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

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

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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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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  1. 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.
  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.
  3. Balaguer-Coll, Maria Teresa & Prior, Diego & Tortosa-Ausina, Emili, 2007. "On the determinants of local government performance: A two-stage nonparametric approach," European Economic Review, Elsevier, vol. 51(2), pages 425-451, February.
  4. Edward Glaeser & Giacomo Ponzetto & Andrei Shleifer, 2007. "Why does democracy need education?," Journal of Economic Growth, Springer, vol. 12(2), pages 77-99, June.
  5. Bahl, Roy & Martinez-Vazquez, Jorge, 2006. "Sequencing fiscal decentralization," Policy Research Working Paper Series 3914, The World Bank.
  6. Francesco Caselli & Guy Michaels, 2013. "Do oil windfalls improve living standards?: evidence from Brazil," LSE Research Online Documents on Economics 48086, London School of Economics and Political Science, LSE Library.
  7. Araujo, M. Caridad & Ferreira, Francisco H.G. & Lanjouw, Peter & Ozler, Berk, 2006. "Local inequality and project choice : theory and evidence from Ecuador," Policy Research Working Paper Series 3997, The World Bank.
  8. Susan Steiner, 2010. "How Important is the Capacity of Local Governments for Improvements in Welfare? Evidence from Decentralised Uganda," Journal of Development Studies, Taylor & Francis Journals, vol. 46(4), pages 644-661.
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