Fiscal decentralization and federalism in Latin America

Publius: The Journal of Federalism

Volumn 31, Issue 4, 2001, Pages 23-40

  Escobar Lemmon, Maria ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0041078983     PISSN: 00485950     EISSN: None     Source Type: Journal    
DOI: 10.1093/oxfordjournals.pubjof.a004919     Document Type: Article

References (73)

1. Claudio Veliz, The Centralist Tradition in Latin America (Princeton, NJ: Princeton University Press, 1980).
2. R. Andrew Nickson, Local Government in Latin America (Boulder, CO: Lynne Rienner Publishers, 1995), pp. 16-17.
3. Remy Prud'homme argues that decentralization may result in problems of allocation, preventing decentralization from leading to efficiency. "Pure" decentralization may also make redistributive policy more difficult, increasing disparities among regions. He also claims decentralization makes it more difficult to pursue macroeconomic policies, thereby making it harder for the country to achieve stability. Even if the state does achieve allocative efficiency by decentralization, productive efficiency may still be lacking and corruption could increase. See Remy Prud'homme, "The Dangers of Decentralization," The World Bank Research Observer 10 (August 1995): 201-220. For a response and refutation of Prud'homme's argument, see Charles E. McLure, Jr., "Comment on 'The Dangers of Decentralization' by Prud'homme," World Bank Research Observer 10 (August 1995): 221-226.
4. Remy Prud'homme argues that decentralization may result in problems of allocation, preventing decentralization from leading to efficiency. "Pure" decentralization may also make redistributive policy more difficult, increasing disparities among regions. He also claims decentralization makes it more difficult to pursue macroeconomic policies, thereby making it harder for the country to achieve stability. Even if the state does achieve allocative efficiency by decentralization, productive efficiency may still be lacking and corruption could increase. See Remy Prud'homme, "The Dangers of Decentralization," The World Bank Research Observer 10 (August 1995): 201-220. For a response and refutation of Prud'homme's argument, see Charles E. McLure, Jr., "Comment on 'The Dangers of Decentralization' by Prud'homme," World Bank Research Observer 10 (August 1995): 221-226.
5. Here the term state government refers to all intermediate levels of government. In Latin America, this level of government goes by a variety of names, including provincial, state, departmental, and regional. The term subnational government encompasses this level of government as well as municipal (or local) government.
6. Dennis A. Rondinelli, "Decentralizing Public Services in Developing Countries: Issues and Opportunities," Journal of Social, Political and Economic Studies 14 (January 1989): 77-98.
7. There is growing debate over the relationship between fiscal decentralization and the ability of the national government to successfully engage in macroeconomic stabilization. This relationship is beyond the scope of this article. For recent work on the relationship between decentralization and inflation and economic management, see Daniel Treisman, "Political Decentralization and Economic Reform: A Game-Theoretic Analysis," American Journal of Political Science 43 (April 1999): 488-517 and Daniel Treisman, "Decentralization and Inflation: Commitment, Collective Action, or Continuity?" American Political Science Review 94 (December 2000): 837-857; on the relationship between state size and decentralization see, Ernesto Stein, "Fiscal Decentralization and Government Size in Latin America," Inter-American Development Bank, Working Paper #368, January 1998, World Wide Web: Internet Citation: http:// www.iadb.org/res/pdf/368.pdf.
8. There is growing debate over the relationship between fiscal decentralization and the ability of the national government to successfully engage in macroeconomic stabilization. This relationship is beyond the scope of this article. For recent work on the relationship between decentralization and inflation and economic management, see Daniel Treisman, "Political Decentralization and Economic Reform: A Game-Theoretic Analysis," American Journal of Political Science 43 (April 1999): 488-517 and Daniel Treisman, "Decentralization and Inflation: Commitment, Collective Action, or Continuity?" American Political Science Review 94 (December 2000): 837-857; on the relationship between state size and decentralization see, Ernesto Stein, "Fiscal Decentralization and Government Size in Latin America," Inter-American Development Bank, Working Paper #368, January 1998, World Wide Web: Internet Citation: http:// www.iadb.org/res/pdf/368.pdf.
9. There is growing debate over the relationship between fiscal decentralization and the ability of the national government to successfully engage in macroeconomic stabilization. This relationship is beyond the scope of this article. For recent work on the relationship between decentralization and inflation and economic management, see Daniel Treisman, "Political Decentralization and Economic Reform: A Game-Theoretic Analysis," American Journal of Political Science 43 (April 1999): 488-517 and Daniel Treisman, "Decentralization and Inflation: Commitment, Collective Action, or Continuity?" American Political Science Review 94 (December 2000): 837-857; on the relationship between state size and decentralization see, Ernesto Stein, "Fiscal Decentralization and Government Size in Latin America," Inter-American Development Bank, Working Paper #368, January 1998, World Wide Web: Internet Citation: http:// www.iadb.org/res/pdf/368.pdf.
10. The exact nature of the relationship between fiscal and political decentralization is an open empirical question. Although it is reasonable to expect that these two processes will occur simultaneously, there is no reason to believe that must be the case.
11. Stella Lowder, "Decentralization in Latin America: An Evaluation of Achievements," Decentralization in Latin America, an Evaluation, eds. Arthur Morris and Stella Lowder (New York: Praeger Publishers, 1992), pp. 179-194.
12. Dennis A. Rondinelli, "Financing the Decentralization of Urban Services in Developing Countries: Administrative Requirements for Fiscal Improvements," Studies in Comparative International Development 25 (Summer 1990): 43-59.
13. For an extended discussion of how the allocative, redistributive, and stabilization functions of government relate to fiscal decentralization, see Inter-American Development Bank, Latin America After a Decade of Reforms (Washington, DC: Johns Hopkins University Press, 1994), pp. 153-156.
14. Charles M. Tiebout, "A Pure Theory of Local Expenditures," Journal of Political Economy 64 (October 1956): 416-424.
15. Friedrich A. Hayek, "The Use of Knowledge in Society," American Economic Review 35 (September 1945): 519-530.
16. James Buchanan, "Federalism as an Ideal Political Order and an Objective for Constitutional Reform," Publius: The Journal of Federalism 25 (Spring 1995): 19-27.
17. Decentralization has been a slippery concept, making it difficult to measure accurately. Many studies therefore do not distinguish between fiscal decentralization and political decentralization.
18. See, for example, Bertus de Villiers, ed., Evaluating Federal Systems (Norwell, MA: Kluwer Academic Publishers, 1994).
19. Arend Lijphart, "Non-Majoritarian Democracy: A Comparison of Federal and Consociational Theories," Publius: The Journal of Federalism 15 (Spring 1995): 3-15.
20. Eghosa E Osaghae, "A Reassessment of Federalism as a Degree of Decentralization," Publius: The Journal of Federalism 20 (Winter 1990): 83-98.
21. William H. Riker, Federalism: Origin, Operation, Significance (Boston and Toronto: Little, Brown, and Company, 1964), p. 6.
22. Federalism is the primary measure that Treisman, "Decentralization and Inflation" uses for decentralization.
23. See, for example, C. Lloyd Brown-John, ed., Centralizing and Decentralizing Trends in Federal States (Boston: University Press of America, 1988)
24. and Thomas Fleiner-Gerster and Silvan Hutter, eds., Federalism and Decentralization (Boulder, CO: Westview Press, 1984).
25. See, for instance, Victoria E. Rodrignez, "Recasting Federalism in Mexico," Publius: The Journal of Federalism 28 (Winter 1999): 235-254.
26. Albert Breton, "Federalism and Decentralization: Ownership Rights and the Superiority of Federalism," Publius: The Journal of Federalism 30 (Spring 2000): 1-16. Breton also notes that while both federal and unitary states share both the costs and benefits of decentralization, federal states alone bear the costs of federalism, which includes policing and enforcing constitutional ownership provisions.
27. Nickson, Local Government in Latin America, pp. 20-22.
28. Rodriguez, "Recasting Federalism in Mexico," 243 and Victoria E. Rodriguez, Decentralization in Mexico: from Reforma Municipal to Solidaridad (Boulder, CO: Westview Press, 1997), especially pp. 140-145.
29. Rodriguez, "Recasting Federalism in Mexico," 243 and Victoria E. Rodriguez, Decentralization in Mexico: from Reforma Municipal to Solidaridad (Boulder, CO: Westview Press, 1997), especially pp. 140-145.
30. The most current version of this discussion and the role of participation as both a pre-condition and a goal can be found at the World Bank's website on decentralization. World Wide Web: Internet Citation: http://www1.worldbank.org/publicsector/decentralization/participation.htm.
31. Lowell S. Gustafson, "Factionalism, Centralism and Federalism in Argentina," Publius: The Journal of Federalism 20 (Summer 1990): 163-176.
32. Kent Eaton, "Political Obstacles to Decentralization in Argentina and the Philippines" (Paper presented at the Annual Meeting of the American Political Science Association, Boston, MA, 3-6 September 1998).
33. Nickson, Local Government in Latin America, pp. 22-23. But, Allison Rowland, for instance, argues that in Mexico, this has not led to decentralization of austerity in the provision of public goods, implying that financing has been commensurate with responsibility. However, she does note that under decentralization, we have begun to witness a wider variety of quality and quantity of public goods across the Mexican municipalities. Allison M. Rowland, "Decentralized Urban Service Provision: What Can We Learn from Mexico?" (Paper presented at the Latin American Studies Association Meeting, Chicago, IL, 24-26 September 1998).
34. Nickson, Local Government in Latin America, pp. 22-23. But, Allison Rowland, for instance, argues that in Mexico, this has not led to decentralization of austerity in the provision of public goods, implying that financing has been commensurate with responsibility. However, she does note that under decentralization, we have begun to witness a wider variety of quality and quantity of public goods across the Mexican municipalities. Allison M. Rowland, "Decentralized Urban Service Provision: What Can We Learn from Mexico?" (Paper presented at the Latin American Studies Association Meeting, Chicago, IL, 24-26 September 1998).
35. Hamid Davoodi and Heng-fu Zou, "Fiscal Decentralization and Economic Growth: A Cross-country Study," Journal of Urban Economics 43 (March 1998): 244-257.
36. Serdar Yilmaz, Concept of Fiscal Decentralization and Worldwide Overview, 31 January 2001, p. 12; World Wide Web: Internet Citation: http://www1.worldbank.org/wbiep/decentralization/module1/module-1.pdf.
37. Program design includes such issues as how transfers are allocated, whether resources are commensurate with responsibilities, and how subnational governments are financed. The general consensus is that immobile tax bases (such as property) should be assigned to local governments while more mobile tax bases should be assigned to the national government. See, for example, Richard M. Bird, Caroline L. Freund, and Christine I. Wallich, "Decentralizing Fiscal Systems in Transition Economies," Finance & Development 32 (September 1995): 31-34; Kerry Jacobs, "The decentralization debate and accounting controls in the New Zealand public sector," Financial Accountability and Management 13 (November 1997): 331-144; Richard A. Musgrave, The Theory of Public Finance: A Study in Public Economy (New York: McGraw Hill, 1959); and Teresa Ter-Minassian, "Decentralizing Government," Finance & Development 34 (September 1997): 34-38. See the World Bank's website http://www1.worldbank.org/ publicsector/decentralization/criteria.htm.
38. Program design includes such issues as how transfers are allocated, whether resources are commensurate with responsibilities, and how subnational governments are financed. The general consensus is that immobile tax bases (such as property) should be assigned to local governments while more mobile tax bases should be assigned to the national government. See, for example, Richard M. Bird, Caroline L. Freund, and Christine I. Wallich, "Decentralizing Fiscal Systems in Transition Economies," Finance & Development 32 (September 1995): 31-34; Kerry Jacobs, "The decentralization debate and accounting controls in the New Zealand public sector," Financial Accountability and Management 13 (November 1997): 331-144; Richard A. Musgrave, The Theory of Public Finance: A Study in Public Economy (New York: McGraw Hill, 1959); and Teresa Ter-Minassian, "Decentralizing Government," Finance & Development 34 (September 1997): 34-38. See the World Bank's website http://www1.worldbank.org/ publicsector/decentralization/criteria.htm.
39. Program design includes such issues as how transfers are allocated, whether resources are commensurate with responsibilities, and how subnational governments are financed. The general consensus is that immobile tax bases (such as property) should be assigned to local governments while more mobile tax bases should be assigned to the national government. See, for example, Richard M. Bird, Caroline L. Freund, and Christine I. Wallich, "Decentralizing Fiscal Systems in Transition Economies," Finance & Development 32 (September 1995): 31-34; Kerry Jacobs, "The decentralization debate and accounting controls in the New Zealand public sector," Financial Accountability and Management 13 (November 1997): 331-144; Richard A. Musgrave, The Theory of Public Finance: A Study in Public Economy (New York: McGraw Hill, 1959); and Teresa Ter-Minassian, "Decentralizing Government," Finance & Development 34 (September 1997): 34-38. See the World Bank's website http://www1.worldbank.org/ publicsector/decentralization/criteria.htm.
40. Program design includes such issues as how transfers are allocated, whether resources are commensurate with responsibilities, and how subnational governments are financed. The general consensus is that immobile tax bases (such as property) should be assigned to local governments while more mobile tax bases should be assigned to the national government. See, for example, Richard M. Bird, Caroline L. Freund, and Christine I. Wallich, "Decentralizing Fiscal Systems in Transition Economies," Finance & Development 32 (September 1995): 31-34; Kerry Jacobs, "The decentralization debate and accounting controls in the New Zealand public sector," Financial Accountability and Management 13 (November 1997): 331-144; Richard A. Musgrave, The Theory of Public Finance: A Study in Public Economy (New York: McGraw Hill, 1959); and Teresa Ter-Minassian, "Decentralizing Government," Finance & Development 34 (September 1997): 34-38. See the World Bank's website http://www1.worldbank.org/ publicsector/decentralization/criteria.htm.
41. Treisman, "Decentralization and Inflation." He also rules out the possibility that decentralization makes it easier for the government to lower inflation.
42. The international financial institutions have also been among the most active sources of scholarship on the subject. Fiscal decentralization is treated extensively in the 1994 and 1997 annual reports issued by the Inter-American Development Bank and the 1999/2000 report by the World Bank. Inter-American Development Bank, Economic and Social Progress in Latin America 1994 Report; Inter-American Development Bank, Latin America After a Decade of Reforms; World Bank, Entering the 21st Century: World Development Report 1999/2000 (New York, NY: Oxford University Press, 2000). Both organizations also maintain extensively developed websites on decentralization.
43. Roy Bahl and Johannes Linn, "Fiscal Decentralization and Intergovernmental Transfers in Less Developed Countries," Publius: The Journal of Federalism 24 (Winter 1994): 1-18.
44. Stein, "Fiscal Decentralization and Government Size in Latin America," 2. For a richer comparison of the two regions, see Rafael de la Cruz, "La revolución federal de la finanzas públicas," Descentralización en perspectiva, ed. Rafael de la Cruz (Caracas, Venezuela: IESA, 1998), pp. 1-50.
45. Stein, "Fiscal Decentralization and Government Size in Latin America," 2. For a richer comparison of the two regions, see Rafael de la Cruz, "La revolución federal de la finanzas públicas," Descentralización en perspectiva, ed. Rafael de la Cruz (Caracas, Venezuela: IESA, 1998), pp. 1-50.
46. Richard M. Bird and Francois Vaillancourt, eds., Fiscal Decentralization in Developing Countries (Cambridge, UK: Cambridge University Press, 1998). Their study includes Colombia, Argentina, China, India, Indonesia and Pakistan, Morocco and Tunisia, South Africa, and Bosnia-Herzegovina.
47. Inter-American Development Bank, Sustainable Development Department. Local Government Development: A strategy profile; September 1998; World Wide Web: Internet citation: http://www.iadb.org/sds/doc/socgn2026E.pdf.
48. Bird and Vaillancourt, Fiscal Decentralization in Developing Countries, p. 17.
49. See, for example, Christopher Garman, Stephan Haggard, and Eliza Willis, "Fiscal Decentralization: A Political Theory with Latin American Cases," World Politics 53 (January 2001): 205-36; Treisman "Decentralization and Inflation"; and World Bank, Entering the 21st Century: World Development Report 1999/ 2000, pp. 216-217.
50. See, for example, Christopher Garman, Stephan Haggard, and Eliza Willis, "Fiscal Decentralization: A Political Theory with Latin American Cases," World Politics 53 (January 2001): 205-36; Treisman "Decentralization and Inflation"; and World Bank, Entering the 21st Century: World Development Report 1999/ 2000, pp. 216-217.
51. See, for example, Christopher Garman, Stephan Haggard, and Eliza Willis, "Fiscal Decentralization: A Political Theory with Latin American Cases," World Politics 53 (January 2001): 205-36; Treisman "Decentralization and Inflation"; and World Bank, Entering the 21st Century: World Development Report 1999/ 2000, pp. 216-217.
52. Inter-American Development Bank, Latin America After a Decade of Reforms.
53. Ricardo Lopez Murphy, ed., Fiscal Decentralization in Latin America (Washington, DC: Inter-American Development Bank, 1995).
54. John Joseph Wallis and Wallace E. Oates, "Decentralization in the Public Sector: An Empirical Study of State and Local Government," Fiscal Federalism, ed. Harvey S. Rosen (Chicago: University of Chicago Press, 1988), pp. 5-32.
55. Serdar Yilmaz, Concept of Fiscal Decentralization and Worldwide Overview, p. 3.
56. The design of transfers can vary significantly from country to country with some having systems that are less politicized, more equitable, and/or create greater taxing incentives. For a good comparison of three countries, see Mortiz Kraemer, "Intergovernmental Transfers and Political Representation: Empirical Evidence from Argentina, Brazil and Mexico," Inter-American Development Bank, Working Paper #345, January 1997; World Wide Web: Internet Citation: http://www.iadb.org/res/pdf/345.pdf.
57. World Bank, Entering the 21st Century: World Development Report 1999/2000, p. 117.
58. Nickson, Local Government in Latin America, p. 47.
59. Ibid., p. 49.
60. Daniel J. Elazar, ed., Federal Systems of the World: A Handbook of Federal, Confederal and Autonomy Arrangements, 2d ed. (Essex, UK: Longman Group Limited, 1994).
61. Data on voter turnout was obtained from Dieter Nohlen, Enciclopedia Electoral Latinoamericana y del Caribe (San Jose, Costa Rica: Instituto Interamericano de Derechos Humanos, 1993).
62. See Nickson, Local Government in Latin America, pp. 20-22.
63. Freedom House scores countries on a 1 to 7 scale on each dimension, with 1 being the most democratic. The political rights and civil liberties indexes were added together and the sum subtracted from 14. Consequently, the least democratic cases were coded 0, and the most democratic cases, 14. Data were obtained from Raymond Gastil, Freedom in the World: Political Rights and Civil Liberties (New York: Freedom House, various years).
64. Constitutional decree authority is not the same as delegated degree authority. However, both imply greater presidential power, especially relative to the legislature, than is possessed by presidents who have the authority to issue only regulatory or procedural decrees. For a complete discussion of the distinction and the source of my data on this variable, see Scott Mainwaring and Matthew Soberg Shugart, eds., Presidentialism and Democracy in Latin America (New York: Cambridge University Press, 1998), pp. 440-460.
65. Data on GDP growth was obtained from the United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), Statistical Yearbook for Latin America and the Caribbean (Santiago, Chile: ECLAC, 1997), pp. 70-71.
66. The IDB annually measured progress in reforming each of these areas and rated countries between 0 and 1 (0 is no reform). These five values were summed together and then averaged. The result is a decimal value between 0 and 1. In the resulting index, 0 represents no adjustment and 1 indicates the maximum degree of adjustment possible in all five areas. In reality, most countries fall somewhere in the middle (the average is .455). For instance, a .10 increase in structural adjustment represents a 10 percent increase in the possible level of structural adjustment. Data were obtained from the Inter-American Development Bank, Latin America After a Decade of Reforms, pp. 95-96.
67. Data on GDP per capita were obtained from ECLAC, Statistical Yearbook for Latin America and the Caribbean, pp. 186-187.
68. Land area is measured in square kilometers. Population is the number of residents in the country. Urbanization is the percentage of people living in cities. Data on these variables was obtained from the World Bank, International Economic Department, World Tables of Economic and Social Indicators, 1950-1992 (Washington, DC: World Bank, 1993).
69. Missing data present a substantial problem because many countries do not report subnational expenditures to international financial institutions. Given that it is not possible to estimate a full pooled model with missing data, missing values were interpolated using a linear fit. Data on subnational government expenditures were also obtained from the International Monetary Fund, Government Finance Statistics Yearbook (Washington, DC: IMF, 1996, 1990, 1985). For some countries 1995 data were obtained from Inter-American Development Bank, Latin America After a Decade of Reforms, pp. 157.
70. Missing data present a substantial problem because many countries do not report subnational expenditures to international financial institutions. Given that it is not possible to estimate a full pooled model with missing data, missing values were interpolated using a linear fit. Data on subnational government expenditures were also obtained from the International Monetary Fund, Government Finance Statistics Yearbook (Washington, DC: IMF, 1996, 1990, 1985). For some countries 1995 data were obtained from Inter-American Development Bank, Latin America After a Decade of Reforms, pp. 157.
71. To determine whether it was necessary to use panel-corrected standard errors (PCSE) or if ordinary standard errors would be unbiased, I conducted several different tests. Among the most easily interpretable of these is the Cook-Weisberg test for heteroskedasticity. This post-hoc test considers the residuals produced in an ordinary least squares regression of the model. In this case, the test value (6.89) exceeds the chisquare value, meaning that there is heteroskedastic variance. To determine if this variance was caused by the time component or by the countries, I estimated fixed effects models controlling first for year effects and then for country effects. The joint F-test for the country effects is significant but the one for the time effects is not. This implies that there is serial correlation within panels, but not across time. The PCSE method is advocated by Nathaniel Beck and Jonathan Katz to correct for correlation among the panels (in this case the countries). They argue that this method provides more efficient and unbiased error estimates than does the similar Parks Procedure using GLS. See Nathaniel Beck and Jonathan N. Katz, "What to do (and not to do) with Time Series Cross-Section Data," The American Political Science Review 89 (September 1995): 634-647.
72. The correlation between land and population is the highest in the dataset. Federalism is correlated with each of these variables at .67 and .72 respectively. No other correlations exceed .80; hence error variances are unlikely to be inflated due to multicollinearlity.
73. Breton, "Federalism and Decentralization."