8. Intergovernmental transfers in
subnational finances
Fernando Rezende and Joao Veloso
1 INTRODUCTION
O ver tim e, fiscal decentralization in L atin A m erica has been accom p an ied by the grow in g im portan ce o f intergovernm ental transfers in su bn ational finances. There are three m ain exp lan ation s for this: first, the im pact o f g lob al m arkets an d tech n ological ad vances on the m ob ility o f the tax b ase traditionally tap p ed in to at the su bn ational level, w hich has im p osed ad d ition al con strain ts on the decentralization o f tax powers; second, the increasing role p layed by provin cial and lo ca l governm ents w ith regard to the p rovision o f urban and social services, as w ell as in p u b lic in vestm ents that are essential to p rom ote eco n o m ic d evelop m en t and im prove social w ell-being, such as ed u cation , health and urban infrastructure; and third, a rise in costs to fulfill su bn ational govern m en ts’ responsibilities, w hich reflect societies’ d em and s for a higher standard in the p rovision o f p u b lic services together w ith the need to apply costly solu tion s to tackle urban an d social p rob lem s in a h ighly dense and u nequ al en vironm ent.
T h e ou tco m e o f con trad ictory m oves - greater sp en din g resp on sib ili ties in a co n text o f higher p rod ucing co sts and less room for raising ow n revenues through taxes - is an increasing financial gap. Furtherm ore, w hen regional an d social disparities are high, as is the case in m ost Latin A m erican countries, h u ge differences arise w ith respect to the financial gap faced by distinct ju risd iction s (the so-called ‘h orizon tal d isparities’); that is, it is n o t p ossib le to deal properly w ith this situ ation by attem p ting to bypass the lim itation s to raising taxes at the su bn ational level.
R elian ce on transfers is in dispensable, b esid es being necessary, even th ou gh it leaves su b n ation al governm ents vulnerable to external events, such as cuts in du ced by m acroecon om ic fiscal adjustm ent needs, the im pact o f an ec o n o m ic d ow n tu rn on b udgetary receipts, the lik elih o o d o f restrictions being im p o sed on the u se o f transfer-originated resources, and the fact that central governm ent financial au th orities prefer to raise taxes n ot inclu d ed in the transfer system .
224 D ece n tra liza tio n a n d reform in L a tin A m e ric a
T he financial risks su b n ation al governm ents face by relyin g on transfers are n o t on ly related to their m agnitude. M ore im p ortan t are the character istics o f the transfer system an d the rules governing its op eration . A s such, a high share o f transfers in to ta l revenues sh ould n ot be seen as inferior com p ared to an oth er case that sh ow s a low er ratio. E ach case sh ou ld be exam in ed b efore co n clu sio n s are reached ab ou t the q u ality o f the n ation al finances.
W hat, then, are the characteristics that a transfer system sh ould exhibit to be seen as favorab le from the view p oin t o f the financial needs o f sub n ation al governm ents? H o w can the situ ation en cou n tered in a h andful o f L atin A m erican cou n tries be appraised in the light o f such an approach? T o w hat extent is the adherence to som e basic principles - w hich sh ould be observed in th e design and op eration o f in tergovern m ental transfers - im portan t to reduce distortions, dim inish risks and a v o id setbacks?
Such q u estion s p o in t to a new ap proach to appraise the q uality o f su bn ational finances. Shou ld the focu s be prim arily con cern ed w ith the n eed to reduce th e w eigh t o f transfers on su bn ational revenues, or should due attention be paid to the iden tification o f h o w far rem oved existing regim es are from the basic principles o f a sou nd in tergovern m ental trans fer system? T o w hat extent can the latter p rovok e a d eb ate that m ay lead to the recogn ition o f the im portan ce o f su bstitutin g a th o ro u g h reform for piecem eal adjustm ents in order to overcom e the w ell-k n o w n flaw s o f m ost regimes?
T his chapter op ts for this new approach. It b egins w ith a short sum m ary o f the m ain characteristics exh ib ited by the transfer regim es o f eight Latin A m erican cou n tries, h ighlights ch an ges p rovok ed by reaction s to the e c o n om ic crisis o f the 1990s, p oin ts to the m ain flaws and con clu d es w ith a p rop osal for an agen d a to reform these regim es in order to rem ove their flaw s and m ake them com p atib le w ith to d a y ’s needs.
2 TAX AND TRANSFERS IN SUBNATIONAL
FINANCES
G ó m ez Sabaini and Jim énez (ch. 6 in this volu m e) stressed the im portan ce that in tergovern m ental resource transfers p lay in su b n ation al budgets. A m o n g the eight cou n tries surveyed in this chapter, Brazil show s the low est transfers/total revenues ratio, w hile M exico exh ib its the highest. C ontrad ictin g co m m o n sense, differences are n ot exp lain ed by the p olitical organ ization o f the state or the country size. S u b n ation al governm ents in A rgentin a, C o lo m b ia and B olivia (Plurinational S tate of), like M exico, are d ependent on transfers. The tim ing o f the fiscal decentralization p rocess is
In terg o ve rn m e n ta l transfers in su bn ation al fin a n c es 225 a n i m p o r t a n t f a c t o r to e x p la in th e d iffe re n c e s , a s th e th r e e c o u n tr ie s t h a t e m b a r k e d o n a d e c e n t r a li z a ti o n s p re e in th e 1 9 80s - B ra z il, C o lo m b ia a n d A r g e n ti n a - s h o w th e lo w e r r a t io s . B o liv ia ( P l u r in a t io n a l S ta te o f), w h ic h w a s n o t a m o n g t h e f o r e r u n n e r s , h a s r e c e n tly m a d e r a p i d p r o g r e s s in s h if tin g r e s p o n s ib ilitie s a n d r e s o u r c e s to s u b n a t i o n a l g o v e r n m e n ts .
T h e firs t w a v e o f fisc a l d e c e n t r a liz a ti o n , w h ic h g a in e d im p e tu s in th e la te 19 8 0 s, w a s a c c o m p a n ie d b y a w id e s p r e a d d e fe n s e o f th e v ir tu e s o f f a m il ia r iz in g g o v e r n m e n ts w ith t h e i r c o n s titu e n c ie s , so a s t o im p r o v e efficien cy in m a n a g i n g p u b lic r e s o u r c e s , a c h ie v e efficacy b y a d ju s ti n g th e p r o v i s io n o f p u b lic se rv ic e s to lo c a l p r i o r it ie s , a n d a llo w in g f o r a c c o u n t a b ili ty o f th e g o v e r n m e n ta l a u t h o r it ie s . T h is s h o u l d a ls o e n h a n c e d e m o c r a c y fo llo w in g t h e d e m is e o f a u t h o r i t a r i a n re g im e s in s o m e p a r t s o f L a t i n A m e r ic a .
T r a n s f e r s y s te m s p u t in p la c e a t t h a t tim e w e r e d e s ig n e d in a c c o r d a n c e w ith t h e e x p e c te d b e n e fits o f fisc a l d e c e n t r a li z a ti o n . T h e b a s i s o f th e i n t e r g o v e r n m e n ta l t r a n s f e r s y s te m s in B ra z il a n d A r g e n ti n a w a s a r e v e n u e s h a r in g re g im e d e s ig n e d to r e d u c e fis c a l d is e q u ilib r ia . T h e y in c lu d e d p r o v is io n s to e n s u r e th e a u t o m a t i c o p e r a t i o n o f s u c h a re g im e a n d g a v e s u b n a t i o n a l g o v e r n m e n ts f r e e d o m t o m a k e t h e a p p r o p r i a t e d e c is io n s c o n c e r n in g th e u s e o f re s o u r c e s . C o lo m b ia a ls o i n t r o d u c e d c h a n g e s to i m p r o v e th e q u a l i t y o f its s y s te m b u t k e p t d e c is io n s o n t h e u s e o f r e s o u r c e s in th e h a n d s o f t h e c e n tr a l g o v e r n m e n t. H o w e v e r , th e s i t u a t i o n o f t h e 1980s d i d n o t la s t lo n g . T h e i n t e r n a ti o n a l e c o n o m i c c ris is t h a t h i t t h e r e g io n in th e la t e 1 9 90s c o n tr ib u t e d to its p r e m a t u r e d e m is e . T h e e n s u in g n e e d to a d ju s t th e fisc a l a c c o u n t s a n d r e s to r e m a c r o e c o n o m i c s ta b ility le d to s u b s t a n ti a l c h a n g e s t h a t im p in g e d o n th e m a n a g e m e n t o f fisc a l r e s o u r c e s a t th e s u b n a t io n a l le v e l b y a d d in g in s ta b i li ty a n d in t r o d u c i n g c o n d it i o n s in t h e u s e o f tr a n s f e r s .
O n t h e p o litic a l sid e , th e m e a s u r e s a d o p t e d t o r e s to r e fisc a l d is c ip lin e a ls o r e d u c e d th e p o s s ib il it y t h a t th o s e g o v e r n m e n ts t h a t h a d t o a p p ly u n p o p u l a r p o lic ie s w o u ld s ta y in p o w e r . T h e r e f o r e , th e s e c o n d w a v e o f fisc a l d e c e n t r a l i z a t i o n w a s a c c o m p a n ie d b y a s t r o n g c a ll f o r th e n e w le a d e r s to g iv e t o p p r i o r i t y t o p o lic ie s a im e d a t r e d u c i n g in c o m e in e q u a litie s a n d im p r o v i n g th e liv in g s t a n d a r d s o f t h e p o o r . T h u s th e s e c o n d w a v e t o o k a d if f e r e n t a p p r o a c h . I t m o v e d a w a y f r o m th e p r e v a i li n g r e v e n u e - s h a r in g re g im e a n d g a v e p r e f e r e n c e to c h a n n e lin g f e d e r a l r e s o u r c e s t o s u b n a t i o n a l g o v e r n m e n ts , e a r m a r k e d f o r e d u c a t io n a n d h e a lt h . T h is w a s se e n n o t o n ly a s a m e a n s t o r e d u c e s o c ia l in e q u a l i tie s , b u t a ls o a s a n i m p o r t a n t i n s t r u m e n t f o r r a is in g th e p r o s p e c ts o f e c o n o m ic d e v e lo p m e n t. A d ir e c t a p p o r t i o n m e n t o f c a s h to f a m ilie s t h a t a r e b e lo w th e p o v e r t y lin e , e ith e r d ir e c tly o r w ith th e h e lp o f s u b n a t io n a l g o v e r n m e n ts , w a s a ls o f a v o r e d .
2 2 6 D e ce n tra liza tio n an d reform in L a tin A m eric a t h e p r e v io u s o n e . I t m o d if ie d t h e n a t u r e o f t h e e a r l ie r r e g im e s a n d a d d e d n e w s o u r c e s o f i n t e r g o v e r n m e n t a l t r a n s f e r s o n t o p o f th e e x is tin g o n e s , l e a d i n g t o a f r a g m e n t a t i o n t h a t a d d e d f u r t h e r d is to r t io n s . T h e s e w ill b e a n a ly z e d in d e ta il in th e n e x t s e c tio n . T h e p o i n t b e in g m a d e h e r e is t h a t th e e ffe c t o f t h e a c c u m u la t i o n o f d is ti n c t a p p r o a c h e s w a s a n in c r e a s in g i m p o r t a n c e o f tr a n s f e r s in s u b n a t i o n a l f in a n c e s ( J im e n e z a n d G o m e z S a b a in i, 2 0 0 9 ).
A s t r o n g r e lia n c e o n tr a n s f e r s le d t o s e v e ra l c r itic is m s o f fis c a l d e c e n tr a l i z a t i o n ( P r u d ’h o m m e , 1995). T h is m e t h o d o f f i n a n c in g th e t r a n s f e r o f r e s p o n s ib ilitie s t o lo w e r le v e ls o f g o v e r n m e n t w a s s a id t o h i n d e r efficien cy in th e p r o v i s io n o f p u b li c s e rv ic e s, im p in g e o n th e a c c o u n t a b il i t y o f lo c a l p o litic ia n s a n d r i s k je o p a r d i z i n g th e g o a l o f s u s ta in i n g a s o u n d m a n a g e m e n t o f th e fisc a l a c c o u n t s a t th e n a t i o n a l lev el. E f f o r ts to r e d u c e th e s u b n a t i o n a l g o v e r n m e n ts ’ d e p e n d e n c e o n in t e r g o v e r n m e n ta l tr a n s f e r s b y in c r e a s in g th e i r a b ility t o t a x s h o u ld , th e r e f o r e , b e e n c o u r a g e d .
S u c h c r itic is m s a r e n o d o u b t w o r th y o f s e r io u s c o n c e r n . H o w e v e r , w e s h o u l d ta k e in t o a c c o u n t w h a t c a n r e a lis tic a lly b e d o n e to d e a l w ith th e p r o b l e m s w e fa c e n o w a d a y s in f in a n c in g th e d e c e n t r a li z a ti o n o f r e s p o n s i b ilitie s to s u b n a t i o n a l g o v e r n m e n ts , f o r e x a m p le , n e w lim its o n in c r e a s in g th e a b ility to t a x a t th e lo c a l lev el.
I n a p a p e r t h a t e x p lo r e s th e s e lim its , V ito T a n z i ( T a n z i, 2 0 0 5 ) ra is e s i m p o r t a n t is s u e s t h a t p o i n t to f u r t h e r c o n s t r a in t s o n r a i s in g o w n ta x e s a t th e s u b n a t i o n a l lev el, in a d d i t i o n to th o s e t h a t a r e r e l a t e d t o s o c io e c o n o m i c (s m a ll b a s is ) o r p o liti c a l r e a s o n s ( lo c a l a u t h o r i t i e s u n w illin g to ta x w e a lth y r e s id e n ts ) . T h e s e n e w lim its r e f e r to th e u n p r e c e d e n t e d m o b ili ty o f th e ta x b a s e c o m m o n ly t a p p e d i n t o a t th e s u b n a t i o n a l lev el, a c q u ir e d r e c e n tly a s a r e s u lt o f t h e im p a c t o f g lo b a l iz a t io n a n d t h e i n c o r p o r a t i o n o f n e w te c h n o lo g ie s in t o th e p r o d u c t i o n p ro c e s s .
In a d d i t i o n t o r e a l e s t a te , w h ic h c a n n o t m o v e ( a l t h o u g h th e re s id e n ts c a n ) a n d p e r s o n a l s e rv ic e s, a ll o th e r a c tiv itie s b e c a m e v e ry s e n s itiv e to t a x a t i o n c o s ts ; t h a t is, a t t e m p t s t o im p o s e a h ig h b u r d e n m a y fo r c e p e o p le t o m o v e a w a y , o r e v e n a b r o a d . I n s o m e c a s e s , g e o g r a p h y p o s e s b a r r ie r s t o le a v in g , b u t th e r a p i d im p r o v e m e n t in th e s p e e d o f m o v in g g o o d s , e v e n h e a v y o n e s , a r o u n d th e w o r ld is r e d u c i n g th e p r o t e c t i o n t h a t g e o g r a p h y c a n o ffe r. B e tte r m e a n s o f c o m m u n i c a t i o n m a d e t a x a t i o n o f s e rv ic e s e v e n m o r e s e n s itiv e t o t a x b u r d e n s , w h ic h in th e c a s e o f f i n a n c ia l s e rv ic e s is a ls o e n h a n c e d b y t h e p r o l i f e r a t i o n o f ta x h a v e n s . F r o m a n a t i o n a l p e r s p e c tiv e , th e id e a o f h a v in g d is ti n c t j u r is d i c ti o n s im p o s in g d if f e r e n t b u r d e n s o n t h e s a m e g o o d s a n d s e r v ic e s is f a r f e tc h e d , s in c e it m a y in c r e a s e r e g i o n a l d is p a r itie s , p r o v o k e a n ta g o n i s m s a n d j e o p a r d iz e p o li tic a l u n it y . T h e a l t e r n a t iv e t o th is is a f u lly h a r m o n i z e d ta x s y s te m , in w h ic h s u b n a t i o n a l g o v e r n m e n ts m a y s h a r e th e p r o c e e d s o f
In terg o vern m en ta l tran sfers in su b n a tio n a l fin an ces 2 2 7
n a t i o n a l ta x e s , b u t m a y n o t d is p o s e o f a n y d e g re e o f fr e e d o m to e s ta b lis h t h e ru le s a p p lie d t o th e i m p o s i ti o n o f th e s e ta x e s .
O f c o u r s e , b e tw e e n th e s e e x tr e m e s th e r e a r e o t h e r o p ti o n s , s u c h a s a llo w in g ta x p a y e r s t o d e d u c t a ll o r p a r t o f t h e i r p r o p e r t y t a x lia b ilitie s f r o m t h e n a t i o n a l i n c o m e ta x , o r a llo w in g f o r s o m e f o r m o f d u a l V A T to b e a d o p t e d a t th e p r o v i n c ia l lev el. R e c o u r s e t o u s e r c h a r g e s c a n a ls o b e c o n s id e r e d . H o w e v e r , it is n o t in th e s c o p e o f th is c h a p t e r t o d w e ll o n s u c h o p tio n s . T h e m e s s a g e t h a t th e s e r e f e re n c e s t o f u r t h e r lim itin g s u b n a t i o n a l t a x a t i o n c o n v e y s is t h e n e e d to f o c u s o n th e d e s ig n o f th e in t e r g o v e r n m e n t a l t r a n s f e r s y s te m s to i m p r o v e th e q u a li t y o f s u b n a t i o n a l fin a n c e s . M u c h c a n b e a c h ie v e d w ith r e g a r d to th is o b je c tiv e b y a d h e r i n g t o s o m e p r in c ip le s o f a g o o d t r a n s f e r r e g im e , e v e n i f it is n o t p o s s ib le t o r e d u c e th e ir i m p o r t a n c e in t h e s u b n a t i o n a l b u d g e ts . A f ir s t s te p in t h a t d i r e c tio n is to p r e s e n t t h e m a i n fla w s o f th e c u r r e n t re g im e s .
3 INTERGOVERNM ENTAL TRANSFERS IN LATIN
AMERICA: MAIN FLAWS
T h e m a i n fla w s o f in t e r g o v e r n m e n ta l t r a n s f e r re g im e s o f t h e c o u n tr ie s in c lu d e d in th is s t u d y a r e lis te d b e lo w . T h is lis t d o e s n o t im p ly t h a t a ll o f t h e m a r e a ff e c te d e q u a lly w ith r e s p e c t t o th e s e fla w s , a lt h o u g h e v e ry c o u n t r y h a s c e r t a in e le m e n ts o f e a c h , a lb e i t t o a d if f e r e n t d e g re e :
1. a b s e n c e o f a t r a n s f e r s y s te m o r g a n i z e d u n d e r p r in c ip le s a n d o b je c tiv e s c le a r ly s ta te d ;
2. m u ltip lic ity o f t r a n s f e r s o u r c e s a n d d is ti n c t c r i te r ia a p p li e d to th e s h a r in g o f fu n d s ; 3. in s ta b i li ty o f t h e r u le s t h a t g o v e r n t h e o p e r a t io n o f e a c h c o m p o n e n t o f th e tr a n s f e r re g im e ; 4. h ig h , a n d g r o w in g , in te r f e r e n c e in th e s u b n a t i o n a l g o v e r n m e n ts ’ u s e o f th e ir b u d g e t a r y re v e n u e s ; a n d 5. a b s e n c e o f p r o v i s io n s f o r a p e r i o d ic a l r e v is io n o f th e t r a n s f e r re g im e . T o a g r e a t e x te n t, th e s e fla w s w e re t h e o u tc o m e o f c h a n g e s in t r o d u c e d o v e r tim e in r e s p o n s e t o p r e s s u r e s to r e d u c e fisc a l d e fic its a t th e n a t i o n a l le v e l f o r m a c r o e c o n o m i c r e a s o n s , a n d t o im p o s e c o n d it io n s o n t h e u s e o f th e r e s o u r c e s to in d u c e th e a d h e r e n c e o f s u b n a t i o n a l s p e n d in g t o n a ti o n a l p r io r itie s . M a c r o e c o n o m i c p r e s s u r e s h a d a g r e a t e r in f lu e n c e in c o u n tr ie s t h a t e m b a r k e d o n a fis c a l d e c e n t r a li z a ti o n b in g e in th e 1980s f o llo w in g r e d e m o c r a t i z a t i o n . A t t h a t tim e , fisc a l r e f o r m s a im e d a t in c r e a s in g tr a n s f e r s ,
2 2 8 D e cen tra liza tio n a n d reform in L a tin A m e ric a e n h a n c e s t a b il it y in th e flo w o f r e s o u r c e s to s u b n a t i o n a l g o v e r n m e n ts , g iv e a u t o n o m y w ith r e g a r d t o t h e i r u s e a n d a p p ly c r i te r ia t h a t w e re i n te n d e d t o re d r e s s v e r t ic a l a n d h o r i z o n t a l d is p a r it ie s in fis c a l c a p a b ilitie s . S u c h w a s th e c a s e in A r g e n t i n a , w h ic h im p le m e n te d c h a n g e s in th e c o p a r t i c i p a t i o n re g im e in 1 9 8 8 , in B ra z il, w ith th e 1988 c o n s t it u ti o n a l r e f o r m in th e r e v e n u e - s h a r i n g s y s te m , in M e x ic o , a s a r e s u lt o f c o n s t i t u t i o n a l a m e n d m e n t s a d o p t e d in 1983, a n d in C o lo m b ia , w h e re a p a r t i a l r e f o r m im p le m e n te d in 1986 le d t o th e n e w s y s te m a d o p t e d b y t h e 1991 C o n s t i tu t i o n . T h e e x p e c te d r e s u lts o f s u c h c h a n g e s d id n o t m a te r i a li z e . T h e o u t b r e a k o f a n e c o n o m ic c ris is t h a t r e a c h e d L a t i n A m e r i c a a fe w y e a r s la t e r f o r c e d a c h a n g e o f c o u r s e . I n g e n e r a l, t h e m e a s u r e s a d o p t e d r e d u c e d th e a m o u n t o f m o n e y c h a n n e l e d in t o th e s u b n a t io n a l c o ffe rs a n d m o v e d a w a y f r o m a re g im e t h a t p r e s e n te d s o m e g o o d f e a tu r e s , s u b s t it u t i n g t r a n s i t o r y ru le s t h a t la te r b e c a m e p e r m a n e n t . A n e w e c o n o m i c s c e n a r io c o u ld h a v e a llo w e d f o r a r e t u r n to th e f o r m e r p a t h , b u t s o m e h o w th e e n c h a n t m e n t w ith th e d e c e n t r a l i z a t i o n id e a l see m s t o h a v e f a d e d . A s c e n tr a l g o v e r n m e n t t a x r e v e n u e s r e c o v e r e d a lo n g s id e a r e t u r n t o e c o n o m i c g r o w th , th e m e a s u r e s a d o p t e d to d e a l w ith a n e m e r g e n c y c o u ld h a v e b e e n r e v e r s e d , b u t w e re n o t. I n a w a y , a p o li ti c a l r e a l ig n m e n t e x p la in s t h e n e w o r i e n t a t i o n , a s th e f o r c e s t h a t s u p p o r t e d th e r e f o r m s im p le m e n te d in th e 1 9 8 0 s lo s t t h e i r g rip o n n a t i o n a l p o litic s . I n c r e a s in g so c ia l d is p a r itie s c h a n g e d th e b a la n c e o f p o w e r t o w a r d s p o li tic ia n s w h o e m b r a c e d a c r itic a l v ie w o f p a s t e c o n o m ic p o lic ie s o n th e a s s u m p t i o n t h a t s u c h p o lic ie s d is r e g a r d e d th e n e e d s o f th e p o o r . T h e i n a u g u r a t i o n o f g o v e r n m e n ts a lig n e d w ith s u c h a p o s i ti o n le d to a n e w a p p r o a c h in th e fie ld o f in te r g o v e r n m e n ta l t r a n s f e r s . T h is n e w a p p r o a c h f o c u s e d o n th e u s e o f tr a n s f e r s t o s u p p o r t n a ti o n a l p o lic ie s o r i e n te d to w a r d s p r o g r a m s t h a t e x e r t a d ir e c t im p a c t o n th e liv in g s t a n d a r d s o f th e p o o r , n a m e ly e d u c a t io n , h e a l t h a n d u r b a n i n f r a s t r u c tu r e . 1 T h is le d t o g r e a t in te r f e r e n c e b y th e c e n t r a l g o v e r n m e n t in th e a ll o c a ti o n o f s u b n a t i o n a l re v e n u e s b y m e a n s o f e s t a b li s h in g c o n d it io n s f o r th e u s e o f tr a n s f e r s , s h if tin g r e s p o n s ib ilitie s t o lo w e r le v e ls o f g o v e r n m e n t, o r t h r o u g h a n in c r e a s e in th e p a r t i c i p a t i o n o f e a r m a r k e d r e v e n u e s in th e in t e r g o v e r n m e n ta l t r a n s f e r re g im e . A s im ila r p a t t e r n c a n b e o b s e r v e d in c a s e s w h e r e fis c a l d e c e n t r a li z a ti o n is a m o r e r e c e n t p h e n o m e n o n . T h is is, f o r in s ta n c e , th e c a s e in th e A n d e a n c o u n tr ie s - B o liv ia ( P l u r i n a t io n a l S ta t e o f), P e r u a n d E c u a d o r - a s w ell a s, a lb e i t o n a s m a lle r s c a le , in C h ile . I n th o s e c o u n tr ie s , a s u r g e in th e p ric e o f m in e r a l c o m m o d it ie s a llo w e d f o r a n in c r e a s e in c e n t r a l g o v e r n m e n t r e v e n u e s , w h ic h w a s tr a n s la t e d in t o a s ig n ific a n t i n c r e m e n t in tr a n s f e r s to s u b n a t i o n a l g o v e r n m e n ts e a r m a r k e d f o r s o c ia l p r o g r a m s c a r r ie d o u t a t th e r e g io n a l a n d lo c a l lev els.
In te rg o v ern m en ta l tran sfers in su bn ation al fin a n c es 229 A s e v id e n c e in t h e a v a ila b le l i te r a tu r e s h o w s , e v e n t h o u g h t h e re la tiv e i m p o r t a n c e o f in t e r g o v e r n m e n ta l tr a n s f e r s in s u b n a t i o n a l r e v e n u e s v a rie s t o a s ig n if ic a n t d e g r e e , r e f le c tin g h is to r i c a l, i n s ti t u t i o n a l , g e o g r a p h ic a l a n d p o li ti c a l f a c t o r s , d if f e r e n t r o u t e s f o llo w e d d id n o t p r e c l u d e t h e t r a n s f e r r e g im e s o f th e d i s t i n c t c o u n tr ie s re v ie w e d in th is c h a p t e r f r o m e v o lv in g in s u c h a w a y a s t o e x h ib it s im ila r g e n e r a l tr a i t s , a s p o i n t e d o u t e a r lie r , s h o w in g a d is r e g a r d f o r w e ll- e s ta b lis h e d p r in c ip le s s e t u p in th e li te r a tu r e a n d f o r g o o d - p r a c ti c e s t a n d a r d s a p p lie d in o t h e r c o u n tr ie s ( B o a d w a y a n d S h a h , 2 0 0 7 ). T h e m u l t i p li c a t i o n o f t r a n s f e r s o u r c e s t h a t r e s u lte d f r o m th e a c c u m u l a t i o n o f in i ti a ti v e s a d o p t e d in d if f e r e n t p e r i o d s a n d a s a r e a c t i o n to p a r t i c u l a r p r e s s u r e s , to g e t h e r w ith t h e o v e r la p p in g o f ru le s t h a t g o v e r n th e a c t u a l w o r k in g o f th e s e re g im e s , a r e t h e m o s t s ig n if ic a n t e v id e n c e o f t h a t d is r e g a r d . T h e r e f o r e , a s im ila r g e n e r a l p a t t e r n is a c c o m p a n ie d b y i m p o r t a n t d if fe re n c e s w ith r e s p e c t t o d e ta ils . J im é n e z a n d P o d e s t à (2 0 0 9 ) d e s c r ib e t h e m o s a ic o f f e a t u r e s e x h ib ite d b y 11 L a ti n A m e r i c a n c o u n tr ie s w ith r e s p e c t t o s o u r c e s , r u le s h a r in g o b lig a ti o n s a n d th e m a i n r e c ip ie n ts o f c e n tr a l g o v e r n m e n t m a n a g e d f u n d s . T h e d is r e g a r d f o r p r in c ip le s is a ls o re f le c te d in fisc a l d is p a r itie s , m a in ly t h e s o - c a lle d ‘h o r i z o n t a l d is p a r it ie s ’, t h a t is, th o s e t h a t p r e s e n t h u g e d if fe r e n c e s in th e f i n a n c ia l c a p a b i lit ie s o f i n d e p e n d e n t u n its o f a s a m e le v e l o f g o v e r n m e n t, w h e th e r s ta te s , p r o v in c e s , d e p a r t m e n t s o r m u n ic ip a litie s ( C e t r à n g o l o a n d G o ld s c h m id t , c h . 3 in th is v o lu m e ).
D is p a r iti e s in f in a n c ia l c a p a b ilitie s a r e n o t th e o n ly p r o b l e m . W o r s e still is t h e m i s m a tc h b e tw e e n th e t e r r i t o r i a l d i s tr i b u ti o n o f th e fisc a l r e s o u r c e s a n d t h e c o r r e s p o n d in g lo c a l iz a tio n o f th e d e m a n d s f o r g o v e r n m e n t- s p o n s o r e d a c tiv itie s , w h ic h a ris e s f r o m t h e o v e r l a p o f d is ti n c t c r i te r ia a p p li e d t o th e d i s t r i b u t i o n o f e a c h sp e c ific tr a n s f e r . T h e e n s u in g in e ffi c ie n c y in t h e m a n a g e m e n t o f p o lic ie s c a r r ie d o u t a t th e s u b n a t i o n a l lev el g e n e r a t e s w a s te a n d d o e s n o t c o n t r i b u t e to b e t t e r o u tc o m e s .
T h e e n d le s s p r o r o g a t i o n o f p r o v i s o r y ru le s re in f o r c e s d i s t o r t i o n s g e n e r a te d b y th e m u ltip lic it y o f tr a n s f e r s o u r c e s . A s t h e s p e e d w ith w h ic h th e s o c io e c o n o m ic d y n a m i c c h a n g e s th e w a y in w h ic h e c o n o m i c a c tiv ity a n d p o p u l a t i o n m o v e a r o u n d th e n a t i o n a l t e r r i t o r y g a in s m o m e n tu m , d iffic u l tie s in r e c o n s id e r in g d e c is io n s a d o p t e d in th e p a s t , e v e n n o t so lo n g a g o , l e a d t o f u r t h e r i m b a la n c e s in t h e lo c a l iz a t io n o f th e fisc a l r e s o u r c e s a n d th e c o r r e s p o n d i n g lo c a l iz a t io n o f t h e d e m a n d s fa c e d b y s u b n a t i o n a l g o v e r n m e n ts . M o u n t i n g c o n flic ts m a k e i t h a r d e r to r e c o n s id e r p a s t d e c is io n s , e s p e c ia lly a s m o r e ti m e e la p s e s s in c e th e d e c is io n s w e re m a d e , d u e to th e m u lti p li c it y o f in t e r e s t s t h a t h a v e to b e d e a lt w ith in p o li tic a l n e g o ti a tio n .
T h e A r g e n ti n e c a s e p r o v id e s th e m o s t i m p o r t a n t e v id e n c e o f th e p o l i ti c a l d iffic u ltie s f a c e d in m o v in g f r o m a s u c c e s siv e p r o r o g a t i o n o f p r o v i s o r y
2 3 0 D e ce n tra liza tio n a n d reform in L a tin A m erica n o r m s c o u p le d w ith a n a d h o c a d ju s tm e n ts t r a p . B r a z il fo llo w s c lo s e ly sin c e th e p r o v i s o r y ru le s a d o p t e d in 1989 t o d is tr i b u te th e s h a r e o f f e d e r a l ta x e s to s ta te s a n d m u n ic ip a l it ie s h a s la s te d f o r m o r e t h a n tw o d e c a d e s .2 T h e p r o v i s o r y re g im e a d o p t e d in C o lo m b ia is n o w s c h e d u le d to e n d in 2 0 1 7 (e ig h t y e a r s a f t e r t h e o r i g in a l d a te ) w h e n a n e w r u l e w ill a p p l y .3 W e s h a ll h a v e to w a it t o see w h e th e r E c u a d o r w ill b e a b le t o a v o id s u c h a tr a p . A n o t h e r p r o b l e m a ris e s a s a r e s u lt o f h o w c o n d it io n s a r e im p o s e d o n th e s u b n a t i o n a l g o v e r n m e n t s ’ u s e o f tr a n s f e r s . A s s o c i o e c o n o m i c d is p a r itie s a r e u s u a lly h ig h , a s y m m e tr ic ru le s s h o u l d b e p r e f e r r e d t o m a k e it e a s y to a d j u s t s u b n a t i o n a l b u d g e ts t o lo c a l p r e f e r e n c e s , b u t p o li ti c a l c o n s t r a in t s r a r e ly f a v o r s u c h a n a p p r o a c h . S y m m e tr ic n o r m s m e a n t h a t it is h ig h ly u n lik e ly t h a t th e m o n e y w ill b e d is t r i b u t e d in a w a y t h a t re f le c ts p a r t i c u l a r n e e d s , e s p e c ia lly i f o n e ta k e s in t o a c c o u n t th e f a c t t h a t e a c h s e c t o r d iffe rs w ith r e g a r d to t h e d e g r e e o f d e c e n tr a li z a ti o n t h a t b e s t s u its its sp e c ific c a s e .
I n t e r g o v e r n m e n ta l c o o p e r a t i o n in p u b li c in v e s tm e n ts a n d s e rv ic e s p r o v is io n c o u ld m iti g a te th e p r o b l e m s g e n e r a t e d b y a h ig h d e g re e o f d is p a r it y in th e d is t r i b u ti o n o f fis c a l r e s o u r c e s , b u t it is h ig h ly u n lik e ly t h a t c o o p e r a t i o n w ill e m e r g e in th e a b s e n c e o f in c e n tiv e s d u e to p o li ti c a l riv a lr ie s t h a t a r e f o s te r e d in a c o n te x t o f h u g e d is p a r itie s . F u r t h e r m o r e , c o o p e r a t i o n is a ls o h i n d e r e d w h e n a n u n s t a b le r e g im e le a d s to u n c e r t a in t ie s c o n c e r n in g th e in f lo w o f re s o u r c e s , e it h e r th e a m o u n t o r w h e n th e y a r e e x p e c te d , m a in ly w h e n c o o p e r a t i o n im p lie s o b li g a ti o n s to b e s a tis f ie d in t h e m e d iu m a n d lo n g te r m s .
4 PRINCIPLES AND PRACTICES
Principles
T h e fla w s a c c u m u l a t e d o v e r tim e re fle c t a p r o g r e s s i v e a b a n d o n m e n t o f s o m e p r in c ip le s t h a t s h o u l d b e o b s e r v e d in th e d e s ig n o f i n t e r g o v e r n m e n t a l tr a n s f e r s . T h e b a s ic p r in c ip le r e f e r s to th e p r o p o s i t i o n t h a t e v e ry n a t i o n a l c itiz e n s h o u l d b e e n a b le d to m o v e u p t h e s o c ia l l a d d e r r e g a r d le s s o f b i r t h o r w h e r e h e /s h e liv e s. I t s h o u ld b e th e s t a t e ’s r e s p o n s ib i li ty t o g iv e th e u n d e r p r iv il e g e d a c c e s s to th e b a s ic s e rv ic e s t h a t a r e n e c e s s a r y t o fu lfill s u c h c o n d it io n s . B e c a u s e in m o s t c a s e s th is r e s p o n s ib i lity h a s b e e n s h ifte d to s u b n a t i o n a l g o v e r n m e n ts , w h ic h d e p e n d o n tr a n s f e r s t o e n a b le th e m to fu lfill th e i r d u ti e s e ffic ie n tly , th e d e s ig n o f tr a n s f e r s s h o u l d o b s e r v e th e f o llo w in g :
1. e n s u r e a r e a s o n a b l e b a la n c e a m o n g th e d i s t r i b u t i o n o f th e fisc a l r e s o u r c e s a n d t h e c o r r e s p o n d i n g d is t r i b u t i o n o f d e m a n d s to b e m e t
In terg o ve rn m en ta l tran sfers in su b n a tio n a l fin a n c e s 231
b y e a c h lev el o f g o v e r n m e n t w ith i n t h e b o u n d a r i e s o f t h e i r re s p e c tiv e ju r is d i c tio n s ;
2. a llo w f o r a r e a s o n a b le d e g re e o f fle x ib ility w ith r e g a r d t o t h e u s e o f tr a n s f e r s a t th e s u b n a t i o n a l le v e l so t h a t d e c is io n s r e l a ti n g t o th e u s e o f tr a n s f e r s c a n r e f le c t d if fe re n c e s in d e m a n d p a t t e r n s a c r o s s t h e n a ti o n ; 3. in s e r t p r o v i s io n s t h a t e n a b le th e s y s te m t o p e r i o d ic a l ly a d a p t to c h a n g in g s o c io e c o n o m ic c ir c u m s ta n c e s t h a t a lt e r th e l o c a l iz a t io n o f fis c a l r e s o u r c e s a n d lo c a l d e m a n d s in th e n a t i o n a l te r r it o r y ; 4 . p r o v i d e s t a b il it y in t h e flo w o f r e s o u r c e s t h a t c o m p r is e th e s u b n a t io n a l b u d g e ts to g iv e lo c a l a d m i n i s t r a t o r s th e n e c e s s a r y c o n d i t io n s to b e t t e r m a n a g e t h e i r r e s p o n s ib ilitie s ; a n d 5. a v o id s i t u a t i o n s t h a t r a is e th e v o la tility o f tr a n s f e r s d u e t o e c o n o m ic o r p o li tic a l r e a s o n s . F le x ib ility c o n c e r n in g th e u s e o f in t e r g o v e r n m e n ta l tr a n s f e r s c a n n o t b e u n lim i te d , i f t h e b a s i c p r i n c ip l e (to e n s u r e t h a t e v e ry c itiz e n , r e g a r d le s s o f w h e r e in t h e n a t i o n a l t e r r i t o r y h e /s h e liv e s, h a s e q u a l a c c e s s t o b a s ic n e e d s ) is t o b e o b s e r v e d . F le x ib ility s h o u ld b e a c c o m p a n ie d b y e q u il ib r iu m , w h ic h a ls o d e p e n d s o n p r o v i s io n s f o r a p e r i o d ic a d j u s t m e n t t o c h a n g in g c ir c u m s ta n c e s . A d a p t a t i o n t o a n e w e n v ir o n m e n t m a y n o t im p ly in s t a b i l ity c o n c e r n i n g th e flo w o f r e s o u r c e s to s u b n a t io n a l g o v e r n m e n ts , w h e r e a s a less v u ln e r a b le t r a n s f e r b a s e is i m p o r t a n t t o a v o id a lo s s in f le x ib ility t h a t r e s u lts f r o m le s s r o o m f o r m a n e u v e r in a n e c o n o m i c d o w n t u r n . T h e w a y in w h ic h e a c h c o u n t r y ’s t r a n s f e r s y s te m c o m b in e s th e five e le m e n ts s t a t e d a b o v e d e te r m i n e s th e d e g r e e o f re s ilie n c e o f th e s u b n a t io n a l f in a n c e s t o c h a n g in g s o c i o e c o n o m i c c ir c u m s ta n c e s . A s y s te m t h a t d o e s n o t p r o m o t e e q u il ib r iu m , h a s v e ry little fle x ib ility , c a n n o t b e e a s ily a d a p t e d a n d d o e s n o t g iv e c o n f id e n c e t o s u b n a t i o n a l m a n a g e r s w ith r e s p e c t t o th e in f lo w o f t r a n s f e r s , w ill b e p o o r l y r a t e d f r o m t h e re s ilie n c e p e r s p e c tiv e a n d th e r e f o r e , w ill n o t c r e a t e m o r e f a v o r a b le c o n d it i o n s f o r th e e ffic ie n c y a n d efficacy o f s o c ia l p o lic ie s c a r r ie d o u t a t th e s u b n a t i o n a l lev el. T h e r e a r e , o f c o u r s e , n o c le a r - c u t f o r m u la s f o r a p p r a i s i n g th e e x te n t t o w h ic h e a c h c a s e b e t t e r a d h e r e s t o t h e p r in c ip le s r e f e r r e d t o a b o v e , b u t a q u a li ta t iv e a n a ly s is o f t h e s i tu a t i o n e n c o u n te r e d in d if f e r e n t c o u n tr ie s m a y th r o w s o m e lig h t o n o n e i m p o r t a n t a s p e c t o f s u b n a t i o n a l fin a n c e s . T h e a v a ila b le l i t e r a t u r e o n in t e r g o v e r n m e n ta l tr a n s f e r re g im e s in p la c e i n d if f e r e n t L a ti n A m e r i c a n c o u n tr ie s p r e s e n ts e v id e n c e t h a t s h o w s h o w f a r th e y a r e f r o m m e e t in g th e s e p r e s c r ip t io n s . T a k e firs t th e n e e d f o r e q u i l ib r i u m b e tw e e n r e s o u r c e s a n d re s p o n s ib ilitie s . A s t h e p r o c e s s o f fis c a l d e c e n t r a li z a ti o n b e g a n t o f o c u s o n s o c ia l s e c to r s - e d u c a t io n a n d h e a lt h , m a in ly , b u t a ls o u r b a n in f r a s t r u c t u r e - it b e c a m e e v e n m o r e d iffic u lt to a c h ie v e e q u ilib r iu m , g iv e n t h e d iv e r s ity o f f a c t o r s in t h e l o c a liz a t io n o f
2 3 2 D e ce n tra liza tio n a n d reform in L a tin A m eric a f in a n c ia l n e e d s , m a k i n g i t h a r d t o d e a l w ith g iv e n th e f r a g m e n t e d re g im e in th e a b s e n c e o f g u id e lin e s t h a t p a y d u e a t t e n t i o n to s p e c ific n e e d s . T h e p r e v i o u s s e c tio n p o i n t e d t o th e p r o l if e r a ti o n o f t r a n s f e r re g im e s . B ra z il s t a n d s o u t in th i s r e s p e c t. A l t o g e t h e r th e r e a r e n o w 19 re g im e s c o m b in i n g o ld r e v e n u e - s h a r i n g m e c h a n is m s , h e a lt h a n d e d u c a t i o n e a r m a r k e d tr a n s f e r s t o s u p p o r t th e d e c e n t r a l i z a ti o n o f s u c h se rv ic e s , c o m p e n s a ti o n f o r e x e m p tin g e x p o r t s f r o m th e s t a te v a lu e a d d e d ta x , s u b n a t io n a l g o v e r n m e n ts ’ s h a r e o f th e p r o c e e d s o f r o y a ltie s f r o m th e e x p l o i t a t i o n o f n a t u r a l r e s o u r c e s (o il) a n d a n n u a l a ll o c a t i o n o f f u n d s in t h e f e d e r a l b u d g e t. I n c o n t r a s t , A r g e n ti n a s h o w s a lo w e r d e g r e e o f f r a g m e n t a t i o n sin c e its c o p a r t i c i p a t i o n r e g im e r e s p o n d s t o th e b u lk o f in t e r g o v e r n m e n t a l tr a n s f e r s . F is c a l d is p a r it ie s t h a t m o u n t e d in th e w a k e o f th e p r o l i f e r a t i o n o f t r a n s f e r re g im e s m a d e i t h a r d to fo llo w th e p r e s c r ip t io n s . A s s e c t o r - o r ie n t e d t r a n s f e r s g a in e d i m p o r t a n c e , th e s y s te m s b e c a m e le s s c a p a b l e o f a d a p t i n g t o s o c io e c o n o m ic d y n a m i c s sin c e th e e a r m a r k i n g o f r e s o u r c e s e n ta ils th e c o n s o l id a t io n o f lo b b ie s t h a t r e s is t c h a n g e s . I n a d d i t i o n , m u l ti p le re g im e s m e a n a d iv e r s if ic a tio n o f in te r e s ts , im p ly in g a m o r e c o m p le x s i tu a t io n to o b t a i n p o liti c a l s u p p o r t f o r b r o a d e r r e f o r m s , w ith p ie c e m e a l a d ju s tm e n ts b e in g in c a p a b le o f a c h ie v in g m u c h g a in . A n in c r e a s e in tr a n s f e r s e a r m a r k e d to s o c ia l s e c to r s a ls o im p in g e d o n th e fle x ib ility o f th e t r a n s f e r sy s te m , a s a s ig n ific a n t p a r t o f t h e r e s o u r c e s a r e s u b je c t to r u le s d e s ig n e d a t th e n a t i o n a l lev el w ith little r o o m to a d a p t to th e sp e c ific n e e d s o f d is ti n c t s u b n a t i o n a l g o v e r n m e n ts .
T h e c o m p o u n d e d e ffe c t o f th e m u ltip lic ity o f re g im e s , la c k o f c o n d it io n s t o a d a p t t o c h a n g in g c ir c u m s t a n c e s a n d a lo w d e g r e e o f f le x ib ility r e s o n a te o n th e c a ll f o r s ta b ility . D is t in c t ru le s a p p lie d t o s e v e r a l p a r t i c u l a r o b je c tiv e s m e a n t h a t c h a n g e s in a n y p a r t i c u l a r s o u r c e o f t r a n s f e r s c a n b e c a r r ie d o u t re g a r d le s s o f its im p a c t o n th e w h o le . I n d e p e n d e n t c h a n g e s o n a n y c o m p o n e n t o f th e t r a n s f e r s y s te m m a y h a v e sid e -e ffe c ts t h a t r e d u c e th e r e s o u r c e s n e e d e d to m e e t o t h e r o b je c tiv e s . A s e a r m a r k e d tr a n s f e r s ta k e a h ig h e r s h a r e o f th e p ie th e y c r o w d o u t th o s e a c tiv itie s t h a t d o n o t re ly o n s o m e k i n d o f p r o t e c ti o n . T h is in c r e a s e s th e v u ln e r a b il it y o f s u b n a t i o n a l fin a n c e s s in c e it is p o li t i c a lly h a r d t o c u t s p e n d i n g in h e a lt h a n d e d u c a t i o n in th e e v e n t o f a fa ll in r e v e n u e s . A ll t h e o t h e r a c tiv itie s t h a t a r e c a r r ie d o u t a t t h e s u b n a t i o n a l le v e l e x p e r ie n c e d iffic u ltie s , e s p e c ia lly w h e n , a s is th e c a s e o f th e A n d e a n c o u n tr ie s , m o s t o f t h e r e s o u r c e s t h a t s u p p o r t th e tr a n s f e r s a r e b a s e d o n ta x e s t h a t a r e h ig h ly s e n s itiv e to c h a n g e s in t h e i n t e r n a t i o n a l e c o n o m ic s c e n a r io .
W h a t fo llo w s h ig h lig h ts s o m e a s p e c ts o f th e t r a n s f e r r e g im e s o f e a c h c o u n tr y c o v e r e d in th is c h a p t e r , e x tr a c te d f r o m t h e i n f o r m a t i o n g a th e r e d
In te rg o vern m en ta l tran sfers in su b n a tio n a l fin a n ce s 233 in A p p e n d ix 8 A , w h ic h s h o w s to w h a t e x te n t th e y o b s e r v e o r ig n o r e th e a b o v e - m e n ti o n e d p r in c ip le s . P ractices M exico T h e M e x ic a n c a s e is t h e o n ly o n e in t h e g r o u p t h a t c le a r ly s ta te s th e c o e x is te n c e o f tw o re g im e s - R a m o 28 a n d R a m o 33 - w h ic h s h a r e a lm o s t e q u a ll y t h e r e s o u r c e s a ll o c a t e d t o tr a n s f e r s . T h e firs t im p o s e s n o c o n d i ti o n s w ith r e s p e c t to th e u s e o f re s o u r c e s , w h e r e a s th e s e c o n d is m a in ly e a r m a r k e d f o r e d u c a t i o n a n d h e a l t h s p e n d in g . I f th e o p e r a t i o n o f th e s e tw o re g im e s a t t e m p t e d t o c o m b in e t h e r e d u c t i o n o f fisc a l d is p a r itie s w ith th e sp e c ific n e e d s o f e a c h s e c to r , th e M e x ic a n c a s e c o u ld b e r e g a r d e d as p r e s e n tin g a r e a s o n a b l e a d h e r e n c e t o th e p r in c ip le s m e n t io n e d a b o v e , b u t t h a t is n o t t h e c a s e . I n s te a d o f r e d u c i n g fis c a l d is p a r it ie s , th e c r i te r ia a p p lie d to th e u n b o u n d e d tr a n s f e r s le a d to t h e o p p o s i te r e s u lt - 9 0 p e r c e n t o f R a m o 28 tr a n s f e r s b e n e f it th e r ic h e r a n d m o r e h ig h ly p o p u l a t e d s ta te s . A s c h a n g e c a n o n ly o c c u r a t t h e m a r g in ( t h e n o m i n a l a m o u n t re c e iv e d in o n e y e a r c a n n o t b e s m a lle r t h a n t h a t in th e p r e v i o u s y e a r ) a d ju s t m e n t s to th is s i tu a t i o n d e p e n d o n f a v o r a b le e c o n o m ic c o n d i t i o n s o r o n i n s t i t u t io n a l r e f o r m s . A ll o th e r th i n g s b e in g e q u a l, r e s o u r c e s e a r m a r k e d f o r e d u c a t io n a n d h e a l t h r e in f o r c e s e x is tin g d is to r t io n s . I n th e c a s e o f e d u c a t i o n , 95 p e r c e n t o f th e r e s o u r c e s a r e u s e d t o p a y te a c h e r s ’ s a la rie s , f o llo w in g t h e s h if tin g o f r e s p o n s ib i li ti e s in th is a r e a t o th e s ta te s . I n h e a l t h , th e p h y s ic a l lo c a t i o n o f h e a l t h u n i t s c o m m a n d s th e d i s t r i b u t i o n o f r e s o u r c e s ( C a b r e r a - C a s te lla n o s a n d L o z a n o - C o r t é s , 2 0 0 8 ). L o c a l g o v e r n m e n ts re c e iv e 2 0 p e r c e n t o f t h e i r r e s p e c tiv e s t a t e s ’ s h a r e in f e d e r a l re v e n u e s u n d e r th e s a m e s c h e m e a n d c o n d i t io n s .4 A s s u c h , i n e q u a litie s in th e d i s t r i b u t i o n o f f e d e r a l tr a n s f e r s a m o n g s e c to r s a n d s ta te s a r e r e p r o d u c e d a t t h e m u n i c ip a l le v e l. F u r t h e r m o r e , s im ila r m u n ic ip a litie s in d if f e r e n t s ta te s w ill g e t d is tin c t s u m s o f m o n e y to s u p p o r t th e i r b a s ic f u n c tio n s a s w ell a s t o f in a n c e s o c ia l p r o g r a m s . T h e te r r it o r i a l in e q u a litie s in f in a n c ia l c a p a b i lit ie s t r a n s l a t e in t o in c o m e d i s t r i b u t i o n in e q u a litie s to fu lfill th e i r b a s ic n e e d s . I n a d d it io n , a s s t a te le g is la tio n s e s t a b li s h th e d i s t r i b u t i o n o f t h e lo c a l g o v e r n m e n ts ’ p ie , t h e li k e li h o o d o f th is le a d in g t o g r e a t h o r i z o n t a l in e q u a l it ie s a t t h e m u n ic ip a l le v e l is f a ir ly h ig h . T h e b a la n c e a m o n g th e tw o tr a n s f e r re g im e s s u g g e s ts t h a t t h e M e x ic a n c a s e s h o w s a r e a s o n a b l e d e g re e o f fle x ib ility ( s u b n a t i o n a l g o v e r n m e n ts c a n d is p o s e fre e ly o f a b o u t 4 0 p e r c e n t o f f e d e r a l tr a n s f e r s ) a n d s ta b ility (th e b u l k o f tr a n s f e r s r e ly o n a b r o a d b a s e ) .5 T h e s a m e c a n n o t b e s a id o f th e o t h e r a t t r i b u t e s t h a t a r e e s s e n tia l f o r a s o u n d re g im e o f s u b n a t io n a l fin a n c e s . B e sid e s fa ilin g t o p r o m o t e e q u ilib r iu m , t h e t r a n s f e r s y s te m p u t
234 D e ce n tra liza tio n an d reform in L a tin A m erica i n t o p la c e in 1988 (S is te m a N a c io n a l d e C o o r d i n a c i ó n F is c a l ( N a t i o n a l S y s te m o f F is c a l C o o r d i n a t i o n ) : S N C F ) la c k s a d a p t a t i o n to c h a n g in g c ir c u m s ta n c e s ( t r a n s f e r s re fle c t h is to r ic a l f a c ts ) a n d p r e s e n ts a s ig n ific a n t d e g re e o f v u ln e r a b ilit y , a s n o n - t a x re v e n u e s ( m a in ly f r o m o il) a c c o u n t f o r a h u g e p a r t o f t h e t r a n s f e r b a s e .6 G iv e n th e d iffic u lty o f c u t t i n g s p e n d in g o n so c ia l p r o g r a m s , th i s m a y a ls o le a d t o less f le x ib ility in s u b n a t i o n a l b u d g e ts s in c e fr e e r e s o u r c e s a r e lik e ly t o b e d iv e r te d t o c o v e r a f a ll in o il re v e n u e s . Colombia T h e C o l o m b ia n re g im e fo c u s e s o n th e sp e c ific n e e d s o f e a c h s e c to r. I ts m o s t i m p o r t a n t c o m p o n e n t - th e G e n e r a l P a r t ic i p a t i o n S y s te m ( S G P in S p a n is h ) d i s tr i b u te s a lm o s t a ll o f its r e s o u r c e s (85 p e r c e n t ) t o th r e e s e c to rs : e d u c a t io n , h e a l t h a n d i n f r a s t r u c t u r e .7 I n a d d i t i o n , th e d i s t r i b u t i o n o f r o y a ltie s f r o m t h e e x p l o i t a t i o n o f n a t u r a l r e s o u r c e s a ls o p r i o r it iz e s in v e s t m e n t s to f o r c e th o s e ju r i s d i c t i o n s t h a t d id n o t m e e t n a t i o n a l s t a n d a r d s in th e s a m e a r e a s t o c a tc h u p . P e r h a p s f o r t h a t r e a s o n , th e C o lo m b i a n c a s e d o e s n o t lo o k g o o d f r o m a fle x ib ility p e r s p e c tiv e , sin c e r e s o u r c e s t r a n s fe r r e d u n d e r th e S G P a s w e ll a s t h e d i s t r i b u t i o n o f r o y a l ti e s a r e s u b je c t t o s t r in g e n t c o n d i t i o n s r e g a r d in g t h e i r u ti l i z a t i o n .8 T h e C o l o m b ia n re g im e c o m b in e s t r a n s f e r to d e p a r t m e n t s a n d to m u n ic ip a litie s in d if f e r e n t w a y s d e p e n d in g o n th e p a r t i c u l a r a s p e c ts o f e a c h s e c to r. T h e p o r t i o n a ll o c a te d to e a c h le v e l o f g o v e r n m e n t v a rie s a c c o r d i n g t o th e c o n d it i o n s fa c e d d u r in g th e p r o c e s s o f d e c e n t r a li z a ti o n a n d th u s m i g h t r e f le c t h is to r i c a l tr e n d s . T h e m o n e y flo w in g t o t h e d e p a r t m e n t s s e e m s t o re f le c t a n a t t e m p t t o b e t t e r o r g a n iz e t h e p r o v i s io n o f s o c ia l se rv ic e s a n d i n f r a s t r u c t u r e in v e s tm e n ts a t th e r e g io n a l lev el. M o r e o v e r th e p o lic y a p p li e d t o t h e d e s t i n a t i o n o f r e s o u r c e s f r o m r o y a l ti e s n o t o n ly a im s t o m a k e la g g a r d s c a tc h u p w ith n a t i o n a l s t a n d a r d s in th e s o c ia l a r e a b u t a ls o se e k s a r e d u c t io n in r e g i o n a l d is p a r itie s . P r o v is o r y n o r m s t h a t h a v e b e e n in p la c e sin c e 20 0 1 e s t a b li s h t h a t th e a m o u n t o f r e s o u r c e s t o b e tr a n s f e r r e d t o s u b n a t io n a l g o v e r n m e n ts in C o lo m b ia is fix e d o n th e b a s is o f p r e v io u s d a t a a n d a d ju s te d t o t a k e i n t o a c c o u n t th e r a t e o f in f la t io n a n d th e p a c e o f e c o n o m ic g r o w th . T h is p r o v i s o r y re g im e s h o u l d h a v e la s te d u n til 2 0 0 8 , b u t h a s r e c e n tly b e e n e x te n d e d t o 2 0 1 7 , w h e n th e a v e r a g e in c r e a s e in c e n tr a l g o v e r n m e n t c u r r e n t re v e n u e s w ill b e u s e d t o c o r r e c t p r e s e n t v a lu e s . A s th e C o lo m b ia n r e g im e f o c u s e s o n e d u c a t i o n a n d h e a lt h , a n d th e c r i t e r ia a p p lie d t o th e s h a r in g o f r e s o u r c e s e a r m a r k e d to th e s e s e c to r s re fle c t th e lo c a t io n o f d e m a n d s f o r s u c h s e rv ic e s, it p e r f o r m s w e ll u n d e r t h e e q u i li b r iu m c r i te r ia i f n o t u n d e r fle x ib ility . S in c e r o y a l tie s d o n o t p la y a c ru c ia l r o le , th e p r o v i s o r y ru le s p r o v i d e r e a s o n a b le s ta b il ity w h ile a t th e s a m e
In terg o ve rn m e n ta l tran sfers in su b n a tio n a l fin a n c e s 235
tim e r e d u c i n g v u ln e r a b il it y t o a d v e r s e e c o n o m i c c o n d it io n s . S u b n a t i o n a l m a n a g e r s , h o w e v e r , c a n n o t a d j u s t th e i r b u d g e ts t o a fa ll in d o m e s ti c r e v e n u e s o r t o p a r t i c u l a r d e m a n d s f r o m t h e i r c o n s titu e n c ie s .
Bolivia (Plurinational S ta te of)
V u ln e r a b i li ty s e e m s t o b e th e m a i n c h a r a c t e r i s ti c o f th e B o liv ia n c a s e f r o m t h e p e r s p e c tiv e o f s u b n a t io n a l fin a n c e s , g iv e n th e h ig h p a r t i c i p a t i o n o f oil a n d g a s re v e n u e s in t o t a l tr a n s f e r s . I t d o e s n o t p e r f o r m w ell f r o m t h e s t a b ility p e r s p e c tiv e , s in c e u n c e r t a in t ie s r e l a te d to th e o c c u r r e n c e o f e x te r n a l c ris e s a n d r e s tr i c tio n s t o c o m p e n s a te f o r a fa ll in e x te r n a lly in d u c e d r e v e n u e s b y m e a n s o f a n in c r e a s e in d o m e s tic o n e s d o e s n o t g iv e s u b n a t io n a l m a n a g e r s a d e q u a t e m e a n s to s u s ta in a s ta b le in f lo w o f re s o u r c e s .
O il a n d g a s r e v e n u e s - r o y a l ti e s a n d sp e c ific ta x e s - a r e th e s o le s o u r c e o f tr a n s f e r s t o B o liv ia n d e p a r t m e n t s . B a s ic a lly , th e f o r m u l a a p p lie s a m ix o f d e v o lu t io n a n d d is tr i b u ti v e c r ite r ia . S ix ty p e r c e n t o f t h e r o y a ltie s a n d 4 0 p e r c e n t o f th e r e v e n u e s f r o m th e h y d r o c a r b o n ta x a r e r e t u r n e d to th e i r o r ig in . L e a v in g a s id e a f r a c t i o n o f th e ta x e a r m a r k e d f o r p u b lic u n iv e r s i tie s , w h a t is t r a n s f e r r e d t o o t h e r d e p a r t m e n t s is a im e d a t r e d u c i n g r e g i o n a l d is p a r itie s . B o liv ia n m u n ic ip a litie s s h a r e 20 p e r c e n t o f a ll n a t i o n a l ta x e s , e x c e p t th e h y d r o c a r b o n o n e , a n d g e t a little m o r e t h a n o n e - t h i r d o f t h e l a t t e r f r o m t h e i r re s p e c tiv e d e p a r t m e n t s . A m i n o r s o u r c e c o m e s f r o m r e s o u r c e s o f a n in t e r n a t i o n a l p r o g r a m f o r h ig h ly in d e b t e d p o o r c o u n tr ie s ( H I P C ) . B e s id e s r e c e iv in g a la r g e a m o u n t o f m o n e y , th e y b e n e f it f r o m a s p e c ia l f o r m u la t h a t is a im e d a t r e d u c i n g d is p a r itie s in t h e h o r i z o n t a l d i s t r i b u t i o n o f lo c a l g o v e r n m e n ts ’ p e r c a p i t a re v e n u e s . C o u p le d w ith a tt e m p t s to r e d u c e r e g i o n a l d is p a r itie s , a n e q u a l i z a t i o n a p p r o a c h to th e d i s tr i b u t i o n o f th e lo c a l g o v e r n m e n t s ’ s h a r e o f n a t i o n a l ta x e s le a v e s t h e B o liv ia n c a s e o n r e a s o n a b le te r m s w ith r e g a r d to e q u ilib r iu m . T h e a v a ila b le e v id e n c e (s e e A p p e n d ix T a b le 8 A .1 ) su g g e s ts t h a t th e B o liv ia n re g im e g iv e s lo c a l g o v e r n m e n ts s ig n ific a n t le e w a y to m a n a g e t h e i r o w n b u s in e s s ; t h a t is, i t a p p e a r s to p r e s e n t a r e a s o n a b le d e g re e o f fle x ib ility sin c e th e c o n d it io n s a t t a c h e d to th e u s e o f tr a n s f e r s a r e e a s ily a d ju s ta b l e . F r o m a n o t h e r p e r s p e c tiv e , t h e v u ln e r a b il it y o f tr a n s f e r s to i n t e r n a t i o n a l p r ic e s m e a n s t h a t s u b n a t i o n a l m a n a g e r s m a y fa c e d iffic u ltie s in a d a p t i n g to a fa ll in r e v e n u e s d u r i n g a d o w n t u r n c y c le i f e d u c a t i o n a n d h e a l t h c la im a h ig h p r o p o r t i o n o f th e i r b u d g e ts . Ecuador S u b n a ti o n a l f in a n c e s in E c u a d o r m a y g a in m o r e s ta b ility a s a r e s u lt o f t h e ru le s im p le m e n te d in 2 0 0 9 . T h e s e r u le s s u b s t i t u t e d a c o n s o l id a t e d re g im e in w h ic h a t le a s t 15 p e r c e n t o f th e c e n tr a l g o v e r n m e n t’s p e r m a n e n t
2 3 6 D e ce n tra liza tio n a n d reform in L a tin A m eric a re v e n u e s , p lu s 5 p e r c e n t o f th e t e m p o r a r y o n e s , w e re s h if te d t o s u b n a t i o n a l g o v e r n m e n ts . S in c e th e G e n e r a l S ta t e B u d g e t f o r 2 0 0 9 , a t r a n s i t i o n d is p o s i ti o n e n title s s u b n a t io n a l g o v e r n m e n ts t o re c e iv e t h e s a m e a m o u n t o f m o n e y as in 2 0 0 8 . B e fo re t h e r e f o r m , s u b n a t i o n a l g o v e r n m e n ts re c e iv e d m o n e y f r o m 19 d is ti n c t s o u r c e s u n d e r c r i te r ia t h a t i n c o r p o r a t e d p o p u l a t i o n a n d l a c k o f m e a n s to p r o v i d e a c c e s s t o b a s ic n e e d s . A g e n e r ic c o n d it i o n t h a t r e s o u r c e s s h o u l d b e a lm o s t w h o lly u s e d to f in a n c e c a p it a l e x p e n d it u r e s a ll o w e d f o r a r e a s o n a b le d e g re e o f f le x ib ility in th e u s e o f r e s o u r c e s , b u t a h ig h d e p e n d e n c e o n o il r e v e n u e s c o n f e r r e d v u ln e r a b il ity to t h e s u b n a t i o n a l f in a n c e s . T h e n e w re g im e im p r o v e s t h e E c u a d o r i a n m o d e l o n tw o a c c o u n t s . A b r o a d t r a n s f e r b a s e m e a n s b e t t e r s ta b ility , w h e r e a s t h e f o r m u l a a d o p t e d t o d i s tr i b u te t h e r e s o u r c e s a m o n g s u b n a t i o n a l u n it s m i g h t r e d u c e fisc a l d is p a r itie s a n d a llo w f o r a d y n a m i c a d ju s tm e n t t o c h a n g in g c ir c u m s ta n c e s . N o t e , h o w e v e r , t h a t th e s e o u tc o m e s d e p e n d o n m a i n t a i n i n g t h e fu ll s c h e d u le d i m p le m e n t a t io n o f th is n e w re g im e . I t is p o s s ib le t h a t t h e t r a n s i t o r y p e r i o d m a y b e p o s t p o n e d , a s h a s b e e n th e c a s e e ls e w h e r e , g iv e n t h e d i f fic u ltie s in v o lv e d in th e o p e r a t i o n o f th e f o r m u la f o r s h a r in g re s o u r c e s , w h ic h re lie s o n v a r ia b le s t h a t a r e h a r d t o m e a s u r e a n d m a y b e a s o u r c e o f e n d le s s c o n flic t. Peru T h e P e r u v i a n r e g im e s e e m s t o r e s e m b le th e o ld E c u a d o r i a n m o d e l: s e v e ra l t r a n s f e r s o u r c e s a r e g o v e r n e d b y i n d e p e n d e n t d i s t r i b u t i o n c r ite r ia . D e p a r t m e n t s a n d m u n i c ip a l it ie s re c e iv e tr a n s f e r s f r o m t h e c e n tr a l g o v e r n m e n t c u r r e n t re v e n u e s a s w ell a s f r o m sp e c ific s o u r c e s . R e g io n a l g o v e r n m e n t s g e t r e s o u r c e s e a r m a r k e d f o r r e g i o n a l in v e s tm e n t p r o j e c ts a n d th e M u n i c ip a l C o m p e n s a t i o n F u n d ( F O N C O M Ú N in S p a n is h ) re s e m b le s a n e q u a li z a tio n r e g im e f o r t h e m u n ic ip a litie s w ith n o c o n d i t i o n s a tt a c h e d . T h e d i s t r i b u t i o n o f F O N C O M Ú N a im s a t g u a r a n t e e in g t h a t n o o n e g e ts less t h a n e ig h t U I T (unidades impositivas tributarias) ( a b o u t U S $ 1 ,2 0 0 ).
T h e m a i n s o u r c e o f tr a n s f e r s in P e r u is th e s o - c a lle d ‘canons’, w h ic h t r a n s f e r t o s u b n a t i o n a l g o v e r n m e n ts p a r t o f th e r e v e n u e s f r o m th e e x p lo i t a t i o n o f n a t u r a l r e s o u r c e s , t h e m o s t i m p o r t a n t b e in g th o s e r e l a te d to o il a n d g a s ,9 w h ic h g e t 12.5 p e r c e n t o f th e v a lu e o f o il a n d g a s p r o d u c ti o n . O th e r canons c o m p r is e 50 p e r c e n t o f th e in c o m e ta x c o lle c te d f r o m th e r e l a te d e n te r p r i s e s a n d / o r a n e q u a l s h a r e o f c o n c e s s io n r ig h ts . B o th r e g i o n a l a n d lo c a l g o v e r n m e n ts s h a r e th e s e r e s o u r c e s o n a n o r i g in b a s is ; t h e f o r m e r g e ts 2 0 p e r c e n t a n d th e l a t t e r 75 p e r c e n t , w ith t h e r e m a in i n g 5 p e r c e n t g o in g d ir e c tly to p u b li c u n iv e r s it ie s .10 T h e c r i te r ia a p p li e d to d is tr i b u te t h e lo c a l g o v e r n m e n ts ’ s h a r e a m o n g t h e m u n i c ip a l it ie s c o m b in e p o p u l a t i o n a n d a m e a s u r e o f u n c a te r e d - f o r b a s ic n e e d s , b e s id e s a p p ly in g
In terg o ve rn m en ta l tran sfers in su b n a tio n a l fin a n ce s 237
a s e p a r a te re g im e f o r a s p e c ia l c a te g o r y o f m u n ic ip a l it y (municipios distri tales). T h e d i s t r i b u t i o n o f th e canon petrolero fo llo w s a c o m p le x f o r m u la .
F o r lo c a l g o v e r n m e n ts , t h e s e c o n d m o s t i m p o r t a n t t r a n s f e r s o u r c e is t h e F O N C O M Ú N w h o s e r e s o u r c e s c o m e f r o m n a t i o n a l ta x e s e a r m a r k e d f o r th is fu n d . T h e f u n d a im s t o p r o v i d e lo c a l g o v e r n m e n ts w ith m o n e y to fu lfill t h e i r re s p o n s ib ilitie s . T h e r e is n o s p e c ia l p r o v is io n c o n c e r n in g th e u ti li z a t i o n o f th e s e r e s o u r c e s , b u t t h e m u l ti p li c it y o f c r i te r i a a d o p t e d to d e te r m in e e a c h m u n i c ip a l it y p o r t i o n in th is f u n d is u n lik e ly t o le a d t o a r e a s o n a b le e q u il ib r iu m . O n t h e b a s is o f t h e c o lle c te d i n f o r m a t i o n , t h e P e r u v i a n re g im e d o e s n o t p e r f o r m w e ll f r o m th e v ie w p o in t o f r e d u c i n g fisc a l d is p a r itie s a n d p r o v i d in g s u b n a t i o n a l g o v e r n m e n ts w ith a s ta b le s o u r c e o f r e v e n u e s a n d a less v u ln e r a b le in f lo w o f r e s o u r c e s d u e t o a h ig h d e p e n d e n c e o n re v e n u e s t h a t a r e s e n s itiv e to in t e r n a t i o n a l p ric e s ( C a s a s , 2 0 0 9 ). F o r t h e s a m e r e a s o n s , th e r e is little li k e li h o o d t h a t s u b n a t io n a l m a n a g e r s w ill a d a p t to a d v e r s e e c o n o m ic c ir c u m s ta n c e s . F lo w e v e r, it d o e s g iv e lo c a l g o v e r n m e n ts s o m e le e w a y w ith r e s p e c t t o t h e u s e o f t r a n s f e r r e s o u r c e s , sin c e th e m a i n c o n d it io n s r e f e r t o t h e o b li g a ti o n to f in a n c e c a p i t a l e x p e n s e s . C h ile T h e t r a n s f e r re g im e in C h ile c o m b in e s a k in d o f e q u a l i z a ti o n p r o g r a m w ith s o m e sp e c ific s u p p o r t to s e le c te d s e c to r s . T h e f ir s t is t h e o b je c t o f th e M u n i c ip a l C o m p e n s a t io n F u n d ( F C M in S p a n is h ) c o m p r is i n g a b o u t 60 p e r c e n t re v e n u e s f r o m p r o p e r t y a n d v e h ic le ta x e s a n d is d is t r i b u t e d b y m e a n s o f a f o r m u l a t h a t a im s a t r e d u c i n g a c t u a l fis c a l d is p a r itie s . R e s o u r c e s f r o m t h e F C M a c c o u n t e d f o r 33 p e r c e n t o f t h e m u n i c ip a l s p e n d in g in 2 0 0 7 . T h e s e c o n d is p a r t o f th e N a t i o n a l F u n d f o r R e g io n a l D e v e lo p m e n t ( F N D R in S p a n is h ) t h a t tr a n s f e r s r e s o u r c e s to r e g io n a l g o v e r n m e n ts b a s e d o n p r o j e c ts a p p r o v e d b y r e g i o n a l c o u n c ils a f t e r b e in g c le a r e d a t t h e f e d e r a l le v e l. C r it e r i a f o r d i s t r i b u t i n g F N D R r e s o u r c e s la c k t r a n s p a r e n c y . N in e ty p e r c e n t o f th e r e s o u r c e s a r e a l l o c a te d a t t h e b e g in n in g o f th e fisc a l y e a r t a k i n g in t o a c c o u n t p o v e r t y a n d in f r a s t r u c t u r e n e e d s , th e r e m a in i n g b e in g s e t a p a r t f o r e m e r g e n c ie s a n d t o c r e a te in c e n tiv e s f o r efficien cy . F N D R r e s o u r c e s a r e e s t a b lis h e d in th e n a ti o n a l b u d g e t. O th e r m i n o r tr a n s f e r s o u r c e s m a n a g e d b y th e n a t i o n a l g o v e r n m e n t s u p p o r t d a y - t o - d a y r e g i o n a l g o v e r n m e n t s ’ n e e d s a n d lo c a l g o v e r n m e n ts ’ d e m a n d s to f in a n c e i n f r a s t r u c t u r e p r o j e c ts , e d u c a t io n , h e a l t h a n d c u l t u r a l a c tiv itie s . T h e h ig h d e g re e o f c e n t r a l g o v e r n m e n t in t e r f e r e n c e in t h e m a n a g e m e n t o f s u b n a t i o n a l f in a n c e s is a d is tin c tiv e a s p e c t o f t h e C h ile a n r e g im e . T h is c o u ld f a v o r a less u n e q u a l d is tr i b u t i o n o f r e s o u r c e s i f d e c is io n s c o n c e r n in g t h e a ll o c a ti o n o f F N D R r e s o u r c e s c o u n t e r a c t th e F C M c o n t r i b u t i o n to th e a t t e n u a t i o n o f m u n i c ip a l fisc a l d is p a r itie s . S in c e m u n i c ip a l it ie s c a n