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

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  • 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.

Suggested Citation

  • Gonzalez, Christian Y. & Rosenblatt, David & Webb, Steven B., 2002. "Stabilizing intergovernmental transfers in Latin America : a complement to national/subnational fiscal rules?," Policy Research Working Paper Series 2869, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2869
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Consejo Directivo, 2003. "Misión del ingreso público: Informe del Consejo Directivo," CUADERNOS DE FEDESARROLLO 012731, FEDESARROLLO.
    2. World Bank, 2003. "Decentralizing Indonesia : A Regional Public Expenditure Review Overview Report," World Bank Other Operational Studies 14632, The World Bank.
    3. Mariano Tommasi & Miguel Braun, 2002. "Fiscal Rules for Subnational Governments. Some Organizing Principles and Latin American Experiences," Working Papers 44, Universidad de San Andres, Departamento de Economia, revised Mar 2002.
    4. World Bank, 2009. "Colombia - Decentralization : Options and Incentives for Efficiency - Sector Annexes," World Bank Other Operational Studies 3097, The World Bank.
    5. 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 4334, Inter-American Development Bank, Research Department.
    6. repec:idb:idbbks:6883 is not listed on IDEAS
    7. World Bank, 2009. "Colombia - Decentralization : Options and Incentives for Efficiency - Main Report," World Bank Other Operational Studies 3096, The World Bank.
    8. Mariano Tommasi, 2002. "Federalism in Argentina and the Reforms of the 1990s," Working Papers 48, Universidad de San Andres, Departamento de Economia, revised May 2002.
    9. Vicente Fretes Cibils & Teresa Ter-Minassian & J. Sebastián Scrofina & Federico Ortega & Germán Ríos & Alejandro Rasteletti & Arturo Ramírez Verdugo & Emilio Pineda & Jorge Martínez-Vázquez & Cristián, 2015. "Decentralizing Revenue in Latin America: Why and How," IDB Publications (Books), Inter-American Development Bank, number 88858 edited by Vicente Fretes Cibils & Teresa Ter-Minassian, February.
    10. 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, November.
    11. Germán Ríos & Federico Ortega & J. Sebastián Scrofina, 2012. "Sub-national Revenue Mobilization in Latin America and Caribbean Countries: The Case of Venezuela," IDB Publications (Working Papers) 4052, Inter-American Development Bank.
    12. Miguel Braun & Luciano di Gresia, 2003. "Towards Effective Social Insurance in Latin America: The Importance of Countercyclical Fiscal Policy," Research Department Publications 4333, Inter-American Development Bank, Research Department.
    13. World Bank, 2003. "Argentina : Reforming Policies and Institutions for Efficiency and Equity of Public Expenditures," World Bank Other Operational Studies 14637, The World Bank.
    14. Fardoust, Shahrokh & Lin, Justin Yifu & Luo, Xubei, 2012. "Demystifying China's fiscal stimulus," Policy Research Working Paper Series 6221, The World Bank.

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