Decentralization and Bailouts in Colombia

INTRODUCTION. Within the Latin American context Colombia is in a relatively advanced stage in terms of decentralization. According to the IDB (1997), it ranks third in the region after Argentina and Brazil, two countries organized as Federal States. While in 1995 average public expenditure allocated by sub-national governments amounted to 15% of total public expenditure in Latin America and to 35% in the OECD countries, it reached 39% in the case of Colombia. Economic activity is also very decentralized compared to other Latin American countries. Descentralization has meny benefits, but it can also weaken fiscal discipline; specifically, expectations on the possibility of a bailout by central government create incentives for fiscal misbehavior; fiscal discipline does not pay because it carries a smaller expected bailout. In Colombia the substantial transfer form the central government to the sub-regions created structural expenditure pressures and irresponsible behavior in terms of debt (mainly loans from banks), brought the departments into default and forced the central government to bail them out.