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Stabilizing intergovernmental transfers in Latin America : a complement to national/subnational fiscal rules?

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Author Info

  • Gonzalez, Christian Y.
  • Rosenblatt, David
  • Webb, Steven B.

Abstract

The traditional theory of fiscal federalism assigns the role of macroeconomic stabilization to the federal government. In addition to this long-standing theoretical result, there is empirical observation that federal governments in developing countries typically have cheaper and more stable access to capital markets, relative to subnational governments. Drawing on the recent experience of four large federal countries in Latin America-Argentina, Brazil, Colombia, and Mexico--the authors examine how intergovernmental transfers affect the division of the burden of stabilization across the levels of government, when the nation as a whole faces economic fluctuations. Imposing stabilizing rules on federal transfers that protect subnational governments from fluctuations in the business cycle can serve two purposes. During boom periods, stabilizing rules prevent subnational governments'tendency to increase inflexible expenditures. And during downturns, stabilizing rules place the burden of borrowing at the federal level-the level most appropriate for macroeconomic stabilization and often the level with superior access to credit. Despite the logic of these rules, recent experience of the four countries reveals that these rules can be risky, particularly inthe face of high GDP volatility. Protection against falling revenues in the downturn constitutes a contingent liability for the central government. Argentina's stabilizing rule contributed to fiscal and political tensions during its ongoing crisis. Colombia is beginning to implement similar rules. Meanwhile, Brazilian and Mexican transfers do not implement such rules and fiscal and economic results do not appear to have fared any worse for this absence. The authors draw on the country experience to establish that certain conditions should be in place before establishing a stabilization rule to federal-to-subnational fiscal transfers-in particular the elimination of long-term structural fiscal imbalances, either within levels of government or across levels of government.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2869.

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Date of creation: 31 Jul 2002
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Handle: RePEc:wbk:wbrwps:2869

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Keywords: Municipal Financial Management; Public Sector Economics&Finance; Public&Municipal Finance; Banks&Banking Reform; Urban Economics; Banks&Banking Reform; National Governance; Public Sector Economics&Finance; Municipal Financial Management; Urban Economics;

References

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  1. Mariano Tommasi & Sebastian M. Saiegh & Pablo Sanguinetti, 2001. "Fiscal Federalism in Argentina: Policies, Politics, and Institutional Reform," Working Papers, Universidad de San Andres, Departamento de Economia 32, Universidad de San Andres, Departamento de Economia, revised May 2001.
  2. Ernesto H. Stein & Ernesto Talvi & Alejandro Grisanti, 1998. "Institutional Arrangements and Fiscal Performance: The Latin American Experience," Research Department Publications, Inter-American Development Bank, Research Department 4110, Inter-American Development Bank, Research Department.
  3. George Kopits, 2001. "Fiscal Rules," IMF Working Papers 01/145, International Monetary Fund.
  4. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1.
  5. Thomas Courchene, 1999. "Subnational Budgetary and Stabilization Policies in Canada and Australia," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 301-348 National Bureau of Economic Research, Inc.
  6. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 459-72, September.
  7. Bayoumi, Tamim & Masson, Paul R, 1998. "Liability-Creating Versus Non-Liability-Creating Fiscal Stabilization Policies: Ricardian Equivalence, Fiscal Stabilization and EMU," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1984, C.E.P.R. Discussion Papers.
  8. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 205-259, 04.
  9. Afonso S. Bevilaqua, 2000. "State-government bailouts in Brazil," Textos para discussão, Department of Economics PUC-Rio (Brazil) 421, Department of Economics PUC-Rio (Brazil).
  10. Mariano Tommasi & Pablo Sanguinetti, 2003. "Intergovernmental Transfers and Fiscal Behavior: Insurance versus Aggregate Discipline," Working Papers, Universidad de San Andres, Departamento de Economia 60, Universidad de San Andres, Departamento de Economia, revised Aug 2003.
  11. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 134-38, May.
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Citations

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Cited by:
  1. Fardoust, Shahrokh & Lin, Justin Yifu & Luo, Xubei, 2012. "Demystifying China's fiscal stimulus," Policy Research Working Paper Series 6221, The World Bank.
  2. Mariano Tommasi, 2002. "Federalism in Argentina and the Reforms of the 1990s," Working Papers, Universidad de San Andres, Departamento de Economia 48, Universidad de San Andres, Departamento de Economia, revised May 2002.
  3. World Bank, 2009. "Colombia - Decentralization : Options and Incentives for Efficiency - Main Report," World Bank Other Operational Studies 3096, The World Bank.
  4. Miguel Braun & Luciano Di Gresia, 2003. "Towards Effective Social Insurance in Latin America: The Importance of Countercyclical Fiscal Policy," IDB Publications 6508, Inter-American Development Bank.
  5. Miguel Braun & Mariano Tommasi, 2004. "Fiscal Rules for Subnational Governments. Some organizing principles and Latin American experiences," Public Economics, EconWPA 0410004, EconWPA.
  6. World Bank, 2009. "Colombia - Decentralization : Options and Incentives for Efficiency - Sector Annexes," World Bank Other Operational Studies 3097, The World Bank.
  7. World Bank & Inter-American Development Bank, 2003. "Restoring Fiscal Discipline for Poverty Reduction in Peru : A Public Expenditure Review," World Bank Publications, The World Bank, number 15118, August.
  8. Miguel Braun & Luciano di Gresia, 2003. "Hacia un sistema de seguro social eficaz en América Latina: la importancia de una política fiscal anticíclica," Research Department Publications, Inter-American Development Bank, Research Department 4334, Inter-American Development Bank, Research Department.
  9. World Bank, 2003. "Argentina : Reforming Policies and Institutions for Efficiency and Equity of Public Expenditures," World Bank Other Operational Studies 14637, The World Bank.
  10. World Bank, 2003. "Decentralizing Indonesia : A Regional Public Expenditure Review Overview Report," World Bank Other Operational Studies 14632, The World Bank.

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