Fiscal decentralization in Latin America and the Caribbean by Luiz Villela in the book Citizens in Change: Managing Local Budgets in East Asia and Latin America by Isabel Licha (Editor) published by IADB (2004).
“The main characteristic of the decentralization process in Latin America has been that in many countries it has occurred very much in parallel with the democratization of government, when military regimes crumbled and gave place to direct elections not only for presidents but, more significantly, for governors, mayors, local legislators, and council members. The result has been that not only are subnational governments playing a larger role in the management of local affairs, they are becoming more democratic because citizens have a greater voice.
Since Musgrave’s (1959) classic work, fiscal decentralization has been an important topic in the public finance literature. It has become a major political and economic issue for most Latin American countries in the past two decades. Nations throughout the region have extended power-sharing arrangements to local governments together with revenue transfers that have, in some countries, quadrupled local government income compared with 10–15 years ago. Even in already highly decentralized countries such as Brazil, the proportion of central to subnational government net revenues (after transfers) has changed from 70 to 30 in 1980 to around 58 to 42 in early 2001 (BNDES 2001).
Fiscal decentralization is both an economic and a political process, involving many technical issues and raising an array of questions. This chapter, which is based on IDB (2000, 2001), presents some basic information on the main issues of fiscal decentralization and how it has evolved in Latin America. This should level the playing field and allow those involved with correlated matters, such as community development, citizen participation, and local management, to better understand how these processes interact.
Reasons for Decentralization
The motivations underlying the decentralization process in Latin America and the Caribbean often do not coincide with the theoretical propositions that support decentralization as a mechanism to improve and democratize the allocation and use of public resources. One of the main features of fiscal decentralization in the region in the past two decades has been that it has occurred in parallel with the democratization of government, significantly changing the way local affairs are run. Subnational governments not only are becoming more democratic, but they are also playing a larger role in the management of local affairs.
The number of countries in the region with democratically elected central governments increased from 13 in the mid- 1980s to 26 in the late 1990s. Democratization also has taken place in subnational governments. Elected officials run municipal governments in 23 countries, up from only six two decades ago. In most of them (17), mayors are elected by direct vote; in the others, through an elected council (IDB 1997).
In less than 15 years, the average share of public expenditures managed by subnational governments increased from 8 percent to almost 15 percent. However, there are significant variations among countries in the degree of decentralization. While Argentina, Brazil, and Colombia are highly decentralized (with more than 40 percent of total government expenditures managed by subnational entities), others are still highly centralized. For instance, in Costa Rica, the Dominican Republic, and Panama, subnational governments manage less than 5 percent of total government expenditures. Still others have not decentralized at all. In Barbados and the Bahamas, the central government is in charge of all expenditures (see Table 3.1)…”
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