The Institutional Challenges of the Fiscal Decentralization in Latin America

In the first part, this document presents a review of the main theoretical arguments about the fiscal decentralization process, those that support it and those that stand against it; this is necessary in order to have a clear understanding about the current status of the debate. In the second part, the article shows a brief analysis about the ongoing status of the fiscal decentralization process in developed and developing countries, with particular reference to the Latin American case. In this point we observe that Latin American reforms promote better the expenditure decentralization (mainly through fiscal transferences) than the revenue decentralization (broadening the fiscal attributions of sub national government levels). In the third part, from the Mexican experience, this paper analyzes how the institutional and administrative capacities of the sub national governments can be a key factor for the success of the fiscal decentralization process, or in some cases, a cause of its failure. It is clear that the fiscal decentralization should not be seen as an end by itself, it should only be considered as a strategy to strength the entire decentralization process and to improve the well-being and development levels in a country.

There is important evidence that the institutional capacities of sub national governments are a crucial factor in every process of fiscal decentralization. Sub national governments without a dynamic interchange of knowledge and experiences between them, with obsolete normative frameworks, undeveloped organizational and management structures, inexperienced public servants, poor democratic systems and no accountability policies, will be an impediment to the fiscal decentralization process.

The strengthen of the institutional capacities of sub national governments is a process that even in governments with similar conditions (sizes, economic developments) may take different rhythms. For this reason, the construction of national programs of decentralization with a standard design should be avoided; in its place, we need to design "asymmetric" (flexible) public policies that can be adapted to different contexts. In this way, central governments may become in the promoters, assessors, sponsors, and regulators of the process, but further intervention can lead us to repeat a history of failure efforts of administrative reforms, which is very common in Latin American countries.

The development of local institutions is a clear example of how central governments shall make better efforts to apply "soft regulation", correct incentives and allowing more autonomy to the sub national governments. The fiscal decentralization process is, for central governments, an opportunity to learn new kinds of intervention in others government levels.