Intergovernmental Transfers and Fiscal Decentralization Argentina Brazil Colombia

Intergovernmental Transfers and Fiscal Decentralization Argentina, Brazil, Colombia Fernando Rezende Regional Dialogue Washington, May 2007

Content l l What Happened to fiscal decentralization over the past decades? Reasons, Reactions and Outcomes Providing reccomendations or highlighting the Trade-Offs and the implications of alternative choices? Some Concluding Remarks

Going Backwards l l Uncertainties and Instability Increasing Interference on Subnational Spending Vertical and Horizontal Imbalances Growing antagonisms

For What Reasons? l Dominance of Macroeconomic Concerns – l Pressures to eliminate fiscal disequilibria Focus on national policies – Emphasys on alleviating poverty and reducing inequalities in family income distribution

Same Pressures, Distinct Reactions l l l AR: Transfer of Responsibilities; maintenance of a provisory regimen; increasing discricionary transfers. BR: Reliance on non-shared taxes; increase in earmarked transfers CO: adoption of a provisory regimen; less room for subnational autonomy

But not so different results l l l Fiscal Discipline impinged on subnational autonomy National Priorities diminished the space for adhering to local preferences More weight on equity concerns hindered efficiency on services provision Less transparent rules impaired accountability Abandon of agreed rules fomented antagonisms

Albeit in Varying Degrees- Argentina l l l Subnational autonomy is still high, but efficiency sufers from instability, dependence on transfers and not so hard budgetary constraints The redistributive character of coparticipation regimen reduced differences in provincial IDHs, but frozen coefficients increased horizontal disparities and affected the quality of services. Lack of transparency bodes ill for accountability and growing discricionary transfers increased antagonisms.

Albeit in Varying Degrees- Brazil l l In practice is the more flexible regimen among the cases studied. Own subnational revenues and HBC could favor efficiency but high horizontal disparities and strong municipalities make things worse. Transparent rules and increase in transfers earmarked to health&education favor accountability and equity from a global perspective, which, however, are compromised by horizontal disparities and lack of coordination.

Albeit in Varying Degrees- Colombia l l l Adoption of the provisory regimen made it less rigid under favorable economic conditions, but the likelihood of postponing the return to the permanent regimen may increase distortions. Small tax powers and high interference on subnational spending make it the less favorable case from the viewpoint of efficiency and accountability. Demand oriented transfers improved the situation in education and health and led to better results from an equity standpoint

One common trait and two promising signals l Common trait: failure to properly address horizontal disparities (mismatch between resources and responsibilities and lack of coordination in service provision) l Two promising signals: implementation of a demand oriented approach for distributing resources earmarked to education (Colombia and Brazil)

But Substantial Reforms Face Strong Barriers l l l Macroeonomic uncertainties Institutional weakenesses Strong Antagonisms Unbalance in Political Representation Reaction from Beneficiaries of the present situation

Trying to Reform? Focus on the trade-offs instead of looking for traditional receipees l l l Fiscal Discipline versus subnational autonomy Efficiency in service provision versus equity in access to basic social needs Emphasys on national priorities versus more room to local preferences

Evaluating the Trade-Offs l l Rigid norms coupled with a high subnational share of federal revenues do not favor fiscal discipline Earmarked transfers and low tax powers hinders subnational autonomy Transfers based autonomy do not favor efficiency and accountability More weight on national priorities may enhance equity but undermines ability to adhere to local preferences.

How rigid is the intergovernmental transfer system? % of shared revenues on total national revenues Norms l l Constitution Special Law Ordinary Law Annual Budget Over 60 VR R M L 40 -60 25 -40 0 -25 R RML- M ML VL L L+ VL VL+ -------------------------------------------------Legend: VR = very rigid; R= rigid; M= medium; L= low; VL= very low.

How autonomous are subnational governments? --------------------------------------------------% of earmarked revenues on total revenues 80 -100 60 -80 30 -60 0 -30 Grants Types l l Non-matching Sectors Programs Matching Sectors Programs VL VL+ L L+ M M- VH H- MVL LL-- M+ M-- VH VH+ ----------------------------------------------------Legend: VL= very low; L= low; M= medium; VH= very high; H=high

Is autonomy and previsibility in transfers enough for efficiency? How favorable are conditions for efficiency VF F M U VU l Hard Budgetary Constraints Yes VE VE- E I VI No VI VII II------------------------------------------------Legend: VF=very favorable; F=favorable; M=medium; U=unfavorable; VU=very Unfavorable. VE=Very efficient; VI= Very inefficient; E= eficient; I= inefficient; VI= very inefficient.

How High is the interference of national priorities? ----------------------------------------------------% revenues earmarked to national priorities 70 - 100 50 -70 30 -50 0 -30 Non matching Grants Sectors VH M VL Programs H H M L Matching Sectors M H VL VL+ Programs H M L VL Close ended H M L VL Open ended M H VL VL+ -----------------------------------------------------Legend: VH=very high; H=high; M=medium; L=low; VL=very low

And what are the best combination from the viewpoint of accountability? -------------------------------------------------Subnational Autonomy VH H M L Own revenues/ Unconditional transfers Over 3 VG G M+ B Between 2 e 3 G GMB+ Between 1 e 2 M+ MB B++ Between 0, 5 e 1 B BVB VB+ Below 0, 5 VB VB++ ---------------------------------------------------Legend: VG=very good; G= good; M=medium; BR= bad; VB= very bad

Highlighting the implications of alternative choices l l l Exposing implications of distinct choices allows policy makers and the public at large to ponder alternatives and their consequences. How flexible should a transfer system be? How best to reconcile flexibility and autonomy under high regional disparities? To what extent subnational governments should be granted autonomy to spend? Under what conditions?

Looking for clues l l Less rigidity and HBC could allow for more autonomy. Adoption of equalization formulas could reconcile efficiency and equity goals. Increasing subnational tax powers could be a better way to achieve accountability and efficiency. Focusing on output oriented conditionalities could enhance efficiency

Some final considerations to be taken into account l l l An unstable economic scenario calls for the adoption of a calendar for a periodic revision of the ammount to be transferred. Fast demographic and socioeconomic changes demand attention to the horizontal dimension of the IG transfers. Think about introducing asymetric rules. The long the delay in making changes the harder is the way towards a broad reform.