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More than you can handle : decentralization and spending ability of Peruvian municipalities

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  • Loayza, Norman V.
  • Rigolini, Jamele
  • Calvo-Gonzalez, Oscar

Abstract

In the past three decades, emerging countries have gone through extensive decentralization reforms. Yet, there are no studies assessing quantitatively the relative importance of various factors known to affect the success of decentralization. This paper builds on a comprehensive dataset the authors constructed for Peru, which merges municipal fiscal accounts with information about municipalities'characteristics such as population, poverty, education, and local politics. The paper then analyzes the leading factors affecting the ability of municipalities to execute the allocated budget using complementary methodologies, from least squares to quantile regression analyses. According to the existing literature and the Peruvian context, the analysis divides these factors into four categories: the budget size and allocation process; local capacity; local needs; and political economy constraints. Although all four factors affect decentralization, the largest determinant of spending ability is the adequacy of the budget with respect to local capacity. The results confirm the need for decentralization to be implemented gradually over time in parallel with strong capacity building efforts.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5763.

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Date of creation: 01 Aug 2011
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Handle: RePEc:wbk:wbrwps:5763

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Keywords: Public Sector Expenditure Policy; Subnational Economic Development; Debt Markets; Political Economy; Municipal Financial Management;

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  1. Caselli, Francesco & Michaels, Guy, 2009. "Do Oil Windfalls Improve Living Standards? Evidence from Brazil," CEPR Discussion Papers 7579, C.E.P.R. Discussion Papers.
  2. De Borger, Bruno & Kerstens, Kristiaan, 1996. "Cost efficiency of Belgian local governments: A comparative analysis of FDH, DEA, and econometric approaches," Regional Science and Urban Economics, Elsevier, vol. 26(2), pages 145-170, April.
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  5. Ritva Reinikka & Jakob Svensson, 2004. "Local Capture: Evidence From a Central Government Transfer Program in Uganda," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 678-704, May.
  6. Araujo, M. Caridad & Ferreira, Francisco H.G. & Lanjouw, Peter & Özler, Berk, 2008. "Local inequality and project choice: Theory and evidence from Ecuador," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1022-1046, June.
  7. Susan Steiner, 2008. "How important is the Capacity of Local Governments for Improvements in Welfare? Evidence from Decentralised Uganda," Brooks World Poverty Institute Working Paper Series 4308, BWPI, The University of Manchester.
  8. Roy Bahl & Jorge Martinez-Vazquez, 2013. "Sequencing Fiscal Decentralization," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 641-687, November.
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Cited by:
  1. Loayza, Norman & Mier y Teran, Alfredo & Rigolini, Jamele, 2013. "Poverty, Inequality, and the Local Natural Resource Curse," IZA Discussion Papers 7226, Institute for the Study of Labor (IZA).
  2. Omar Zambrano & Marcos Robles & Denisse Laos, 2014. "Global boom, local impacts: Mining revenues and subnational outcomes in Peru 2007-2011," IDB Publications 85133, Inter-American Development Bank.
  3. Anila Channa & Jean-Paul Faguet, 2012. "Decentralization of Health and Education in Developing Countries: A Quality-Adjusted Review of the Empirical Literature," STICERD - Economic Organisation and Public Policy Discussion Papers Series 038, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

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