Chapter 1 – The Bolivian Decentralization Reform

Prior to 1994 Bolivia was one of the most centralized states in Latin America, with few elected officials of any description at the subnational level, and chains of authority that stretched from the lowliest nurse or school teacher in a distant village directly up to the President and his ministers in the Palacio Quemado in La Paz. Decentralization changed this overnight. On July 1, 1994, responsibility for a suite of local public services was transferred, along with 20 percent of all national tax revenues, to 311 municipal governments newly created or expanded to comprise the entire national territory. A two-tiered system of local oversight and accountability was put into place, and Bolivia became decentralized.

The changes were immediate and dramatic. National public investment patterns shifted from economic production to human capital formation and primary social services. The spatial distribution of resources across Bolivia became far more equitable. And local governments proved far more responsive to objective indicators of local need than central government had been before in: education, agriculture, water and sanitation, health, urban development, and transport. These shifts were disproportionately driven by Bolivia’s smaller, poorer districts, which benefitted from a massive transfer of resources at the expense of the center and cities.

The temporal pattern of investment – very heavy in certain sectors immediately following reform, with other sectors rising in prominence in later years – is highly suggestive. What it suggests is a process of organizational learning in which local governments cut their teeth on comparatively simple, highly visible projects that enjoy broad support such as building schools and town squares. In the process they built capacity in budgeting, bidding, technical oversight, and other skills important to public management. This allowed them to progress to projects that are more complicated, expensive, and intensive in capital and technical skills, such as roads, health clinics, water and sewerage systems, and improving agricultural productivity.