Matteo Grazzi[2]                                 Fidel Jaramillo[3]

Abstract

Fiscal decentralization is a relatively new process in Latin America. Only in the last decades, at the same time as a progressive return to democracy and a wave of sub-national electoral reforms, has a sufficient political consensus been reached in many countries of the region to decentralize some functions usually attributed to central government.

One of the main arguments supporting the devolution of expenditure and tax management to sub-national entities is the general belief that it is beneficial for national public accounts. But in practice, as decentralization progressed across Latin America, the financial situation of several countries worsened because of expanded inter-governmental transfers stemming from higher sub-national deficits and periodic bailouts of over-indebted decentralized governments. In this context, most Latin American countries recognized the need for a second-generation of reforms to establish controls over sub-national accounts.  Many established Fiscal Responsibility Laws (FRLs) containing subnational fiscal rules, attempting to reduce subnational spending and borrowing.

In this study, we analyze the performance of sub-national finances in the region and contribute to the understanding of the determinants of their fiscal outcomes. In particular, we focus on the effectiveness of FRLs in promoting fiscal discipline in local governments.

JEL Classification: H70, H74, O54

Keywords:  Decentralization, Subnational Fiscal Sustainability, Latin America

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