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Decentralization and Fiscal Discipline in Subnational Governments:The Bailout Problem in Uruguay

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  • Fernando Filgueira
  • Fernando Lorenzo
  • Juan Andrés Moraes
  • Herman Kamil
  • Andrés Rius

Abstract

This paper analyzes the reasons behind Central Government (CG) bailouts of Subnational Governments (SNGs) in the case of Uruguay. We argued that Uruguay represents a good example of the risks of fiscal decentralization, in the context of adjustment policies, and when SNGs` responsibilities and resources have not been carefully defined. We show that, in unitary countries where SNGs lack the opportunities to misbehave that they have in federal countries (e. g. , public debt issuance, international borrowing), SNG officials find ways to finance deficits through non-compliance with politically contestable obligations. In particular, SNGs in Uruguay finance their deficits by accumulating debts with other government agencies and obtaining discretionary transfers from the CG. Through statistical analyses we show that debts and deficits are mainly related to vertical fiscal imbalances and economic conditions in the SN jurisdictions. Yet, the analysis of recent bailout episodes suggests that institutions and political factors play a role (i. e. , they are important ex-post factors). This implies that bailouts have been more than simple compensations for structural imbalances, thus creating opportunities for strategic behavior on the part of SNG authorities (partly confirmed by the disparate fiscal performance of Montevideo vis-à-vis the rest of the country).

Suggested Citation

  • Fernando Filgueira & Fernando Lorenzo & Juan Andrés Moraes & Herman Kamil & Andrés Rius, 2002. "Decentralization and Fiscal Discipline in Subnational Governments:The Bailout Problem in Uruguay," Research Department Publications 3152, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:3152
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    File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=R-459&pub_file_name=pubR-459.pdf
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    References listed on IDEAS

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    1. Alesina, Alberto & Hausmann, Ricardo & Hommes, Rudolf & Stein, Ernesto, 1999. "Budget institutions and fiscal performance in Latin America," Journal of Development Economics, Elsevier, vol. 59(2), pages 253-273, August.
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    Cited by:

    1. Aldasoro, Iñaki & Seiferling, Mike, 2014. "Vertical fiscal imbalances and the accumulation of government debt," SAFE Working Paper Series 61, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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