments significant spending responsibilities, taxation power and the capacity to incur debt. Second, large infrastructure financing needs in developing countries are increasingly seeking capital market financing to match the intertemporal nature of infrastructure. Infrastructure networks benefit future generations as well; thus sound public policy demands that the financing of infrastructure networks be shared by future generations through matching repayment of debt financing with maturity of assets. Third, liquidity and growing mobility of international capital across national borders have lowered the cost of borrowing and thereby strengthened financing opportunities for infrastructure. Although the current financial crisis has strained the subnational credit market, the mobility of capital is likely to resume over the medium term.2 This growth in subnational credit markets is characterized by two distinct features. First, subnational bonds have become an increasingly important source of funding due to diversification of financial instruments and increasing flow of international capital to developing countries. Second, although public institutions continue to dominate subnational lending in a number of countries such as Brazil and India, private capital has emerged to play an important role in subnational finance in countries...
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