Local financing and taxation in Latin America by Verónica Sanz

Collection of Studies into Local and Regional Public Policies on Social Cohesion

Local Financing and Taxation in Latin America

Collection of Studies into Local and Regional Public Policies on Social Cohesion

Clemente Ruiz Durán Professor at the School of Economics of the National Autonomous University of Mexico (UNAM) since 1978 and full-time tenured professor since 1982. He is also a member of the National System of Researchers (Level III). He graduated in Economics from Anáhuac University (1967-1972) and subsequently specialised in Welfare Institutions, at Uppsala University in Sweden (1971). He received his doctorate from the University of Pittsburgh in the United States (1975). In 2004, he was awarded an honorary doctorate by the University of Baja California (Mexico).

This document has been produced within the framework of a European Union grant. The content of this document is the exclusive responsibility of the author and should not in any way be considered a reflection of the position held by the European Union. Editor: URB-AL III Programme Còrsega, 273-279 08008 Barcelona Tel. +34 934 049 470 Fax +34 934 022 473 E-mail info@urb-al3.eu www.urb-al3.eu © Publisher: Diputació de Barcelona (URB-AL III Programme Orientation and Coordination Office) Editorial Board: Agustí Fernández de Losada, Octavi de la Varga, Eduardo Feldman, Carla Cors, Víctor Godínez and Verónica Sanz Editing: Directorate of Communication, Diputació de Barcelona Design: Estudi Josep Bagà Printing: DRG LD: B. 14929-2012

Local Financing and Taxation in Latin America Clemente Ruiz Durán

Table of contents

11 Preface 13 Introduction 15 1. Building dialogue around social cohesion: the European Union and Latin America 23 2. Latin America and the European Union: two inequalities to reflect on 31 3. The debate on macro-balances, democracy and social cohesion models 47 4. Territorial development in democracy: decentralised public finance 67 5. The debate on transfers: the path of concerted decentralisation in Latin America 87 6. Latin America: welfare levels, decentralisation of basic services, overview and initial efforts to assess the impact 129 7. Latin America: an analysis of the impact of decentralised expenditure on building productive capacities 149 Conclusions: at the start of an agenda for democratic strengthening 153 Bibliography List of tables, charts and diagrams Tables 27 Table 1. Latin America: government revenue and expenditure (% of GDP) 28 Table 2. European Union: government revenue and expenditure (% of GDP) 35 Table 3. Latin America: budget powers of the legislature and of the executive 37 Table 4. European Union: governmental organisation and representatives of the European Parliament 39 Table 5. Latin America: public social expenditure as a percentage of gross domestic product (GDP) 40 Table 6. European Union (19): public social expenditure as a percentage of gross domestic product (GDP) 42 Table 7. Latin America: structure of social expenditure by budget item (base year 2006) 45 Table 8. Latin America. Indicators of coverage and public expenditure on Conditional Transfer Programmes, 2007 to 2010 48 Table 9. Latin America: political structure for territorial governance 50 Table 10. Latin America: expenditure of sub-national governments as a % of GDP and as a % of public sector expenditure 51 Table 11. European Union (27): expenditure and revenue by level of government (% of GDP) 54 Table 12. Structure of the total revenue of sub-national governments, 2008, as a % of total GDP 56 Table 13. Latin America: allocation of fiscal powers by level of government 59 Table 14. Public expenditure by level of government in Argentina, Brazil and . Mexico, 1994-2009

60 Table 15. Argentina: structure of the total expenditure of the provinces, yearly averages from 1996-2006 62 Table 16. Brazil: structure of state expenditure by large groups, yearly averages from 1996-2006 64 Table 17. Mexico: structure of the gross total expenditure of federative institutions, yearly averages from 1996-2006 73 Table 18. Argentina: own revenue and transfers to the provinces 74 Table 19. Brazil: transfers to states and municipalities, 2010 78 Table 20. Chile: public revenue as a % of GDP 82 Table 21. Mexico: shares in federal revenue and contributions paid to states, municipalities and Federal District from January to December 2010 84 Table 22. Factors conditioning transfers and type of decentralisation 87 Table 23. Infant mortality ratio (per 1,000 live births) 88 Table 24. Maternal mortality ratio (per 100,000 births) 89 Table 25. Improved sources of drinking water (% of population with access) 90 Table 26. Life expectancy at birth (years) 91 Table 27. Primary education completion rate (% of the total) 92 Table 28. Latin America, selected countries: principal areas of decentralised expenditure 93 Table 29. Brazil: literacy in persons aged 15 years and above (percentage) 94 Table 30. Brazil: coverage of basic education (percentage) 96 Table 31. Brazil: infant mortality ratio (under one year of age) 97 Table 32. Brazil: percentage of homes with access to drainage and electricity 99 Table 33. Brazil: percentage of people living in homes with access to drinking water and a solid floor 101 Table 34. Brazil: reduction of poverty, 2005-2009 103 Table 35. Chile: coverage of basic education (% of students of typical age) 104 Table 36. Chile: coverage of public health services (% of total population) 105 Table 37. Chile: people living in poverty (% of total population) 106 Table 38. Chile: coverage of basic services (% of total homes with access to the service) 107 Table 39. Chile: life expectancy at birth (years) 108 Table 40. Chile: average schooling of the population aged 15 and above (years) 111 Table 41. Mexico: literacy rate 112 Table 42. Mexico: coverage of primary and secondary education 114 Table 43. Mexico: average level of schooling 116 Table 44. Mexico: infant mortality ratio (under one year of age) 118 Table 45. Mexico: life expectancy at birth 119 Table 46. Mexico: coverage of health services 121 Table 47. Mexico: evolution of the coverage of basic services and conditions in homes 123 Table 48. Mexico: evolution of the Gini coefficient, 2000-2008 132 Table 49. Latin America: contribution of SMEs (% of total) 140 Table 50. Brazil: sub-national business development (number of businesses) 141 Table 51. Mexico: sub-national business development (number of businesses)

Charts Â 23 Chart 1. Latin America: size of its economies, 2009 24 Chart 2. The European Union: size of its economies, 2009 25 Chart 3. Sigma Convergence: Latin America and the European Union 25 Chart 4. GDP per capita in the European Union and Latin America 26 Chart 5. Latin America: unequal regions 32 Chart 6. Restructuring of public and trade deficit from 1990 to 2010 33 Chart 7. European Union (27): deterioration of the fiscal situation 34 Chart 8. European Union (27): public deficit, featuring representation of the . cohesion process 52 Chart 9. European Union (27): local government expenditure as a proportion of . GDP 57 Chart 10. Latin America: tax revenue by level of government, 2008 (as a % of . GDP) 125 Chart 11. Impact of decentralisation on infant mortality 126 Chart 12. Students who reach the final grade of primary education 127 Chart 13. Spending and inequality, an approach based on the Gini coefficient 143 Chart 14. Brazil: impact of decentralised expenditure on the generation of .. economic units, 2000-2006 144 Chart 15. Brazil: impact of decentralised expenditure on the generation of added value, 2000-2006 144 Chart 16. Brazil: impact of decentralised expenditure on the generation of employment, 2000-2006 145 Chart 17. Mexico: impact of decentralised expenditure on the opening of . economic units, 2003-2008 146 Chart 18. Mexico: impact of decentralised expenditure on the growth of added . value, 2003-2008 146 Chart 19. Mexico: impact of decentralised expenditure on the accumulation of . capital, 2003-2008 147 Chart 20. Mexico: impact of decentralised expenditure on the generation of ... employment, 2003-2008 Diagrams

20 70 72 76 77 80 81 84

Diagram A. Latin America: the path to decentralisation Diagram 1. Financing of decentralisation Diagram 2. Argentina: main federal transfers Diagram 3. Brazil: main federal transfers Diagram 4. Chile: main transfers to municipalities Diagram 5. Mexico: transfer from federal government (shares) Diagram 6. Mexico: transfer from federal government (contributions) Diagram 7. Latin America: system of transfers

Preface

The series Studies into Local and Regional Public Policies on Social Cohesion has been produced by the URB-AL III Programme Orientation and Coordination Office. Its aim is to explore the current situation with regard to a set of core problems in the present agenda for political bi-regional European UnionLatin American discussions on social cohesion. This second issue deals with the subject of local taxation and financing and its relation with social cohesion. Local governments have the job of fostering territorial development, improving people’s quality of life and answering public demand for basic services. They are also increasingly providing public responses to a series of social problems for which they are not legally responsible. Local governments in practice are therefore making up for shortfalls that originate at higher levels of government. Local administrations are also increasingly required to provide territorial responses to problems of an international nature. However, in contexts typified by insufficient public resources, particularly from taxation, either collected locally or on a nationwide basis, it is very hard to provide quality local responses to deal with this series of challenges.

ever important question of what should be done to enhance the efficiency and effectiveness of local tax collection should not be neglected, there is also a political need to tie reflections on local taxation and financing to other problems: first, to the quality and the performance of the taxation systems to which they belong; second, to the real status and workings of intergovernmental relations; and third, to how the decentralisation agenda stands. Improvements in financing local public policies in order to enhance territorial social cohesion requires progress in all areas. Debate on local financing and taxation is therefore a core part of the current agenda of political and institutional challenges that must be dealt with in order to increase the quality of public responses to problems that threaten social cohesion in Latin America. Agustí Fernández de Losada, Director of International Relations at Diputació de Barcelona and General Coordinator of the URB-AL III Programme Orientation and Coordination Office.

Given that the financial resources available to local governments condition their scope and performance, reflection on matters of local taxation and financing is a political necessity. Most local resources come from shared taxes and from intergovernmental transfers (whether earmarked or not). Although the

Introduction

This document has been produced within the URB-AL III Program, a regional cooperation programme run by the European Commission with Latin America, the aim of which is to help increase the level of social and territorial cohesion in sub-national and regional communities in Latin America URB-AL III has generated a series of documents that have enhanced the understanding of the problems associated with social cohesion and have been generated on the basis of other documents produced in the previous phase of the programme. Of particular significance are the documents by Godínez (2007 and 2009) ‘Social cohesion and decentralised cooperation. The European-Latin American experience’ and ‘Local policies for social and territorial cohesion in Latin America in an environment of international financial crisis.’ Both describe the context of social cohesion in the region and the way in which decentralised cooperation can help to achieve it. Against this background, this document intends to analyse how the Latin American region has attempted to strengthen local development through fiscal decentralisation, and the impact that this has had on different social cohesion indicators. This should provide the URBAL Programme with elements with which it can focus its work of cooperation with the region.

1. Building dialogue around social cohesion: the European Union and Latin America

In November 2010, the European Union issued its fifth report on economic, social and territorial cohesion entitled ‘Investing in Europe’s future.’ In this report, the European Commissioner for Regional Policy and the European Commissioner for Employment, Social Affairs and Inclusion stated: ‘The Union, especially during these difficult times, needs Cohesion Policy. It needs a policy that can make the investments that will help the Union and its regions emerge from the crisis, reduce disparities, and contribute to meeting the ambitious objectives of the Europe 2020 strategy. Cohesion Policy has already helped to improve economic, social and environmental conditions within our Union, as shown by our evaluations. However, these same evaluations concluded that focusing on a few key priorities, especially in the more developed regions, would be more effective. Therefore, Cohesion Policy should become more selective.’1 This European Union outlook underlines the need to redesign cohesion strategy, to base it on a limited number of goals for each programme and to closely monitor the progress made. ‘In the current period, Cohesion Policy has already been closely aligned with the objectives of the Lisbon Strategy. The link to the Europe 2020 strategy must be even stronger in the future. This requires putting in place good programmes, with clear conditions

1 EU European Commission (2010). ‘Investing in Europe’s future. Fifth report on economic, social and territorial cohesion.’

and strong incentives. Pre-conditions could require, for example, that investment in environmental infrastructure is preceded by a transposition of the relevant EU environmental legislation. Incentives would reward regions and countries that have performed well and reached agreed European objectives.’ This assessment of what has occurred in the European Union in the midst of the crisis and the results of cohesion policy point to an institution capable of evaluating the impact of policies and able to make corrections along the way. This contrasts with the lack of institutional models assessing cohesion policy in Latin America. The basic difference lies in the fact there is no supranational mechanism responsible for cohesion policies, as there is in Europe. However, a series of agreements gradually reached by the region’s governments has sought to make social cohesion a core feature of economic policy. This has been enhanced by relations with the European Union through the establishment of a series of summit meetings held with a view to evaluating progress made in economic cohesion, fighting poverty, and in equality and social justice. The first was held in Rio de Janeiro, Brazil, in 1999; the second in Madrid, Spain, in 2002; the third in Guadalajara, Mexico, in 2004; the fourth in Vienna, Austria, in 2006 (the main aim of which was to establish, by 2010, a Euro-Latin American Free Trade Area); the fifth was held from 13 to 17 May 2008 in Lima, Peru, and

sought to create an association of social areas, of knowledge and of achievement in sustainable development, and a strategic association between Latin America and Europe, based on the assertion that social cohesion is a priority issue that must be tackled by the governments of both regions in order to overcome the problems arising from poverty, social inequality and exclusion. These are the problems that hinder sustainable economic growth and quality democracy in Latin American countries. Article 11 of the Lima Declaration states: ‘We confirm that the fight against poverty, inequality and exclusion in order to achieve or increase social cohesion is a key policy priority of the strategic partnership between our regions. They remain an important focus for our dialogue and cooperation at national, sub-regional and regional level. We reiterate the primary responsibility of our governments, cooperating with all relevant actors, among them civil society, to implement policies towards this objective.’ The sixth summit, held in Madrid from 17 to 19 May 2010 and entitled ‘Innovation and technology for sustainable development and social inclusion,’ saw the establishment of three trade agreements, the creation of a foundation, a line of financing and strengthening of bi-regional political dialogue. Since the Rio de Janeiro Summit (1999), social cohesion has thus become the focus of relations and political dialogue between the European Union and Latin America. It is however evident that social

cohesion is not solely a matter of guaranteeing access to basic social services, but also the series of policies geared to fostering equal opportunities, active citizen participation and peaceful coexistence among heterogeneous groups. Against this background, five policy sectors were defined: (i) productive-occupational; (ii) social: universal access to basic social services and public security; (iii) reduction in territorial imbalances; (iv) construction of active citizenship; (v) strengthening of institutions and local taxation systems. The following social cohesion criteria were also added: (i) equality and social inclusion; (ii) belonging; (iii) recognition; (iv) legitimacy and (v) participation. The work of these meetings was preceded by the URB-AL Programme, created in 1995 as a community initiative intended to establish lasting and stable collaborative ties among European and Latin American cities. The lessons learned in the first two phases of the URB-AL Programme, in which 13 themebased networks were established, led to URB-AL III, in which 20 projects that will have a direct impact on 74 territories in Latin America have been approved. The beneficiaries of the programme are, first, governments of sub-national groups in Latin America that are implementing public policies in favour of social and territorial cohesion. The citizens of the territories either directly or indirectly favoured by the implementation of the projects will also benefit; as will all those people who may benefit in the mediumterm from the consolidation or

innovation of the public cohesion policies that either arise or are devised while the programme is being implemented. The aim is to set into operation different initiatives that foster social and territorial cohesion in Latin America through different areas of intervention: local governance, crossborder cooperation, migration, waste management, public security, the employment of women, urban development and territorial management. In order to help create the proper conditions to achieve the programme’s general and specific objective, in its third phase the European Commission founded the URB-AL III Orientation and Coordination Office (OCO), which is headed by Diputació de Barcelona in association with the International and Ibero-American Foundation of Public Administration and Policies (FIIAPP), the Municipality of San José (Costa Rica), the Municipality of Bogotá (Colombia), the Province of Santa Fe (Argentina), and the region of Tuscany (Italy). The URB-AL III Programme has established a place for discussion prompted by a series of core documents, which has led to progress in the definition of an agenda and specific goals. The production of this document involved the recovery of some of these texts, of which the document ‘Local policies for social and territorial cohesion in Latin America in an environment of international financial crisis’ (Godínez, 2010) is particularly significant. This document sketches out a series of considerations intended for the production, at URB-AL

III, of an overview of the great problems and priorities of a possible agenda of local policies of social and territorial cohesion in Latin America. It mentions that ‘in the territorial sphere, in order to guarantee its efficiency, public policy can be considered to be a set of policies which are inextricably interlaced, similar, and immersed in inseparable processes, which require mechanisms and instruments which help them operate consistently and synergistically. Another aspect is that the political and institutional practice has established a varyingly broad platform of relatively specialised sectorial measures which operate separately and are almost always scattered. In light of this, we would like to rescue and highlight the great opportunity of a programme such as URB-AL III in building different and more efficacious methods for intervention which contribute to the articulation of the local public policies on social and territorial cohesion. The atomisation of these policies can be overcome, but that requires the previous establishment of a field of reflection and initiatives which is designed to transcend the limits of sectorial and functional specialisation in order to obtain better results and an optimal use of the resources.’ The document thus stresses a need for the territorial interrelation of sectorial policies, and also for multi-level and multi-sectorial coordination of public policies. Different levels of government must thus emphasise that the process of public expenditure always takes place within a spatial context, and that debate conducted in most parliaments takes place on an aggregate basis without mention of

its territorial impact and content. It stresses that ‘proper political and institutional management of the relationships between the local, intermediary, and national levels is a crucial factor improving the productivity of the local efforts for improvement in the area of social and territorial cohesion.’ The priorities defined as essential in the document are: (i) functional association of economic growth and the productive employment of the population; (ii) reactivating sustainable policies for the redistribution of income and wealth that involve a lasting reduction in poverty levels, accompanied by planned measures designed to slow and reverse mechanisms of reproduction and intergenerational transmission of social inequality, particularly in education and health; (iii) reducing territorial inequalities, for which multi-level and intersectorial articulation and coordination of public policies are proposed in accordance with explicit social and territorial cohesion objectives, which must also involve stronger tax systems to sustain social cohesion policies at all levels of government and a reform of the State to open up areas for the political and institutional reinforcement of local government in Latin America. It likewise points out that in the political sphere of the proposals, the main objective is to strengthen democratic institutional frameworks and for society to establish mechanisms to protect social expenditure from economic upsets. The problem of financing is dealt with in the document ‘Financing policies for social cohesion and decentralisation in

Latin America’ (Cetrángolo, Goldschmidt and Jiménez, 2010), which acknowledges the heterogeneous nature of the countries, and states that ‘in view of such a diverse socio-economic situation, the region is showing progress in decentralisation processes both in countries with a high level of development and in those that are less developed and have greater social disadvantages, while varied incentives and dynamics are being identified for each country. In addition to these characteristics, analysis has been performed on the fact that the decentralisation of functions increases demand for resources from sub-national governments, which triggers fiscal tensions. Two problems that substantially condition the attainment of the objectives pursued by public decentralisation policies have been underlined. The first has to do with the difficulties that countries in the region experience in collecting adequate tax revenues. The second is that uneven territorial distribution of tax bases makes it very difficult to fulfil the fiscal coresponsibility goals that many of the ongoing decentralisation processes would require.’ Another area for dialogue on social cohesion between both regions has been the Observatory for European UnionLatin America Decentralised Cooperation, which, at its Fifth Conference held in Brussels on 28 and 29 October 2010, indicated the negative effects of the crisis on public decentralised cooperation, the fundaments of which are: (i) solidarity with the have-nots must not

be abandoned; (ii) the co-responsibility of Europe’s local governments that have assumed a development logic has allowed for the formation of public decentralised cooperation policies in the countries of Latin America, the impact of which are clearly visible and measurable in terms of local development; (iii) progressive raising of public awareness, which may be extended by making it more visible, that public decentralised cooperation is a ‘natural policy’ of local government and is also at the heart of public action as it allows for accompaniment and reinforcement of installed democratisation processes, like those of decentralisation, and provides a local response to an aspiration for internationalisation and/or an openness to citizenry; (iv) the chance for local governments to make their territories known internationally, which legitimises public decentralised cooperation as a contribution to local development; (v) the reciprocal benefits to local governments of generating exchanges and establishing best practices through the creation of networks with which to tackle the challenges of territorial development both in Latin America and in Europe, and institutionalising their public decentralised cooperation policy. Another significant precedent in creating this dialogue is the first meeting of URBsociAL, Euro-Latin American Dialogue on Social Cohesion and Local Public Policy, which was held in Sitges, near Barcelona, on 20, 21 and 22 October 2010. This meeting saw the establishment of the Sitges 2010 URBsociAL Agenda,

which brought together the contributions of over 350 participants from 22 countries in Latin America and the European Union and was attended by 50 local and regional elected representatives. The findings of this meeting state: ‘We are facing an economic crisis – not just financial, but also productive; an environmental crisis, due to both the depletion of natural resources and climate change; and a societal and cultural crisis, caused by the vast transformations which are being experienced by the traditional models. The size of this crisis, together with its speed and constant transformation, has provoked a growing unease which can be seen in both the social fabric –in inequality, social exclusion, intolerance, and the loss of the sense of belonging to a community– and in the different levels of government, which have seen their ability to face the new changes reduced and which are confronting the challenge to generate new models of intervention. As a result, the difficulty of responding to the current challenges of society with traditional public policy has become evident. In this context, we would like to highlight the value of new proposals for public intervention which are carried out by sub-state institutions based on concepts such as proximity, subsidiarity, innovation, territorial competitiveness, and relationship management. We have before us a veritable testing ground of initiatives for endogenous development which may respond to the needs that national public policies alone cannot satisfy. One of the most glaring paradoxes of the crisis is that the gap between economic growth and development is

growing larger every day. In this context, social cohesion emerges as a necessary reference goal; it is difficult to advance on other fronts without having a united society, one with sufficient levels of fairness, and which possesses a solid and fully shared collective project. Its particular link with local issues stems from this. The local aspect, however, is no longer just a platform on which problems which respond to global logics are unequivocally manifested. It has also effectively shown its qualities as a laboratory for suitable

to collect.’

solutions for these problems, particularly in Latin America, despite the existence of decentralisation processes which have not yet been fulfilled or which are poorly designed.’ The findings go on to state: ‘Decentralisation is a key factor in favouring the emergence of governmental formulas and the provision of socially efficient public services. This also broadens the sphere of citizen monitoring of public affairs. However, the complete realisation of the promises associated with decentralisation also requires fiscal decentralisation, appropriate tax policies, and the possibility for local governments Diagram A. Latin America: the path to decentralisation

Centralism (1970s)

The above reflection has led to the production of this document, the purpose of which is to explore how fiscal decentralisation in Latin America has served to increase social cohesion in a region with inequalities. Work towards fiscal decentralisation in Latin America became more defined in the region after the foreign debt crisis, in which central government lost the capacity to respond to the challenges of development, thus prompting a process towards decentralisation. The processes have nevertheless been highly inconsistent and this has also meant unequal impact on social cohesion.

• Bureaucratic regimes • State-driven • Political legitimisation

Crisis of centralism (1980s) • Growing foreign debt • Crisis of efficiency • Debt crisis

Decentralisation and change of paradigm (1990s) • Macro-economic stability • Democracy • Models of powers

Decentralisation and equity • Rights • Transfers • Social cohesion (health, education, basic services)

2. Latin America and the European Union: two inequalities to reflect on

Over recent decades, the European Union and Latin America have been faced with great changes; the number of countries in the Union gradually increased. There were twelve members in 1990; Austria, Finland and Sweden joined in 1995; the Czech Republic, Cyprus, Slovakia, Slovenia, Estonia, Hungary, Latvia, Lithuania, Malta and Poland joined in 2004, and, lastly, Rumania and Bulgaria joined in 2007, to form the EU-27. In the same period, Latin America saw significant transformations in production, which prompted a rise in its GDP from 81 billion dollars in 1960, to 4,180 billion dollars in 2009 (51 times), and opened the way for growing interaction with global society. Growth in production capacity has placed Brazil and Mexico among the worldâ&#x20AC;&#x2122;s top fifteen

Chart 1. Latin America: size of its economies, 2009

1,600

economies, in contrast with Honduras and Paraguay, which amount to only 1% of the Brazilian economy. These figures contrast with those for European Union GDP in 2009, which was four times greater than that of Latin America and amounted to 16,378 billion dollars. Inequality in Europe is, however, greater than that observed in Latin America, as German GDP is 416 times higher than Maltaâ&#x20AC;&#x2122;s. Hence, dialogue between the two regions is based on the notion of inequality for which, while acknowledging the differences, there is a search for common goals such as drawing levels of welfare closer together, both within each region and between the two regions. The development of Latin America has

1,573

1,200 1,000

875

800

El Salvador

Bolivia

Honduras

Paraguay

164 130

Panama

234

200

Costa Rica

326 307

Uruguay

400

Guatemala

600

Ecuador

Billions of current dollars

1,400

Peru

Chile

Colombia

Argentina

Venezuela

Source: World Bank.

Mexico

Brazil

Chart 2. The European Union: size of its economies, 2009

3,500

0.9 0.85 Standard deviation

2,000 1,500

0.8 0.75 0.7

Levels of income per inhabitant are extremely unequal in the two regions. In Latin America, there are countries

Malta

where incomes are below 2,700 dollars per inhabitant (Haiti, Bolivia, Honduras, Nicaragua, and Paraguay); others where incomes are under 7,500 dollars (Guatemala, El Salvador, Belize, Ecuador, Peru, Jamaica, Colombia, Costa Rica, Panama and the Dominican Republic); and others where incomes exceed 7,500 dollars (Argentina, Brazil, Mexico, Uruguay, Chile and Venezuela). The situation in the European Union differs depending on whether it is the EU-17 or the EU-27 that is considered. Analysis of the EU-17 yields levels of inequality that are lower than in Latin America, but consideration of the EU-27 reveals greater differences and a trend towards growing inequality since the crisis of 2009.

0.5 Source: created by the author based on World Bank data.

Source: created by the author based on Eurostat and World Bank data.

2001

2002 EU (17)

2003

2004

EU (27)

2005

2006

2007

2008

2009

LA (19)

100

Chart 4. GDP per capita in the European Union and Latin America

90 GDP pc (thousands of dollars), 2006

Estonia

Latvia

Cyprus

Lithuania

Bulgaria

Slovenia

Slovakia

Luxembourg

Hungary

Romania

Ireland

Czech Rep.

Finland

Portugal

Greece

Denmark

Austria

Sweden

Poland

Holland

0.55 Belgium

0 Italy

0.6

Spain

500

France

0.65

United Kingdom

1,000

been accompanied by the growth in its population, one of the worldâ&#x20AC;&#x2122;s most dynamic, from 218 million people in 1960 to 578 million people in 2009, in contrast with the European Union, the population of which remained steady in this period and increased from 471 million to 499 million. The dynamics of population growth become clearer upon observation that in 2009 European Union GDP per inhabitant amounted to 33,000 dollars, while the equivalent figure in the Latin American region was only 7,221 dollars. The effort made does nonetheless require acknowledgement as it had been only 372 dollars in 1960.

0.95

2,500

Germany

Billions of current dollars

3,000

Chart 3. Sigma Convergence: Latin America and the European Union

Luxembourg Capital

80 70

Brussels Capital London

60 50 40 30 20

Severozapaden (Bulgaria)

Federal District (Mexico) Antofagasta (Chile) Federal District (Brazil)

VaupĂŠs (Colombia)

0 0 50 100 150 200 250 300 350 400 Number of sub-national governments Source: Eurostat, statistics institutes of countries in the study.

European Union1

Latin America2

1. Includes European Union (27); 2. Includes Argentina, Brazil, Chile, Colombia, Mexico

This level of inequality is repeated within countries (see chart 4); consideration of the 129 sub-national divisions of Argentina, Brazil, Chile, Colombia and Mexico as a whole shows a great difference between the highest revenue per inhabitant, which is in Mexico City, and the lowest, in Vichada, Colombia; the highest is 19.7 times greater than the lowest. In Europe, the region with the highest income is London, and the lowest is Severozapaden, in Bulgaria; there is a difference of 395 times, which is considerably greater than that observed in Latin America.

Public budget size as a proportion of GDP is extremely heterogeneous; in 2009, expenditure in Bolivia was three times higher than that of Guatemala. This

national divisions of Latin America. Inequality in Argentina and Colombia remain high, while there have been reductions in Brazil, Chile and Mexico. This inequality contrasts with equality levels among regions in the United States and Spain, where levels are lower than those observed in Chile and Mexico, as shown in chart 5.

shows the regional differences with regard to the public sector’s role in economic restructuring.

Public revenue

Table 1. Latin America: government revenue and expenditure (% of GDP)

Public expenditure

2000

2005

2009

2000

2005

2009

Bolivia

33.7

31.7

44.6

37.4

34.0

44.5

Brazil

32.5

36.6

38.5

36.0

40.0

41.9

Ecuador

25.4

24.8

34.8

24.0

39.3

Paraguay

24.1

31.8

30.1

28.3

33.5

33.6

Argentina

23.2

26.9

27.8

30.4

30.5

30.0

Uruguay

26.1

28.0

27.7

29.0

28.7

29.9

Colombia

28.1

29.1

27.6

31.6

29.5

29.8

Panama

25.9

22.4

25.2

25.6

25.1

28.5

Venezuela

32.7

37.6

24.8

25.4

25.7

26.2

Mexico

18.7

21.1

23.6

19.6

21.2

25.9

0.4

Nicaragua

18.9

21.4

22.3

19.2

24.4

0.3

Chile

21.6

23.8

20.0

23.6

23.2

23.6

0.2

Peru

15.9

17.4

18.2

19.7

19.8

23.5

Honduras

16.1

17.6

17.4

18.8

17.3

20.8

El Salvador

15.8

16.2

17.0

19.2

17.7

20.1

Costa Rica

12.2

13.5

13.7

15.0

15.1

16.7

Guatemala

10.4

12.0

11.1

12.2

13.7

14.2

Latin America (17)

22.4

24.2

24.9

24.6

27.8

There are divergent trends in the evolution of income per inhabitant in the sub-

In this context of inequality, it has been determined that one of the fundamental problems of Latin America, when introducing programmes to limit inequality, is the fiscal weakness of the region’s governments to support more profound changes in production.

0.8

Chart 5. Latin America: unequal regions

Standard deviation of income per inhabitant

0.7 0.6 0.5

0.1 0.0 Argentina Brazil Chile Colombia Mexico USA Spain

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0.61 0.63 0.62 0.64 0.64 0.65 0.65 0.66 0.66 0.64 0.63 0.58 0.58 0.62 0.66 0.61 0.66 0.67 0.59 0.57 0.55 0.56 0.56 0.55 0.55 0.54 0.51 0.51 0.51 0.50 0.49 0.46 0.45 0.44 0.44 0.43 0.42 0.42 0.55 0.52 0.51 0.55 0.55 0.55 0.55 0.55 0.67 0.67 0.51 0.51 0.50 0.49 0.47 0.25 0.24 0.24 0.24 0.25 0.24 0.24 0.24 0.24 0.25 0.25 0.25 0.25

Source: IDB, Latin American and Caribbean Macro Watch.

0.21 0.21 0.21 0.20 0.20 0.19

This contrasts with the situation prevailing in the European Union; comparison of average public expenditure of the two regions shows that the average European budget is nearly twice the Latin American average. There is greater homogeneity, as the difference between the greatest and the smallest budget is only 40%. There is therefore a stronger state in Europe for going about the work of cohesion within each country, a dimension in which there are limitations in Latin America. State strength in Europe together with the efforts made to integrate the region –economically, politically and socially– has prompted all the members of the

Public revenue

Table 2. European Union: government revenue and expenditure (% of GDP)

Public expenditure

2000

2005

2009

2000

2005

2009

Germany

46.4

43.5

44.5

45.1

46.8

47.5

Austria

50.3

48.5

48.8

52.2

50.3

53.0

Belgium

49.1

49.4

48.1

49.1

52.2

54.1

Bulgaria

40.7

36.0

41.3

39.7

40.7

Cyprus

34.3

40.5

39.8

36.6

42.9

45.8

Denmark

55.8

57.8

55.6

53.7

52.8

58.4

Slovakia

39.9

35.2

33.6

52.1

38.0

41.5

Slovenia

43.0

43.8

43.1

46.7

45.3

49.0

Spain

38.1

39.4

34.7

39.1

38.4

45.8

Estonia

35.9

35.2

43.4

36.1

33.6

45.2

Finland

55.1

52.7

53.4

48.3

50.2

56.3

France

50.2

50.4

48.7

51.6

53.4

56.2

Greece

43.0

38.6

37.3

46.7

44.0

52.9

Holland

46.1

44.5

45.9

44.2

44.8

51.4

Hungary

43.7

42.3

46.1

46.8

50.2

50.5

Ireland

36.0

35.6

33.9

31.3

34.0

48.2

Italy

45.3

43.8

46.5

46.2

48.2

51.8

Latvia

34.6

35.2

34.6

37.3

35.6

44.2

Lithuania

35.9

32.8

34.5

39.1

33.3

44.0

Luxembourg

43.6

41.5

41.3

37.6

41.5

42.2

Malta

34.8

41.7

39.5

41.0

44.6

43.2

Poland

38.1

39.4

37.2

41.1

43.4

44.5

Portugal

38.2

39.9

39.7

41.1

45.8

49.8

United Kingdom

40.4

40.8

40.3

39.1

44.1

51.4

Czech Rep.

38.1

41.4

40.1

41.8

45.0

45.9

Romania

33.9

32.4

32.1

38.6

33.6

40.6

Sweden

58.7

55.8

54.2

55.1

53.9

55.2

European Union (27)

45.4

44.3

44.0

45.2

46.8

50.8

Source: Eurostat.

➜

Union to contribute to funds geared to establishing common standards of living, competitiveness, environmental protection and guaranteed citizen participation within each member state. Budgets have therefore been allocated to the following items: 1a) competitiveness; 1b) cohesion; 2) preservation and use of natural resources; 3a) freedom, security and justice; 3b) citizenship; 4) the European Union as a global player; 5) administration; and 6) compensation. In 2010, authorised allocations to these funds accounted for 1% of the GDP of the EU-27. This work enhances integration of standards in the region and provides for greater cohesion among the countries in the Union.

In the Latin American region no effort similar to that of the European Union has been made to implement a process

to establish common standards of living. Concern for reducing inequality has nevertheless been expressed in the

3. The debate on macro-balances, democracy and social cohesion models

document ‘Time for equality: closing gaps, opening trails,’ issued in 2010 by the Economic Commission for Latin America2. The effort has not however been tied to a regional programme that establishes goals aimed at closing gaps among countries with a view to increasing social cohesion; instead, each country has set national targets for raising social cohesion. In practice, the focus has been to decentralise public expenditure as a mechanism for enhancing the development of the areas that lag furthest behind in social welfare, in such a way that transfers from central government to sub-national or municipal institutions have been made with a view to giving local governments a broader institutional base. The aim has therefore been to enhance the management capacity of local development with a view to communities taking responsibility for their own development. Approaches to establishing common standards of living have taken two divergent paths in the European Union and Latin America. In Europe, the process has been possible because of the strength of the state in each country, and combined with a regional budget, whereas in Latin America fiscal weakness has not allowed for basic social foundations to be laid in countries and the focus has been on the decentralisation to local governments of public expenditure.

ECLAC (2010). ‘Time for equality: closing gaps, opening trails,’ Santiago de Chile.

One of the basic points in contemporary economic discussion has been how the public sector in different regions has responded to the challenges of the global market, how these are influenced by democratic processes, and the nature of the role played by social expenditure, which allows for the maintenance of a cohesion policy against a background of market rivalry and democracy. The discussion points dealt with in this section are intended to offer a new approach to debate on the recent financial crisis in which the role played by democratic institutions in recent economic policy is emphasised.

3.1. Macro-balances in the context of social cohesion After the debt crisis at the end of the twentieth century, Latin America began restructuring its public finances in order to reduce public sector deficit and, meanwhile, changed the design of the balance of payments financing model from a system based on foreign debt to one based on foreign investment. Adjustment of public finance in the 1980s, after a period of expansion between 1978 and 1981, and improvement in the international market’s terms of exchange for its exports and generous international loans from the private sector, enabled the region to implement

expansive economic policies. In turn these prompted economic growth rates of over 4% in 11 Latin American countries. In most cases, however, successes were accompanied by excessive balance of payments deficit. 15 countries therefore ended up with a current account deficit of over 4% of their GDP and in 10 of these cases, deficit was in excess of 5% of GDP. High dependence on foreign financing of public expenditure required adjustment both in fiscal and in foreign accounts. This process led to what can be referred to as a ‘search for macro-balances’ (fiscal and foreign), which in the context of public finance weakness –shown in the previous chapter– led to limitations on expenditure on social development and the sacrificing of social cohesion policies. This situation gradually changed in the 1990s, when several countries began to record trade surpluses based on the export of raw materials, which were reflected in fiscal surpluses. In the 1990 to 2010 period, the countries with the greatest surpluses as a proportion of GDP were Venezuela, Argentina, Brazil, Chile, Ecuador and Peru. In fiscal matters, the only country to maintain an average surplus was Chile, although the fiscal deficits of other countries remained limited and did not exceed 4% in this period. There therefore began structural change towards fiscal budget balancing and trade surpluses, although higher trade and fiscal deficits remained in those countries with a weaker economic structure. The effort to keep a balanced fiscal budget has been

Fiscal deficit as a % of GDP

Venezuela

-5%

Chart 6. Restructuring of public and trade deficit from 1990 to 2010

15%

Fiscal progress in Latin America contrasts with what happened in the European Union during the 2008 financial crisis, which saw a considerable deterioration in public finance, particularly in a group of countries where structural change in terms of public finance and of production structure has not been swift enough. This is the case of Ireland, Greece, Spain, Portugal, Poland and Slovakia. Given that they are tied to the euro monetary system, these countries have been forced to discuss adjustment programmes with the European Union authorities. The

10%

Brazil

Peru Ecuador

Bolivia -4%

-3%

-2%

Colombia

-1%

Uruguay Costa Rica

El Salvador

Nicaragua

Chile 1%

Mexico -5%

-10%

Guatemala

Honduras

5% Argentina

Paraguay

-15% Dominican Rep. -20%

Panama

-25% -30% -35%

Trade deficit as a % of GDP

Source: IADB, Latin American and Caribbean Macro Watch.

Chart 7. European Union (27): deterioration of the fiscal situation

United Kingdom is an interesting case because it has remained outside the euro and can therefore maintain high fiscal deficits compared to countries bounded by monetary union. Macro-balances have therefore become a core item for the development of social cohesion policies, as the markets and prevailing institutional frameworks have forced both regions to deal with the adjustment processes of their weakest members. This will most certainly mean sacrificing the population’s standards

1 0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

helped by growth trends in the prices of the region’s raw materials (oil, copper, lithium, uranium, iron, gold and silver), caused by a rise in demand from countries in East Asia (mainly China and India). This has yielded substantial increases in public revenue in countries with large mineral reserves, without the implementation of deliberate fiscal reforms to raise revenue levels. In its report entitled ‘Latin American Economic Outlook 2009,’ the OECD3 states that ‘the extremely hard training conditions in the crisis years have been stimulated by strong rises in

the prices of oil, copper, natural gas and agricultural products, while the input of foreign capital, which ceased abruptly in 1982, has been generous in recent years, at least until the subprime crisis and severe restriction of world credit.’ It may therefore be argued that the region’s fiscal structure is still highly dependent on natural resources, which has been argued by Izquierdo and Talvi in the document ‘All that glitters may not be gold: assessing Latin America’s recent macro-economic performance’ (IDB 2008).4

4 IDB (2008, April). ‘All That Glitters May Not Be Gold: Assessing Latin America’s Recent Macroeconomic Performance.’ Research Department.

OECD (2008). ‘Latin American Economic Outlook 2009.’

Fiscal deficit as a percentage of GDP

-1 -2 -3 -4 -5 -6 -7

Source: Eurostat.

-8

5.00

Estonia

Sweden

Finland

Luxembourg

Denmark

Bulgaria

Malta

Germany

Belgium

Austria

Hungary

Italy

Cyprus

Czech Rep.

Slovenia

Netherlands

France

Romania

Latvia

Lithuania

Poland

Slovakia

Spain

Portugal

Greece

Ireland

-5.00

United Kingdom

Public deficit as a percentage of GDP

0.00

Chart 8. European Union (27): public deficit, featuring representation of the cohesion process

of living and, in the case of Europe, a deterioration in basic social welfare (see table 3).

-10.00

3.2. Democracy as a mechanism of protection against the impact of macro-balances

-15.00

-20.00

-25.00

-30.00

-35.00

given in the document ‘Social cohesion and fiscal consensus in Latin America: the role of Parliaments’ of the part played by the legislature, a part which was discussed at the conference ‘Public policies in response to the global crisis’ (San Salvador, from 31 August to 1 September 2009), organised by the Economic Commission for Latin America and the Caribbean (ECLAC). Latin American democracies have been able to develop a political system with less centralised presidential power, thus giving way to an ever broader legislative system, which is currently able to amend budget proposals and therefore to protect social expenditure items. Table 3 shows that there are only four federal governments and that other countries have one form or another of unitary government. Three countries have just one chamber, while the others have

Source: Eurostat.

Table 3. Latin America: budget powers of the legislature and of the executive

Differences regarding macro-balances could not have been overcome solely by convincing financial bureaucrats and by publicly-supported criticism from other groups inside government. The most significant feature of this process has been the strengthening of democracy in Latin America, which has led the region’s governments to raise social expenditure. A key factor in this debate is the account

Financial crisis in the European Union: the challenge of maintaining social cohesion The great challenge prompted by bailouts for European Union members, as far as social cohesion is concerned, is to maintain social expenditure levels while preventing economic collapse. Agreement on the financial bailout of Portugal was reached at the start of May 2011. Portugal will have to implement an austerity programme in exchange for the loan guaranteed by the European Commission, the International Monetary Fund (IMF) and the Central European Bank (CEB). The figure for the bailout plan amounts to between 70 and 90 billion euros. According to declarations by the Portuguese government, the agreement will not involve new cuts in basic social rights. The Stability and Growth Pact (SGP) does, however, contemplate a reduction in the highest pensions or, in other words, those that exceed 1,500 euros. This plan also envisages raising the minimum wage and does not foresee any civil service redundancies. The basic objective is still to reduce the deficit to 5.9% by 2011, to 4.5% by 2012, and to 3% by 2013. Other bailouts were awarded to Ireland and to Greece, the latter of which will require a further 20 to 30 billion euros, an extension of repayment periods, reduced terms on the repayment of the current 110,000-million euro loan package and a relaxation of the strict schedule for reducing the deficit, which is supposed to be reduced from 15.4% in 2009 to 2.6% in 2014. The situation European Union members are experiencing shows that financial fragility imposes restrictions on social policies and this raises questions about the system for financing the deficit and its structure, and the weakness of states with regard to maintaining their social policies.

Capacity of the legislature to amend executive bills Intervention of the legislature Unrestricted

Cannot Presentation determine of a new bill expenditure

Restricted

Previous year’s budget

Approval of executive budget

Executive

Type of government

Structure of the legislature

Initiative

Executive veto

Argentina

Federal

Bicameral

Executive

Bolivia

Unitary

Bicameral

Executive

Brazil

Federal

Bicameral

Executive

Chile

Unitary

Bicameral

Colombia

Unitary

Bicameral

Country

Institutional alternatives envisaged by the Constitution or budget legislation if the legislature does not intervene in or approve executive bills

➜

➜ Costa Rica

Unitary

Bicameral

Executive

Ecuador

Unitary

Unicameral

Executive

Guatemala

Unitary

Bicameral

Executive

Honduras

Unitary

Bicameral

Executive

Mexico

Federal

Bicameral

Executive

Panama

Unitary

Bicameral

Executive

Paraguay

Unitary

Bicameral

Executive

Peru

Unitary

Unicameral

Executive

Table 4. European Union: governmental organisation and representatives of the European Parliament

Structure of the national legislature

European Parliament Members

Country

Government

Germany

Federal Parliamentary Republic

Bicameral

Austria

Federal Parliamentary Republic

Bicameral

Belgium

Federal Constitutional Monarchy

Bicameral

Bulgaria

Unitary Parliamentary Republic

Unicameral

Cyprus

Unitary Presidential Republic

Unicameral

Denmark

Federal Constitutional Monarchy

Unicameral

Slovakia

Unitary Parliamentary Republic

Unicameral

Slovenia

Unitary Parliamentary Republic

Bicameral

Dominican Republic

Unitary

Bicameral

Executive

El Salvador

Unitary

Bicameral

Executive

Spain

Parliamentary Constitutional Monarchy

Bicameral

Uruguay

Unitary

Bicameral

Executive

Estonia

Unitary Parliamentary Federal Republic

Unicameral

Venezuela

Federal

Unicameral

Executive

Finland

Semi-presidential Federal Republic

Unicameral

France

Semi-presidential Republic

Bicameral

Greece

Unitary Parliamentary Republic

Unicameral

Hungary

Unitary Parliamentary Republic

Unicameral

Ireland

Unitary Parliamentary Republic

Bicameral

Italy

Parliamentary Republic

Bicameral

Latvia

Unitary Parliamentary Republic

Unicameral

Lithuania

Unitary Parliamentary Republic

Unicameral

Luxembourg

Parliamentary Constitutional Monarchy

Unicameral

Malta

Unitary Parliamentary Republic

Unicameral

Netherlands

Federal Constitutional Monarchy

Bicameral

Source: ECLAC (2009). ‘Social cohesion and fiscal consensus in Latin America: the role of Parliaments.’

two houses. Budget initiatives are issued by the executive. What does matter, in this case, is whether the proposal can be vetoed by the legislature. In six countries it can be amended unrestrictedly while in the remainder amendment is possible, albeit with restrictions. It may therefore be concluded that democracy has opened up a way for the legislature to meet social cohesion goals. In European Union countries, the political system features a twin model for

protecting the interests of social cohesion: on one hand there are national parliamentary systems in which there are thirteen countries with bicameral systems and fourteen countries with unicameral systems; on the other, there is the European parliamentary system, which ensures additional resources for cohesion through the structural funds. All in all, the legislative systems in the two regions have managed to guarantee an arrangement whereby greater

➜

11.4 4.8 14.2 13.8 12.7 12.5 12.2 12.3 12.6 Source: Economic Commission for Latin America and the Caribbean (ECLAC): Social Development Division. Database on social expenditure.

12.4 11.8 11.7 11.2 10.9 10.8 10.4 10.1 10.0 9.6 9.1 Latin America

9.1

10.0 nd … … 13.4 11.5 11.8 12.1 11.2 12.1 11.0 9.5 8.2 9.8 7.3 7.8 7.8 Venezuela

9.8

10.1

8.3

7.8

20.2 5.3 21.7 22.0 20.4 19.7 19.5 20.8 22.8 22.4 20.7 20.4 19.7 21.3 21.4 20.6 19.9 19.8 18.0 16.4 Uruguay

17.3

6.0 3.9 … 8.1 8.0 7.2 6.5 5.9 7.2 7.3 6.2 5.9 5.4 5.5 5.4 5.3 6.1 6.0 4.8 4.2 Dominican Rep.

3.4

7.2 3.9 7.8 8.1 8.3 9.2 9.3 9.5 9.5 7.8 7.6 7.3 7.5 7.1 6.6 6.9 6.2 5.9 4.4 4.0 Peru

3.8

8.0 6.0 8.9 13.2 9.3 8.1 7.4 7.4 10.3 6.2 9.8 9.6 8.6 8.7 8.7 8.3 7.3 6.8 6.5 2.9 Paraguay

3.6

8.7 2.5 … 9.4 9.1 7.5 8.4 7.7 8.9 9.9 9.1 8.7 10.8 8.7 8.9 8.3 8.2 9.5 9.1 6.9 Panama

8.1

8.4 5.3 12.3 11.7 11.1 11.2 10.3 10.2 8.5 7.7 8.6 9.3 6.0 6.5 6.6 6.9 7.4 6.7 6.3 7.0 Nicaragua

6.3

9.3 6.4 12.5 11.6 10.8 10.4 10.0 10.1 10.3 10.0 9.4 9.4 9.0 8.6 8.4 8.4 9.3 8.5 7.8 6.1 Mexico

7.0

8.7 nd … … 11.4 11.4 11.8 12.2 10.5 10.6 9.3 8.3 6.4 6.5 6.7 6.7 6.5 7.7 7.4 7.7 Honduras

7.4

6.0 3.4 7.0 7.2 7.8 7.6 7.0 7.6 7.0 7.1 6.5 6.9 6.5 5.2 4.4 4.5 4.7 5.1 4.1 3.9 Guatemala

3.6

8.6 nd … 11.1 11.6 11.6 10.7 10.5 11.1 10.7 9.2 8.5 7.8 6.8 5.8 5.4 5.4 2.9 … … El Salvador

…

6.1 nd … … 6.4 6.3 6.2 5.6 5.4 5.9 4.0 4.4 5.3 4.9 6.2 6.2 5.9 8.9 7.2 7.9 Ecuador

6.9

16.9 3.2 19.3 17.4 16.9 17.3 17.9 18.6 18.8 18.7 17.3 15.9 16.9 17.0 16.7 15.2 16.4 15.6 14.7 16.1 Costa Rica

15.0

10.7 6.6 12.6 12.7 12.0 12.8 10.9 10.6 11.5 11.5 10.8 11.4 13.0 12.6 14.5 11.5 8.9 7.3 6.8 6.0 Colombia

5.8

13.3 2.3 14.2 12.4 12.1 12.9 13.5 14.4 15.1 15.1 14.9 15.0 13.7 12.8 12.8 11.9 12.5 12.6 12.2 11.9 Chile

12.1

20.7 8.4 26.1 25.0 23.7 22.5 22.3 22.4 21.8 21.3 21.2 21.5 21.7 19.3 19.6 20.3 18.8 17.6 14.7 17.6 Brazil

15.5

16.0 nd … … 16.2 17.0 17.0 17.6 17.2 17.0 15.6 16.7 15.7 15.3 13.9 12.4 … …

20.5 4.1 … 23.2 21.1

Average 1998 1997 1996 1995 1994 1993 1992

19.1

Although all sectors or major expenditure items have increased together with

Argentina

This upward trend in social expenditure was similarly consolidated in the European Union, where expenditure levels reached 28% in France, 27% in Sweden, 26% in Germany, Austria, Belgium and Denmark, and was only below 20% in the Czech Republic and Ireland.

1991

In the midst of the debate on macrobalances, Latin American democracies as a whole succeeded in raising social expenditure from 9.1% to 14.2% of GDP between 1990 and 2008. This increase was greater in some regions, particularly in countries in the South. Argentina, Brazil and Uruguay opted to increase such expenditure considerably; specifically, it rose from 18% to 26% in Brazil, from 19% to 23% in Argentina, and from 16% to

1990

3.3. Social expenditure in Latin America: democracy with regard to macro-balances

22% in Uruguay, and thus reached levels similar to those prevailing in the European Union, where the average was 22% for the 1990-2007 period. The second group that increased its expenditure significantly included Costa Rica, where spending rose from 16% to 19%; Bolivia (16%), Chile (14%), Colombia (12.6%), Mexico (12.5%) and Nicaragua (12.3%). In the remaining countries, less of an effort seems to have been made, especially in countries such as Ecuador, Peru, Paraguay, the Dominican Republic and Guatemala, the expenditure of which remained under 10% of GDP.

Country

expenditure is earmarked for social cohesion. This has given rise to a complex system of institutions, thus reducing the power of traditional structures that were tending successively to reduce budgets earmarked for social development.

…

Unicameral

…

Parliamentary Constitutional Monarchy

Bolivia

Sweden

20.1

19.1

Bicameral

19.2

Unitary Presidential Republic

19.7

Romania

22.2

21.4

Bicameral

21.8

Unitary Parliamentary Republic

20.1

Czech Republic

19.8

20.1

Bicameral

21.2

Constitutional Monarchy with Parliament by Constituency

21.0

United Kingdom

20.3

20.0

Unicameral

19.5

Unitary Parliamentary Republic

2004

Portugal

2003

2002

Bicameral

2001

Unitary Parliamentary Republic

1999

Poland

2000

➜

2005

2006

2007

2008

∆ Period

Table 5. Latin America: public social expenditure as a percentage of gross domestic product (GDP)

22.7 2.1 23.0

social expenditure, this growth has been disparate. Social security and welfare are the areas which have seen the greatest growth: almost three percentage points of GDP, slightly over half the total increase in social public expenditure. The reason is partly because of the increase in policies to fight poverty although mainly because of the Conditional Transfer Programmes.

22.9 21.9 Source: OECD database on social expenditure.

23.2 20.6 European Union

22.0

23.9

23.6

23.0

23.1

22.6

22.4

22.3

23.4

23.3

22.6

30.7 -2.93 28.4 29.4 28.4 34.7 30.2 Sweden

31.8

35.7

34.4

32.0

31.6

30.4

30.2

29.7

28.7

30.1

29.5

29.1

27.3

18.8 2.75 19.1 20.6 19.8 17.6 16.0 Czech Republic

17.3

18.1

18.2

18.0

18.8

19.0

19.5

19.8

20.7

19.7

19.5

18.8

19.4 3.79 20.4 19.4 18.6 19.9 16.8 United Kingdom

18.2

20.5

20.1

19.9

19.6

18.7

18.9

18.6

19.3

19.8

20.5

20.6

20.5

18.2 10.02 22.9 20.5 18.9 14.1 12.5 Portugal

13.4

15.5

15.7

16.5

17.1

16.9

17.3

17.7

19.2

22.2

22.4

22.9

22.5

21.8 5.09 21.0 22.5 20.7 24.9 14.9 Poland

21.2

24.4

23.2

22.6

22.8

22.2

21.6

21.8

22.2

22.5

21.7

21.3

20.0

22.3 -5.49 20.3 20.5 19.8 26.0 25.6 Netherlands

25.5

26.1

24.7

23.8

22.6

21.8

21.4

20.5

19.7

21.2

21.1

20.7

20.1

21.0 1.51 21.8 22.0 19.8 19.8 19.1 Luxembourg

19.4

20.1

19.9

20.8

20.9

21.2

20.9

20.4

20.7

23.3

23.9

23.0

20.6

22.7 4.91 25.1 24.0 23.3 20.9 20.0 Italy

20.3

21.1

20.8

19.9

22.0

22.7

22.9

23.3

23.5

24.4

24.7

25.0

24.9

15.2 1.39 15.8 15.2 13.3 16.4 14.9 Ireland

15.7

16.4

16.1

15.7

14.8

14.0

13.0

14.1

14.3

15.6

16.0

15.8

16.3

21.9 nd 23.1 21.5 20.4 ... ... Hungary

...

21.3

20.3

22.5

21.8

22.8

23.1

18.7 4.86 21.3 20.1 19.2 16.1 16.5 Greece

15.9

17.0

17.3

17.9

18.6

19.2

20.6

19.8

19.9

21.0

21.3

28.0 3.53 28.6 28.4 27.7 26.3 24.9 France

25.5

27.8

28.5

28.8

28.6

28.8

28.9

27.7

28.9

29.0

28.4

27.7 0.65 25.9 25.0 24.3 33.4 24.3 Finland

29.4

33.4

32.8

30.9

30.8

28.6

26.4

25.8

24.3

25.9

26.0

26.1

24.9

21.1 1.63 21.4 20.4 20.4 21.8 19.9 Spain

20.7

23.1

22.0

21.4

21.3

20.7

20.6

20.4

20.1

21.0

21.2

21.4

21.6

17.4 nd 16.0 17.7 17.9 ... â&#x20AC;Ś Slovakia

...

18.8

18.4

18.0

18.1

18.6

17.6

17.0

16.5

16.3

15.7

27.0 0.96 26.6 26.6 25.7 26.4 25.1 Denmark

25.9

28.1

29.5

28.9

28.2

27.2

26.5

26.4

26.1

27.9

27.7

27.2

26.1

26.1 1.47 26.4 26.2 25.4 25.8 24.9 Belgium

25.7

26.9

26.3

26.8

25.7

26.0

25.9

25.8

26.3

26.5

26.3

26.5 2.66 27.0 27.3 26.7 24.8 23.8 Austria

24.1

26.2

27.0

26.6

26.7

26.8

26.6

27.0

27.9

27.7

27.4

26.4

26.1 5.11 26.1 27.4 26.6 25.6 20.1 Germany

23.7

26.3

26.8

27.4

26.7

26.6

26.7

27.7

27.1

27.2

25.2

1990 to 2007 1990 to 2007 variation average 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1992 1990 Country

1991

1993 40

Table 6. European Union (19): public social expenditure as a percentage of gross domestic product (GDP)

Meanwhile, an ageing population and commitments associated with financing retirement and pensions, plus improvements in the social security systems of several countries in region, including enhancement of their non-contributory components, have encouraged greater increase in this sector than in others. It has been followed by increased expenditure on education, in line with different international commitments assumed by countries in the region. Although the share of this budget item accounted for slightly over 50% of GDP, such a significant increase in resources has nonetheless been subject to fluctuations. Expenditure on social security and welfare, together with education, represents almost 80% of the total increase in social expenditure between the 1990-1991 and 2007-2008 periods.5 Lastly, of the sectors that can be distinguished from among the countries analysed as a whole, the budget item with the lowest growth rate for almost two decades was public health, for which

5 ECLAC (2010). Economic and social panorama

expenditure was lower even than that on housing and other associated items (such as water and sanitation). This coincides with the trend in several countries towards expansion in private sector health services, which is consistent with the reforms following on from the structural adjustment of the 1980s. Another reason, however, is because it is a highly procyclical item that involves significant investment and is severely affected in periods of economic recession or low growth (ECLAC, 2008a). Disparate increases in items of expenditure have prompted a gravitational change in different sectors towards social expenditure: social security as a proportion rose and accounted for nearly 43% of the regionâ&#x20AC;&#x2122;s social expenditure while the amount spent on education increased slightly (27%). This took place at the expense of expenditure on housing (9.7%) and, above all, of expenditure on health, which as a proportion of total social expenditure fell from 24.1% in 1990-1991 (slightly under 110 dollars per inhabitant) to 20.5% in 2007-2008 (slightly over 180 dollars per person). Table 7 shows the structure of social expenditure and reveals considerable disparity among different budget items and among countries. It is therefore clear that the weakest item is housing, while greatest support was given to education and conditional cash transfer programmes. It also shows that on average 21.7% of social expenditure is earmarked for health, for which only five of the nineteen countries analysed spend over the average for this budget item.

Country

Total

Education

Health

Social security

Argentina

100.0

24.2

22.5

44.5

8.7

Bolivia

100.0

38.9

19.6

28.9

12.5

Brazil

100.0

20.1

19.0

54.3

6.6

Chile

100.0

26.2

23.0

48.3

2.6

Colombia

100.0

25.5

16.1

54.2

4.2

Costa Rica

100.0

30.4

28.8

30.4

10.4

Cuba

100.0

41.3

22.1

27.9

8.7

Ecuador

100.0

41.0

19.7

36.2

3.1

El Salvador

100.0

26.7

33.2

21.1

19.0

Guatemala

100.0

38.9

16.3

14.7

29.9

Honduras

100.0

67.0

30.2

2.3

0.5

Mexico

100.0

36.1

25.0

20.5

18.4

Nicaragua

100.0

44.8

30.6

0.0

24.6

Panama

100.0

45.6

24.8

13.7

15.9

Paraguay

100.0

44.1

17.8

34.8

3.1

Peru

100.0

31.9

14.7

46.6

6.9

Dominican Republic

100.0

26.0

16.6

29.3

28.1

Uruguay

100.0

18.1

18.2

56.3

7.4

Venezuela

100.0

41.0

13.3

34.0

11.6

Average

100.0

35.1

21.7

31.5

11.7

Note: 2006 was chosen as the base year as complete information was available for the countries considered. Source: created by the author based on CEPALSTAT.

Housing

Table 7. Latin America: structure of social expenditure by budget item (base year 2006)

3.4. The challenge of democracy: from Conditional Transfer Programmes to an integrated social security system The debate on the debt crisis yielded Conditional Transfer Programmes (CTP) as a mechanism to attend those most affected and therefore to provide a response to the intense social deterioration being experienced. The beneficiary population of these programmes comprises poor and vulnerable families with children, who receive cash transfers on the condition that certain practices linked with improving human skills and educational attainments are fulfilled. These programmes help to protect the initial stages of the life cycle: conditional transfers in health and nutrition are addressed to the neonatal stage and to early infancy, while those assigned to education are geared to childhood and adolescence. Some countries, however, also include older adults (Ecuador, Honduras, Jamaica, Mexico, Paraguay, Peru and the Dominican Republic), the disabled (Argentina, Ecuador, Jamaica and Paraguay) and poor adults of a working age (Jamaica) in their transfer programmes — mainly on an unconditional basis.6 In the three five-year periods since the implementation of the first CTPs in Brazil

6 Cecchini, S. and Martínez, R. (2011). Inclusive social protection in Latin America: a comprehensive rights-based approach. ECLAC/GIZ.

(Bolsa Escola) and Mexico (Education, Health and Nutrition Programme, PROGRESA), the growth of these social welfare programmes in Latin American and Caribbean countries, in terms of both coverage of the population and of expenditure, has been constant. Around the year 2000, the CTPs or their direct precursors —major programmes to reduce poverty through direct cash transfers, such as the Bono solidario (‘Solidarity Bond’) in Ecuador and the Programa Asignación Familiar (‘Family Allowance Programme’, PRAF) in Honduras— were operating in six countries, with a coverage of around 6% of the region’s population and an expenditure equivalent to 0.19% of GDP. In the following fiveyear period, these programmes expanded very quickly and in 2005 had extended to 17 countries in the region, covering 14% of the regional population, accounting for an expenditure equivalent to 0.24% of GDP. By 2008, expenditure on CTPs had increased to 0.34%, and in 2009 to 0.40% of GDP. This latter increase was due to the combined effect of the expansion of the budgets for these programmes and to a reduction in GDP resulting from the global economic crisis. In 2010, six of the ten countries for which information is available increased the CTP budget in nominal terms, while four lowered it. As a result of expansion, in 2010, one out of five Latin American and Caribbean people —113 million people— were receiving state cash transfers through the CTPs. Of these, around 52 million were young people and children from 0 to 14 years old.

With the launch of the Conditional Cash Transfer Programme (CCTP) in Trinidad and Tobago in 2006 and Mi Familia Progresa (‘My Family is Making Progress’) in Guatemala in 2008, and the abandonment by Nicaragua of such programmes in 2006, there are now 18 countries that implement CTPs. In recent years, new programmes have also been launched and others in progress modified; in 2009, Argentina launched the Asignación Universal por Hijo para Protección Social (‘Child Allowance for Social Protection’), which absorbed the beneficiaries of Familias por la inclusión social, while the Plurinational State of Bolivia created the Juana Azurduy de Padilla mother-child allowance; in 2010, Honduras added a transfer of 10,000 lempiras per year (the Bono 10000, the equivalent of around 500 dollars) to the PRAF in order to improve the education, health and dietary conditions of destitute households with children and teenagers. Although growth of expenditure and beneficiary population is a common feature of the region’s CTPs, levels of coverage effectively attained by each programme vary considerably. In 2010, Ecuador, with the Bono de Desarrollo Humano, was the country where the highest percentage of population was covered by a CTP: 44%. The programmes with the greatest number of beneficiaries in absolute terms were: Bolsa Familia in Brazil (52 million people, nearly half the CTP beneficiaries in the regional zone), Oportunidades in Mexico (27 million), and Familias en Acción in Colombia (12 million). In six countries (Argentina,

Brazil, Chile, Ecuador, Mexico and Uruguay), the number of beneficiaries equalled or exceeded the number of destitute people, although it could be argued that there is still room to extend such programmes and to cover more families who cannot meet their basic needs, given that around 190 million people were living in poverty in 2009. Bolsa Familia and Oportunidades are also the programmes with the largest budgets in the region (6,200 and 3,500 million dollars respectively), although in terms of percentage of GDP (0.47% and 0.51% respectively) they are exceeded by Ecuador’s Bono de Desarrollo Humano (1.17%). The great challenge for Latin American countries involves changing from this system of conditional cash transfers to an integrated social security model, geared to a citizen-focused system of protection throughout the life cycle.

Table 8. Latin America. Indicators of coverage of and public expenditure on Conditional Transfer Programmes, 2007 to 2010

Coverage CTP coverage over total population

CTP coverage of poor population

CTP coverage of destitute population

CTP/GDP expenditure (2009

Sources of financing

households

persons

Argentina

Asignación Universal por Hijo para protección social

756 (2010)

3,400 (2010)

8.3

46.4

>100

0.20

Government of Argentina

Bolivia

Bono Juancito Pinto

1,729 (2009)

17.5

32.4

50.7

0.33

Government of Bolivia, World Bank

Brazil

Bolsa Familia

12,583 (2010)

51,590 (2010)

26.4

84.6

>100

0.47

Government of Brazil, World Bank

Chile

Chile Solidario

333 (2008)

1,147 (2008)

6.8

51.7

>100

0.11

Government of Chile

Colombia

Familias en Acción

2,589 (2010)

11,651 (2010)

25.2

56.5

>100

0.39

Government of Colombia, IDB, World Bank

Costa Rica

Avancemos

151 (2009)

3.3

17.4

52.2

0.39

Government of Costa Rica, World Bank

Ecuador

Bonos de Desarrollo Humano

1,179 (2010)

6,100 (2010)

44.3

>100

1.17

Government of Ecuador, IDB, World Bank

El Salvador

Comunidades Solidarias Rurales

0.02

World Bank, IDB and other bilateral and multilateral sources

Country

Programme

106 (2009)

508 (2009)

8.2

17.1

38.7

➜

4. Territorial development in democracy: decentralised public finance

➜ Guatemala

Mi Familia Progresa

592 (2010)

3,254 (2010)

22.6

39.7

70,5

0,32

Government of Guatemala

Honduras

Programas de Asignación Familiar

132 (2010)

661 (2010)

8.7

12.3

17.2

0.24

Government of Honduras, IDB and other bilateral and multilateral sources

Mexico

Oportunidades

5,561 (2010)

27,247 (2010)

24.6

62.8

>100

0.51

Government of Mexico, IDB and World Bank

Panama

Red de oportunidades

77 (2009)

377 (2009)

10.9

39.5

81.0

0.22

World Bank and IDB

Paraguay

Tekopora

99 (2010)

554 (2010)

8.6

13.9

25.2

0.36

IDB

Peru

Juntos

410 (2009)

2,253 (2009)

7.6

21.2

60.6

0.14

Government of Peru

Dominican Republic

Solidaridad

758 (2010)

2,098 (2010)

21.2

46.3

89.0

0.51

Government of the Dominican Republic

Uruguay

Asignaciones Familiares

91 (2009)

390 (2009)

11.6

84.6

>100

0.45

Government of Uruguay

25,263

112,909

19.3

47.5

>100

0.40

Latin America

nd: no data Source: ECLAC (2010). Social panorama of Latin America, page 148.

This chapter shows how Latin American governments have developed a complex structure of governance in their territories, which has helped to raise subnational and local management capacity and encouraged a model of dynamic decentralisation. If compared to the European Union, however, the process is limited and features differentiated approaches to promoting economic development, combined with a conflict of financing and the appearance of subnational level debt patterns that have exacerbated discussion on financing rules. With a view to more in-depth analysis at territorial level, the region’s federated countries were selected to show that decentralisation does not necessarily mean greater cohesion.

4.1. Structure of territorial governance in Latin America and its impact on the decentralisation of public expenditure In recent decades –with the strengthening of democratic systems of government–, Latin America has altered the geography of governance considerably, a situation that has given rise to a structure of sub-national governments with greater management capacity, stronger legislative structures and more fiscal resources. This has arisen from a process of decentralisation generated by the interaction of political forces and a new arrangement of democratic forces in different areas of national

territory. According to Falleti (2010),7 it is the actor whose territorial interests predominate nationally or sub-nationally that initially determines the type of decentralisation, as this coalition prefers to arrange reforms sequentially in order to strengthen its power. National actors therefore prefer administrative to fiscal measures and fiscal measures to political decentralisation. Sub-national actors, for their part, prefer political to fiscal measures and fiscal measures to administrative decentralisation. This, however, is inseparable from party interests (in power and in opposition), on the grounds that it leads to six types of coalitions (national-level coalition, sub-national coalition, ruling coalition, opposition coalition, national ruling sub-national opposition, sub-national ruling -national opposition), which will give rise to differentiated sequences of decentralisation. These sequences will depend on the interaction of the parties nationally and sub-nationally and also therefore on the concerted model of governance from which the coalitions emerge. The territorial political structure of Latin America is highly diverse. The representatives of the different regions participate through a unicameral or bicameral model, with nearly 3,000 members of parliament and 564 senators, who represent 430 regions, provinces,

7 Falleti, G. T. (2010). Decentralization and Subnational Politics in Latin America. Cambridge: Cambridge University Press.

➜

departments or states. In some countries there are also local deputies who represent the different communities that form each of these territorial arrangements. Regions, provinces, departments and states are in turn divided into departments, municipalities, cantons or provinces, which together form a total of nearly 12,000 institutions, in some cases with deliberating councils, town councils, municipal councils or municipal boards. This heterogeneous structure has also been combined with the development of social networks that champion local interests –defence of natural resources, attention to specific social groups, etc.–, which multiply forms of representation

and which require increases in decentralised budgets yet, in most cases, do not bring additional revenue and thus focuses the process of decentralisation on demand for transfers from central government. This structure of governance has given rise to a process of decentralisation of responsibilities for expenditure from central to intermediate and local levels of government. As a result of this process, sub-national governments are taking an increasingly active part in the management of much of the public budget.

Table 9. Latin America: political structure for territorial governance

Legislative representation Country Argentina

Intermediate government: P,D,S,R,M** P

No. 24

Method of election of MPs to national legislature

MPs

Method of election of senators to the national legislature Senators

Local govt. P,D,S,R,M,C**

No.

Elected on the basis of population. There are never fewer than 5 MPs per province

257

130

3 per department

112

3 per province

512

Brazil

Candidates are voted directly; the number of MPs varies according to the population

513

3 per state

5,565

Council

Chile

2 MPs are elected for each of the 60 electoral districts

120

2 senators for each of the country’s 19 senatorial constituencies

Council

161 MPs elected by territorial constituency and 5 by special constituency (black communities, indigenous communities, Colombians resident overseas and political minorities)

166

100 elected by national constituency and 2 by special constituency

102

1,101

Municipal council

2 MPs are chosen per province and one per every 200,000 inhabitants per province

100

220

Municipal council

Elected on the basis of the departmental party list system

262

Municipal council

Elected in accordance with the number of inhabitants in each region; at least one is elected

158

Municipal council

The number of MPs is determined by proportional representation in accordance with departmental population

128

298

Municipal corporation

500

Two per each state plus one for the largest minority

128

2,456

Ecuador

El Salvador

Guatemala

Honduras

Mexico

300 are elected by means of the system of single-candidate electoral districts and 200 on the basis of proportional representation in party-list constituencies

Nicaragua

20 MPs elected nationally and 70 in departmental constituencies and autonomous regions

70 elected in departmental constituencies and the remainder on a national basis

153

Council

Panama

Elected from single-member (26 circuits) and party lists (13 circuits)

D/M

Municipal council

Paraguay

Elected by department

Elected on a national basis

D/M

236

Municipal offices

Peru

Elected for each department in accordance with population by proportional representation

120

195

Municipal council

Dominican Republic

Elected by proportional representation on the basis of lists and specific candidates throughout the country

178

One per province and one per national district

155

Municipal council

Uruguay

Elected by department on the basis of proportional representation. Minimum of two per department

Elected on a national basis and in a single electoral constituency

Council

Venezuela

110 elected on a singlecandidate basis, 52 per list and 3 by indigenous constituency

165

335

Municipal council

Total

430

Deliberating council

Bolivia

Colombia

Popular representation

68 are elected directly to represent an electoral district; the remainder are elected by proportional representation from the lists of each party in a single district

Municipal council

Elected in accordance with population per province

Costa Rica

2,947

564

Municipal council (cabildo)

11,921

** Unicameral National Congress. ** P: provinces; D: departments; S: states; R: regions; M: municipalities; C: cantons. Source: ECLAC. Panorama of territorial development in Latin America and the Caribbean, Statistics Site and Chambers of the countries considered.

➜

1985-1990

1991-1995

1996-2000

2001-2007

1991-1995

2001-2007

as % of total expenditure of NFPS or Government Expenditure

as % of GDP

1996-2000

Argentina

8.7

11.0

11.9

12.5

44.7

44.8

45.3

Bolivia

2.8

5.7

7.0

8.9

15.7

20.1

24.4

Brazil

…

13.9

12.9

…

36.8

32.3

Chile

2.3

3.0

2.9

7.5

9.5

8.8

Colombia

5.2

5.0

7.3

8.0

23.2

23.1

24.7

Costa Rica

0.8

0.6

0.7

0.8

2.6

2.9

3.1

Ecuador

1.8

2.2

3.8

7.6

9.1

15.7

Mexico

3.8

4.6

6.2

8.0

21.9

30.1

37.2

Paraguay

0.4

0.3

0.4

0.9

1.2

Peru

…

1.9

2.0

2.3

9.3

12.2

LA Average

…

5.0

5.4

6.0

…

18.7

20.5

Table 10. Latin America: expenditure of sub-national governments as a % of GDP and as a % of public sector expenditure

This shows how the governance structure of the European Union has strengthened local development, notwithstanding substantial differences among members (local government expenditure is 38% in Denmark whereas it accounts for scarcely 1% in Malta). Significant in this band is high expenditure in Sweden and Finland of over 20%, compared to expenditure of under 10% in Austria, Germany, Slovakia, Belgium, Spain, Bulgaria,

Table 11. European Union (27): expenditure and revenue by level of government (% of GDP)

1999

2000

Ireland, Portugal, Luxembourg, Greece and Cyprus. Comparison with the European Union shows that the fiscal structure of Latin America requires reform in order to provide sub-national governments with sufficient resources to meet expectations arising from the impulse generated by democracy and the formation of a complex structure of governance unbefitting of the low local spending.

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Expenditure by level of government General government

46.8

45.2

46.2

46.6

47.2

46.8

46.3

45.6

46.9

50.8

50.3

Central government

25.5

24.3

25.3

25.4

25.5

25.6

25.3

25.1

25.6

27.7

28.1

State government

4.5

4.4

4.5

4.6

4.4

4.3

4.2

4.4

4.8

4.7

Local government

10.7

10.8

10.9

11.1

11.3

11.4

11.3

11.4

11.3

11.5

12.3

12.2

Social security

15.2

14.8

14.7

15.1

14.8

14.7

14.3

14.1

14.8

16.5

16.4

44.7

44.1

43.9

44.3

44.8

44.6

43.9

Source: ECLAC United Nations.

Greater decentralisation has led to debate on which level of government is the most effective for providing basic public services or for building the infrastructure required for more solid local development, in the context of an extremely extensive territory that covers around 20 million km2. It should be remembered that Latin America’s current divisions are based on a structure built from political agreements, cultural traditions and citizen’s association agreements. These have yielded a complex system for dealing with the governance of almost 11,000 local

governments in which no single mechanism has, to date, been established to tackle social needs and there are no strategic plans for building a basic or interconnecting infrastructure throughout the region. Comparison of the level of expenditure of Latin America with that of the European Union shows that in Europe, local government expenditure is substantially higher and accounts for 17% of total GDP, almost three times the local expenditure of Latin America.

Revenue by level of government General government Central government

45.8

45.4

24.3

24.2

23.2

22.9

23.4

23.7

23.8

23.1

22.7

State government

4.4

4.3

4.1

4.2

4.3

4.5

4.2

Local government

10.7

10.8

10.9

11.1

11.2

11.3

11.8

Social security

15.5

15.1

14.9

15.1

14.9

14.7

14.6

15.2

16.2

16.3

Source: Eurostat Database.

Chart 9. European Union (27): local government expenditure as a proportion of GDP

Malta Cyprus Greece Luxembourg Portugal Ireland Bulgaria Spain Belgium Slovakia Germany Austria Romania Estonia Slovenia Lithuania France Latvia Czech Rep. Hungary Iceland United Kingdom Poland Norway Italy Netherlands Finland Sweden Denmark 0

Percentage of GDP

As pointed out in the OECD report ‘Latin American Economic Outlook 2009,’ the level of expenditure of the region’s subnational governments is lower than OECD equivalents measured as a percentage of GDP. There are several reasons for this: both sub-national government revenue and transfers from central government are low and this

limits the capacity of these institutions to change their environment.

Source: Eurostat.

4.2. The debate on financing: the response of participants in the face of decentralisation For a region not highly given to the payment of tax, debate on how to finance a higher level of expenditure –befitting a more complex structure of governance– has been extremely intense. This discussion has been taken up again by ECLAC, which has issued a series of documents that broadly summarise the situation, the most recent of which by Gómez Sabaini and Jiménez (2010),8 is backed up by the document by Jiménez and Podestá (2009).9 The first report mentions that “the process of implementing fiscal decentralisation took place in two large ‘waves’, the first of which gained momentum in the latter years of the 1980s, with the view that decentralisation would allow more efficient allocation of public assets to a territorially diverse sub-national citizenry and would, in turn, improve channels of citizen participation, of political responsibility and of accountability. In a second period, marked by the macro-crisis of the mid-nineteen nineties, decentralising reforms assumed a different approach. Tax sharing regimes (generally

8 Gómez Sabaini, J. C. and Jiménez, J. P. (2010).

The financing of sub-national governments in Latin America (a case analysis). Santiago de Chile: ECLAC. 9 Jiménez, J. P. and Podestá, A. (2009). Intergovernmental relations and sub-national finances in the face of the crisis. Santiago de Chile: ECLAC.

unrestricted) were not prioritised as they had been earlier but preference was rather given to channelling federal resources to sub-national governments for education and health, while mechanisms of transfer with specific earmarking were enhanced. This process, in its different periods, was undertaken mainly through public expenditure (rather than revenue) despite quite a heterogeneous situation. Argentina and Brazil (federal countries) have generally attained higher degrees of subnational fiscal decentralisation, in terms of both expenditure and of revenue, followed by Colombia and Bolivia (countries with a unitary system)”. This reflection shows how the financing of decentralisation has been adapted and how the participants therein have sought to obtain income from raw materials, rather than from increasing sub-national tax collection, as is the case of Bolivia, Colombia and Mexico. In Bolivia, strong growth in the primary balance is basically explicable by the introduction of the direct tax on hydrocarbons and hydrocarbon derivates (IDH), collection of which has yielded an average 5.7 points of GDP in the last three years, of which over 90% is transferred to intermediate and local governments. In Colombia, meanwhile, improved performance in regional and local finance is the result of an increase in transfers of national origin and of the adoption of a series of constitutionally and legally ordained fiscal regulations. The first measures were addressed to administrative control of territorial debt introduced by Law 358 of 1997. Subsequently, these controls were reinforced and greater market mechanisms

were adopted. Law 617 of the year 2000, in particular, prompted the restructuring of the internal debt of territorial governments with guarantees endorsed by central government, while Law 633 of 2001 complemented restructuring with a programme of prepayment of bank debt, financed with resources from the oil royalties that sub-national governments had saved in the Oil Stabilisation and Saving Fund (FAEP). In Mexico, most resources come from shares in federal revenue and economic incentives, which in 2010 accounted for 7.2% of GDP. This revenue structure includes resources from the Hydrocarbon Extraction Fund and the tax on trading with these resources.

Brazil

This weakness is the result of the way in which taxation has been structured. Table 13 offers a summary of tax allocation

Transfers

Other revenue

Total

11.9

7.9

1.6

21.4

Argentina

5.6

7.6

0.7

13.9

Bolivia

3.9

7.4

0.5

11.8

Colombia

3.1

4.8

0.1

8.0

Chile

1.8

1.0

0.0

2.8

Mexico

1.5

9.1

0.8

11.4

Ecuador

1.1

2.5

0.0

3.6

Costa Rica

0.9

0.0

0.9

Peru

0.8

4.8

0.4

6.0

Source: ECLAC from official data.

Own resources

In Latin America as a whole, Brazil is the country in which sub-national governments obtain most of their funds from resources they generate themselves. The situation is similar in Chile, albeit on a different scale, as they represent 1.8% of GDP. The remaining countries obtain their funds from transfers from central government. A notable case in point is Mexico, where 80% of resources come from this source. Sub-national governments therefore lack a solid resource base.

Table 12. Structure of the total revenue of subnational governments, 2008, as a % of total GDP

at different levels of government and shows that much of the tax collected is concentrated at national level. This explains the weak revenues of local authorities, which depend for their development on transfers agreed with the national authorities and on agreements they reach with local investors. Such distribution reveals both the weakness of the revenue sources and a lack of local negotiation with the central authorities with a view to generating their own resources. This appears to originate from the lack of an integrated model of the role that local development should play in the process of national development and from what could be described as the paradox of local development: i.e. it wishes to play a leading role without assuming the risk of the conflicts involved in collecting tax directly, while preferring non-local authorities to assume that responsibility and, once collected, returning the revenue to them. This structure whereby fiscal powers are allocated by government level yields a revenue model in which central governments collect 91% of revenue and sub-national governments collect only 9%. The exception is Brazil, where subnational collection accounts for 30% of the total. Chart 10 indicates the proportion of tax revenue by government level for 2008 and shows that the countries in which a greater share was collected at sub-national level were Brazil, Argentina, Colombia and Chile. As a result of the structural weakness of sub-national public finances, in the 1990s

financing was through debt and this increased fiscal fragility. This situation was, however, rectified last decade, and deficits became surpluses, both in terms of level and of duration. Positive changes in sub-national public resources are not generally the result of greater efforts to bring in taxes at intermediate and local level, but rather the result of the growing importance given to transfers from national governments. An indicator of lower public sector vulnerability in the face of this global economic crisis, in comparison with previous crises, is the level of debt, which shows that debt over GDP ratios fell considerably from 2002 to 2007. Different factors contributed to better fiscal results and to a reduction in the debt to GDP ratio of these levels of government. In Argentina, a rise in self-generated revenue and, mainly, in transfers, plus changes in relative prices, led to improved fiscal indicators. This also occurred against a background of agreements between central government and sub-national governments. National government also reached bilateral agreements known as ‘Orderly Financing Programs’ with some provinces whereby the provinces were granted monthly financing to deal with negotiated financial deficits and debt redemption services. These agreements were based on three core areas: reducing the level of fiscal deficit of the provinces through policies to rationalise public expenditure and increase tax revenue, not increasing provincial public debt, and implementing the reforms pending in each signatory

Chart 10. Latin America: tax revenue by level of government, 2008 (as a % of GDP) Table 13. Latin America: allocation of fiscal powers by level of government

Mexico Ecuador Costa Rica Peru Colombia

Argentina

Brazil

Mexico

Bolivia

Chile

Colombia

Peru

Chile Company tax

Bolivia Income tax

Argentina

Gross assets of companies and individuals

Transfer N

Sales (VAT)

Other indirect taxation

Energy and fuel N

Industrial production (IPI) N

Income from natural resources

Royalties: S

Tax on motor vehicles

Property: S

Property and use: S

Tax on real property

Property: S

Land: N Inheritance tax: S Transfer: M

Transfer: S Property: M

Company tax

Fuel N

Tax on gross Tax on gross income: N income: N Consumption tax Consumption tax

Royalties: N

On services: M

Industry and trade: M

In Brazil, improvements in the primary

Royalties: N; S; M

Shared royalties Registration: S

Property

Use: M

Registration and use: S

Tax on local companies (patents)

balances of states and municipalities was the result of different factors such as restrictions on their budgets established

5 Brazil

Petrol: N Alcohol and tobacco: S Surcharge on petrol

N: central government; S: state government; M: municipal government Source: created by the author based on Volume I of the Inter-American Development Bank. The local alternative. Decentralization and economic development, 2010.

jurisdiction.

Brazil

Argentina

Bolivia

Chile

20 Colombia

25 Peru

Costa Rica Ecuador

35 Mexico

Central government

23.9

26.3

20.8

18.5

15.5

16.7

15.6

15.8

9.7

Sub-national government

10.1

4.4

0.9

1.1

2.5

0.2

0.6

0.4

0.6

Source: World Bank.

in bilateral agreements with federal government, the provisions of the Fiscal Responsibility Act and greater tax revenues. The process of renegotiation and assumption of debt by the Treasury started after the creation of the real, through fiscal adjustment programmes with each state and municipality. These agreements incorporated performance targets and prohibited further tax collection until the debt was reduced to a maximum national limit. Payment by creditors of a monthly rate of the debt service as a fixed proportion of current revenue was also established; the main condition was that they must offer firm

guarantees such as automatic blockage and withholding of constitutional transfers and self-generated revenue. Upon completion of this series of debt refinancing programmes, the Fiscal Responsibility Act was issued and this prohibited the award of new loans by the Union and the subscription to new agreements over and above what had already been renegotiated. To sum up, both the existence of overall sub-national surpluses in 8 out of 10 Latin America countries for which information from 2007 is available, and the lower debts figures of these governments, indicate that they are better positioned to tackle this

crisis than they were in previous years. This has partly been helped by a series of reforms in macro-fiscal mechanisms, in the tax system and in intergovernmental transfers.

4.3. An introduction to sub-national public finances in the Latin American region Given the vastness of the Latin American region, the diversity of agreements originating from democracy and a lack of consistent information, this section analyses the federalist models of Argentina, Brazil and Mexico and the unitary state of Chile. It then describes the organisation of public finances at different levels of government with a view, thereafter, to analysing how this fiscal structure deals with the provision of basic services and, therefore, to cohesive local development. As far as expenditure is concerned, the three federalist countries show a clear trend towards concentration. In Argentina, although partnership agreements have allowed for a broader distribution of powers, federal government continues to control a greater share of public spending as a proportion of GDP (14.6% in 1994 and 15.1% in 2006), while the share of the provinces in spending stands at around 10% (10.2% in 1994 and 11.7% in 2006) and has not changed significantly, at least, in the last twelve years; for local governments, the situation is even more unstable: their collection

In Brazil, efforts to strengthen federalism, with the promulgation of the Constitution of 1988, gave states greater independence to exert direct control over high-incidence tax (the Goods and Services Tax that unified five federal taxes for example). Transfers of this tax to the municipalities meanwhile increased by 25%. As a result, federal government control over spending fell (from 30.4% of GDP in 1994 to 21.1% in 2006); the effects on a state level were not so noticeable because of the amount of resources transferred from states to the municipalities. Local governments meanwhile increased their control over spending and, in the same period (19942005), their expenditure by nearly two points of GDP (from 5.7 to 7.5%). In Mexico there were no substantial changes in the expenditure levels exerted by federal, state and municipal government. In the 1994-2010 period, average public sector expenditure remained at around 22.8% of GDP for federal governments, 8.3% for state governments and 1.6% for local governments. Perhaps the only fact worthy of note is the change experienced by the Federal District, which went from reporting to the federal government to become an Autonomous Institution (albeit not a state) with a directly elected government (the Federal District is the institution with the largest share in the country’s economy –amounting to 18% of

4.4. Territorial concentration of sub-national public finances in the Latin American region

national GDP- and a public expenditure equivalent to 1% of the country’s GDP).

levels are low, they are dependant on federal and provincial governments and their expenditure level scarcely amounts to 3% of GDP.

Analysis of the territorial distribution of state or provincial expenditure in these federated countries shows concentration in large urban areas. In Argentina, the province and city of Buenos Aires account for 38% of total spending, followed

Table 14. Public expenditure by level of government in Argentina, Brazil and Mexico, 19942009

Percentages of GDP Federal or national government

Argentina

Brazil

Mexico

1994

14.6

30.4

23.6

1995

14.7

21.9

1996

14.3

1997

State or provincial government Argentina

Municipal or local government

Brazil

Mexico

Argentina

Brazil

Mexico

10.2

13.7

7.4

2.8

5.7

1.3

24.6

10.4

12.0

7.0

2.6

5.9

1.1

21.2

23.9

9.9

12.1

6.7

2.5

5.7

1.1

13.8

27.3

24.3

9.9

17.0

7.4

2.5

5.5

1.1

1998

14.0

18.1

22.1

10.5

11.9

8.2

2.7

6.1

1.3

1999

15.6

17.8

22.7

11.5

11.0

8.4

2.9

5.7

1.5

2000

15.7

18.2

23.1

11.2

11.4

8.2

2.8

5.9

1.6

2001

17.1

19.0

24.8

12.2

12.0

8.8

3.0

6.2

1.7

2002

13.7

19.4

23.8

9.7

12.3

9.0

2.5

6.7

2.0

2003

14.3

18.6

22.2

9.7

11.1

8.4

2.3

7.1

1.8

2004

13.2

19.0

21.2

10.5

11.1

8.1

2.4

7.0

1.7

2005

15.0

20.2

19.6

11.4

11.5

8.4

2.7

7.1

1.8

➜

➜2006

15.1

21.1

19.2

11.7

12.0

8.7

2.9

7.5

1.9

2007

13.9

21.0

11.5

8.8

1.8

2008

14.9

23.4

12.2

9.6

2.1

2009

25.9

13.2

9.5

➜

Source: for Argentina, National Budget Bureau of the Internal Revenue Service of the Ministry of Economy (MECON); for Brazil, Secretariat of the National Treasury (STN), the Brazilian Institute of Geography and Statistics (IBGE) and the Central Bank of Brazil (Bacen); for Mexico, information from the National Institute of Statistics and Geography (INEGI).

by Córdoba, Mendoza and Santa Fe, which account for a joint expenditure of almost 20% of the total. Decentralised expenditure therefore seems to have encouraged the formation of both mega-

cities and a group of intermediate cities where growth is fastest. In Brazil, three institutions account for 48% of territorial expenditure: São Paulo,

Table 15. Argentina: structure of the total expenditure of the provinces, yearly averages from 1996-2006

Percentages of GDP Current expenditure Consumption expenditure

1.0

3.5

Catamarca

Capital expenditure

Current transfers to the public sector

Current transfers to the private and external sector

Income from property and financial investment

0.8

0.0

0.1

3.2

2.1

0.6

0.2

0.1

Córdoba

0.9

0.8

Corrientes

0.3

Chaco Chubut

0.4

0.3

0.1

0.0

0.1

0.0

Formosa

0.2

0.1

0.0

Jujuy

0.2

0.1

0.0

La Pampa

0.2

0.1

0.0

La Rioja

0.2

0.1

0.0

Mendoza

0.5

0.4

0.3

0.1

0.0

0.1

0.0

Misiones

0.3

0.2

0.0

0.1

0.0

Neuquén

0.4

0.3

0.2

0.1

0.0

0.1

0.0

Río Negro

0.3

0.2

0.0

Salta

0.3

0.2

0.0

San Juan

0.2

0.1

0.0

San Luis

0.2

0.1

0.0

0.1

0.0

Santa Cruz

0.3

0.2

0.1

0.0

0.1

0.0

Santa Fe

0.9

0.8

0.5

0.1

0.0

0.1

0.0

Santiago del Estero

0.3

0.2

0.0

Total

Capital transfer

0.0

0.1

0.0

Tucumán

0.4

0.3

0.2

0.1

0.0

0.1

0.0

0.4

0.2

0.3

0.2

0.1

Tierra del Fuego

0.1

0.0

12.1

10.5

7.2

1.8

1.1

0.8

1.6

1.1

0.2

0.5

0.2

0.1

0.0

0.2

0.0

0.4

0.3

0.2

0.1

0.0

0.1

0.0

0.3

0.2

0.0

0.1

0.0

Total

Buenos Aires (capital)

1.1

Buenos Aires

National total

Source: created by the author based on MECON data, National Office of Tax Coordination with the Provinces.

➜

0.4

Real direct investment

Total expenditure

Province

Entre Ríos

Rio de Janeiro and Minas Gerais, followed by a group of intermediate institutions such as Bahia, Paraná and Rio Grande

do Sul, which account for 17%. There then come three institutions, Brasilia, Pernambuco and Santa Catarina, which

account for 10% of expenditure. The development of mega-cities in Brazil has been combined with the growth of an intermediate group, which has led to more balanced development and caters for a stronger governance structure, and has given rise to a more decentralised model of development. Mexico is the least territorially concentrated of the three federated

countries, as the expenditure of the Federal District and its metropolitan area with the State of Mexico only accounts for 22% of the total expenditure of federative institutions, which indicates a process of greater relative decentralisation. This group is followed by a nucleus of three federative institutions that account for 17% of expenditure: Jalisco, Nuevo León and Veracruz. There then comes a group of ten federative

➜

Table 16. Brazil: structure of state expenditure by large groups, yearly averages from 1996-2006

Mato Grosso do Sul

0.2

0.1

0.0

Mato Grosso

0.2

0.1

0.0

Pará

0.3

0.2

0.1

0.0

Paraíba

0.2

0.1

0.0

Pernambuco

0.4

0.3

0.2

0.1

0.0

0.1

0.0

Piauí

0.1

0.0

Paraná

0.7

0.5

0.3

0.1

0.0

0.2

0.1

0.0

Rio de Janeiro

1.4

1.2

0.6

0.5

0.1

0.2

0.1

0.0

0.1

Rio Grande do Norte

0.2

0.1

0.0

Rondônia

0.1

0.0

Roraima

0.0

Rio Grande do Sul

0.8

0.7

0.5

0.2

0.1

0.2

0.1

0.0

0.1

Santa Catarina

0.4

0.3

0.2

0.1

0.0

0.1

0.0

Sergipe

0.1

0.0

São Paulo

3.6

3.2

1.7

1.2

0.3

0.9

0.4

0.0

0.5

Tocantins

0.1

0.0

12.9

10.8

6.0

3.6

1.1

2.5

1.4

0.1

1.0

Percentages of GDP

Total current expenditure

Total expenditure

Total

Acre

0.1

0.0

Alagoas

0.1

Amazonas

0.2

Amapá

Institution

Administrative Expenditure on expenses federal transfers

Capital expenditure Expenditure on physical Expenditure on debt and financial Expenditure on investments federal transfers redemption

Other

Total

0.0

0.1

0.0

0.2

0.1

0.0

0.1

0.0

Bahia

0.6

0.5

0.3

0.2

0.0

0.1

0.0

Ceará

0.4

0.3

0.1

0.0

0.1

0.0

Federal District

0.4

0.3

0.1

0.0

Espírito Santo

0.3

0.2

0.1

0.0

0.1

0.0

Goiás

0.3

0.2

0.1

0.0

0.1

0.0

Maranhão

0.2

0.1

0.0

Minas Gerais

1.2

1.0

0.5

0.3

0.2

0.1

0.0

0.1

National total

Source: created by the author based on data from the Ministry of Finance, Secretariat of the National Treasury, General Coordination of Relations and Financial Analyses of States and Municipalities (COREM).

➜

institutions with an average expenditure of 3-4% of the total that accounts for 31% of expenditure and includes highly disparate states such as Baja California, Chiapas, Chihuahua, Guanajuato,

Michoacán, Oaxaca, Puebla, Tamaulipas and Tabasco. The decentralisation process in Mexico therefore seems more equitable than those that have taken place in other countries in the region.

The three cases show that the level of expenditure of federative institutions, albeit only 8% to 12% of GDP, has been extremely significant for some provinces or other federative institutions, and has prompted substantial changes in regional development. Such is the case of backward regions like Paraná in Brazil or

Table 17. Mexico: structure of the gross total expenditure of federative institutions, yearly averages from 1996-2006

Percentages of GDP

States

Gross total expenditure

Administrative expenditure

➜

Chiapas in Mexico. In these examples, the impact for cohesion may be greater than that observed in a simple outline of budget distribution in each federative institution. For this decentralisation process to have the desired results requires a model of supra-regional planning with defined outlines for the implementation of

Expenditure on public works, economic development and social action

Federalised expenditure

Public debt and financial investment

Othe expenditures

Hidalgo

0.17

0.02

0.13

0.00

Jalisco

0.43

0.18

0.02

0.19

0.01

0.02

State of Mexico

0.83

0.29

0.06

0.39

0.08

0.02

Michoacán

0.27

0.16

0.03

0.08

0.00

Morelos

0.12

0.02

0.01

0.09

0.00

Nayarit

0.10

0.01

0.07

0.00

0.01

Nuevo León

0.43

0.14

0.03

0.16

0.02

0.08

Oaxaca

0.29

0.04

0.02

0.20

0.02

0.01

Puebla

0.33

0.16

0.02

0.13

0.01

0.02

Aguascalientes

0.08

0.01

0.06

0.00

Querétaro

0.13

0.02

0.08

0.00

Baja California

0.29

0.07

0.01

0.12

0.00

0.09

Quintana Roo

0.10

0.01

0.06

0.00

0.01

Baja California Sur

0.06

0.01

0.00

0.04

0.00

San Luis Potosí

0.17

0.03

0.01

0.13

0.01

0.00

Campeche

0.11

0.04

0.01

0.04

0.00

0.02

Sinaloa

0.19

0.04

0.02

0.13

0.01

0.00

Coahuila

0.20

0.11

0.02

0.05

0.00

Sonora

0.21

0.05

0.02

0.13

0.01

0.00

Colima

0.06

0.01

0.00

0.04

0.00

Tabasco

0.26

0.10

0.02

0.12

0.01

Chiapas

0.33

0.12

0.03

0.16

0.02

0.00

Tamaulipas

0.24

0.04

0.15

0.00

0.01

Chihuahua

0.27

0.07

0.04

0.14

0.01

Tlaxcala

0.08

0.02

0.00

0.05

0.00

0.01

Federal District*

1.00

0.58

0.10

0.23

0.06

0.03

Veracruz

0.51

0.25

0.05

0.18

0.01

0.02

Durango

0.13

0.03

0.01

0.09

0.00

Yucatán

0.10

0.04

0.01

0.05

0.00

Guanajuato

0.27

0.09

0.02

0.16

0.00

0.01

Zacatecas

0.11

0.01

0.09

0.00

Guerrero

0.26

0.04

0.02

0.17

0.01

0.02

National total

8.11

2.82

0.69

3.87

0.33

0.40

Source: created by the author based on INEGI, State and Municipal Public Finances of Mexico, assorted editions.

➜

5. The debate on transfers: the path of concerted decentralisation in Latin America

change (Ochs, 1974).10 Otherwise, subnational expenditure may get lost among bureaucratic problems that reduce the impact of decentralisation. Mexico, it is worth mentioning, is currently debating a change in the planning law in order to give greater substance to planning tasks and to guarantee the formation of social networks that foster citizen participation (Center for Social and Public Opinion Studies, CESOP, 2007).11 This initial introduction to the territorial distribution of sub-national public expenditure raises some points about the processes of decentralisation that are worth reflecting upon: / Latin American mega-cities continue to absorb a great deal of public decentralisation effort, a situation that must be redressed in order to consolidate the emergence of intermediate urban centres that benefit highly scattered regions. / The emergence of intermediate cities shows that gradual progress is being made towards a more complex model of territorial development. These experiences should therefore be considered as part of this model. / Decentralisation processes should favour relatively economically backward regions in order to prompt dynamics of change

10 Ochs, Jack (1974). Public Finance. Harper and Row Publishers. 11 Navarro Arredondo, A. and Meixuerio Nájera, G. (2007). Federalism and regional planning in Mexico. CESOP.

for balancing territorial development. / Decentralisation is not necessarily coupled with cohesion; a process of decentralisation focused on social cohesion must therefore be accompanied with the design of rules that guarantee an approach that integrates regions. The following section features analysis of the regulations that have been established to transfer resources to different levels of government, with a view to strengthening state and municipal management capacity.

The previous chapter deals with the significant role that transfers have played in the governance model. This chapter resumes the debate, describes the rules that have been followed to earmark them, and uses the cases of Argentina, Brazil, Chile and Mexico to show how the model that has been chosen is a discretionary one, if compared to the European Union, where the establishment of structural and cohesion funds has created an institutional framework for managing transfers.

5.1. The role of transfers in the debate on decentralisation12 Musgrave (1959) considered that fiscal decentralisation involves the distribution of powers over public revenue and expenditure among levels of government and/or territorial administrations in order to achieve an appropriate distribution of decision-making power, a basis for discussion. The author posits that the State has three basic functions: a) stabilisation (fiscal and monetary policy); b) distribution (redistribution of income); and c) allocation (production of

12 This section involves a resumption of the debate of the working paper of the Undersecretariat for Regional and Administrative Development of the Ministry of the Interior of the Government of Chile (2009), entitled ‘Decentralisation in Latin America: a comparative analysis of the cases of Colombia, Bolivia, Peru, Brazil and Argentina.’

public assets and services). Oates (1972) complemented Musgrave’s notions on basic functions by proposing they should be exercised territorially, leaving the two former functions as the preferential exercise of central government and ‘allocation’ as a function shared among levels of government with a view to reducing the impact of market failures (lack of information, economies of scale, externalities). Varied theoretical arguments therefore exist either in favour or against fiscal decentralisation. There is also no agreement as to the empirical effects of fiscal decentralisation on the national or sub-national economy above and beyond agreement that fiscal decentralisation increases the power of sub-national governments. The approach known as fiscal federalism or, in other words, the series of fiscal relations established by the different areas of government in the federal system, offers the option of combining centralisation and decentralisation. Its main task is therefore to determine the optimum level of fiscal decentralisation on the basis of appropriate assignation of powers at different levels of government. There is an assumption that allocation of public resources is much more efficient in a decentralised model (appropriate distribution of fiscal powers), as the benefits are not applied universally to the population. Given that individual preferences are always different, the more homogeneous and smaller communities are, then the more efficient the provision of services are too. Sub-

national governments would have much more accurate information about the publicâ&#x20AC;&#x2122;s real needs and preferences, which is the reason for pursuing greater fiscal autonomy and, therefore, deciding expenditure and revenue (taxation) on a sub-national scale. When, moreover, public property is provided locally and financed with national taxes, it is harder for people to associate the benefits with the payment of tax they have made. It is likewise assumed that decentralised fiscal structure can increase tax revenue. People should be more able to relate the benefits obtained from the associated taxes, which would create greater willingness to pay them and thus reduce evasion. Citizens would then, in turn, be more able to put pressure on local (rather than national) civil servants to do their job efficiently, as the payment of taxes would be more directly associated with the provision of services (e.g. health, education, drinking water, sanitation, etc.). Collection would also be more efficient for reasons of proximity and supervision capacity. Put simply, it is argued in the literature on fiscal federalism that government works better if it is closer to the people and, in turn, that greater levels of fiscal decentralisation do not necessarily mean macro-economic instability. The underlying notion is the principle of fiscal equivalence or, in other words, the idea that taxes must be associated with the costs of and benefits received from public property. Transfers made from national government in most cases account for the principal source of revenue of sub-

national governments. These may or may not be conditional, depending on the national public policy objectives. They are conditional if the funds transferred are earmarked for a specific purpose (generally sectorial); they are not, however, conditional if they are unrestricted and for use in accordance with the priorities of sub-national governments. As a general rule, subnational governments tend to prefer unconditional transfers with which they can make use of resources according to their own priorities. This, in turn, gives rise to fewer incentives for sub-national governments to generate own resources. Insofar as regional production in each country is very heterogeneous, capacity to generate own revenue via taxation is therefore very much affected. The inexistence of fiscal correspondence between expenditure and self-generated revenue leads to dependence on the system of intergovernmental transfers. Transfers may have different purposes, which include covering vertical imbalance between central and sub-national government, given that for sub-national governments expenditure tends to be higher than revenue; covering horizontal imbalance, improving redistribution among sub-national governments and thus guaranteeing a minimum of public assets for all or compensating territorial disparities; financing merit goods such as health, education or others; correcting negative externalities, and compensating those that may be affected. However, the greater the horizontal imbalance, the greater too the vertical imbalance

and, the more centralised the tax system, the higher the dependence on transfers for covering the financing sub-national government deficit. In a non-optimal distribution of functions, when full fiscal correspondence is impossible, intergovernmental transfers become essential. Two dilemmas have therefore arisen: the degree of subnational government autonomy in the face of a search for sectorial policy objectives, and the question of whether to refund or to redistribute. It could be argued that in Latin America the latter has prevailed, as shown in the following section.

5.2. Patterns of transfers in Latin America The democratisation process in Latin America brought with it electoral reforms that allowed for the democratic election of local and intermediate authorities, which has led to pressure for greater resources to enable local and regional authorities to address the wishes of their electorates, thus giving rise to new grounds for demands for fiscal empowerment. The result has been a gradual yet clear trend towards the decentralisation of public expenditure in Latin America from 1985 to the present day. This is based on the underlying notion that decentralisation should allow more efficient allocation of public assets to a territorially-diverse sub-national citizenry, which in turn would prompt improvement in channels of citizen participation and political responsibility. Diagram 1 shows the route decentralisation may follow. In most cases, transfers from central government were extremely significant: in Brazil, they accounted for 36.9% of the revenue of federative institutions; in Argentina, 54.7% of provincial revenue; in Bolivia, 62.7%; in Colombia, 60%; in Chile, 36%; in Mexico and Peru, 80%; in Ecuador, 89%; while in Costa Rica there were no transfers. Such heterogeneous results are the consequence of the implementation of fiscal practices in which two perspectives are blended: the first has been to develop local capacities to obtain funding â&#x20AC;&#x201C;as is the case in Brazilâ&#x20AC;&#x201C;, with an approach to decentralisation based on the transfer of activities previously performed by the central public sector; in the second

case, decentralisation was opted for without raising the collection powers of intermediate governments, as in the cases of Mexico and Peru. In this event, it is local governments that directly control public resources destined to attend demand for education, health, public services, and security, etc. Fiscal federalism is a tool with which the objective of public expenditure efficiency can be met, provided this spending is based on programmes to improve equality and distribution; its application likewise depends on the management capacity and the degree of autonomy of each level of government.

This section features an explanation of the characteristics of the fiscal systems of the countries under study and special focus on the way in which the resources of federal governments are allocated to state (provincial) governments and local governments. It should be noted that the countries with federal structures (Argentina, Brazil and Mexico) are distinguished from the case of Chile, which has a unitary-type government. The purpose is to find elements with which it is possible to associate the degree of decentralisation with efficiency in the use of resources by means of the impact of social public expenditure on local development, and to determine which factors condition this relationship.

Diagram 1. Financing of decentralisation

Transparency Growth objectives

Transfers

Compensation Search for efficiency

Fair tax system

Macro-economic stability

Financing of decentralisation

External sources

Self-generated fiscal resources

Capacity to assume debt

Responsibility Willingness

More efficient provision of public services

Argentina, Brazil and Mexico are federal republics in which local governments have ceded many of their functions of collection and, therefore, of allocating public resources to the federation; nonetheless, recent years have seen the implementation of a series of reforms addressed to granting greater autonomy to sub-national governments. These reforms have arisen because of the need to increase efficiency in the use of resources, to improve the impact that public policies have on dealing with problems of local development and social backwardness, and to give localities greater autonomy. Chile, as a unitary state, has a centralised organisation and provides a case with which to compare the advantages and disadvantages of federalist models. This section features analysis both of the main characteristics of the general allocation of public resources (expenditure) and the specific case of transfer systems and their conditional nature. This involves the use of country-specific explanatory tables and, in the case of Chile, an explanation of the structure of the public budget and its distribution from the centre by administrative levels

5.3. Transfers in Argentina In Argentina, social expenditure (education, culture, housing, town planning, security and social welfare) is a component that was transferred to sub-national governments through a system of transfers, although the

provinces also provide basic public services: administration, public security (provincial and local). The provinces play a discernibly active role in managing social expenditure. The importance of this budget item lies in the great social backwardness existent in the Republic of Argentina, resulting from recurrent episodes of economic crisis (the most recent of which occurred in 20002001). Decentralised social expenditure currently represents little over 10% of its GDP. Expenditure is allocated to the provinces through the Argentinean intergovernmental transfer regime, based on the Federal Tax-sharing system (CFI) established by Law 23,548. This legislation establishes primary distribution from the central government to the provinces of 57.36% of taxes collected nationally as value added tax (VAT), as income tax and as some fuel taxes. These funds, which reach the provinces through this mechanism, are not earmarked for a specific purpose and the use thereof may therefore be freely decided. Some other transfers are conditional upon allocation to a sector or activity for a specific purpose. These funds are generally earmarked for financing services that the federal government decentralises to the provinces: education and health, and other activities associated with the construction of housing (National Housing Fund, FONAVI), basic infrastructure works

(Buenos Aires Suburban Fund), electricity infrastructures (Fund for the Electric Development of the Interior, FEDEI), social security and roads. The system for distributing transfers depends on a series of variable federal tax-sharing parameters. Funds are distributed in accordance with the percentages directly established in Law 23,548 and are not specifically itemised; the Buenos Aires suburban fund and basic social infrastructure are transfers that are financed by withholding 14% on income tax; the same is the case for the FONAVI, for electricity and road works, which are financed by withholding tax on fuels, gas and electrical energy.

Table 18. Argentina: own revenue and transfers to the provinces

distribution of the National Treasury Contributions (Aportes al Tesoro Nacional, ATN) is totally discretionary. There has been an upward trend in the evolution of provincial revenue: it rose from 10.5% of GDP in 2003 to 13.6% in 2009, because of an increase in revenue generated by the provinces and transfers, although transfers have grown quicker than province-generated revenue. The rise in transfers seems to have been encouraged as a complement to fiscal effort being made by the provinces, all of which appears to demonstrate a virtuous circle for provincial public finances.

There are also transfers that finance the decentralisation of national public services to the provinces, the distribution of which depends on the services transferred. Lastly, there is also a fund for compensating provincial imbalances, which is distributed equally, while

Federal Tax-sharing (CFI) (76% of the total) • Amount: 57.05% of federally collected tax. Some of the total assignable by law may be excluded. • Distribution: There is no explicit formula. The law directly determines the distribution percentages by province. • Conditions: Not earmarked.

FONAVI

Diagram 2. Argentina: main federal transfers

• Amount: 8% of the total • Distribution: – • Conditions: Earmarked for the construction of housing.

Total

Own revenue generated by the province

Transfers

1993

10.5%

4.6%

5.9%

1994

10.4%

4.7%

5.7%

1995

10.1%

4.5%

5.6%

1996

10.3%

4.5%

5.7%

1997

10.5%

4.6%

6.0%

1998

10.7%

4.7%

6.0%

1999

11.0%

4.8%

6.2%

2000

11.2%

4.9%

6.3%

2001

10.9%

4.7%

6.2%

2002

10.1%

4.6%

5.5%

2003

11.1%

5.2%

6.0%

2004

12.5%

5.3%

7.1%

2005

12.8%

5.3%

7.5%

2006

12.8%

5.5%

7.3%

2007

13.1%

5.3%

7.8%

2008

13.2%

5.6%

7.6%

2009

13.6%

5.8%

7.7%

Source: National Directorate of Fiscal Coordination with the Provinces.

5.4. Public expenditure and transfers in Brazil Source: Aghón, Gabriel and Casas, Carlos (1996).

In budgetary matters, Brazilian legislation establishes the general

guidelines only for producing the national budget and not for state and municipal government budgets; in other words, public expenditure in Brazil is highly ambiguous and discretionary.

Some specialists consider that Brazilian federalism is incomplete, despite reforms to the Brazilian Constitution in 1988. These changes tackled the needs of states and municipalities with regard to the decentralisation of public resources, but the establishment of respective responsibilities, especially in social matters, remained unresolved. Brazilian fiscal federalism is characterised by strong regional disparities and deeprooted municipal tradition. This situation points to the existence of pressure from the most backward regions on the federal government in attempting to obtain greater financial resources, and to a demand for greater autonomy from the

Table 19 shows that the institutions to which the greatest quantity of resources are transferred are Bahia, Minas Gerais and São Paulo, the development conditions of which are highly disparate; in the three cases, a greater quantity of resources has been transferred to the municipalities and derived from the system of constitutional transfers.

Transfers to states

Transfers to municipalities

Constitutional transfers

Total

Acre

2.9%

0.7%

Alagoas

3.6%

2.6%

Amazonas

2.6%

1.7%

Amapá

2.9%

0.5%

Bahia

8.7%

8.8%

8.9%

7.1%

Ceará

6.5%

5.5%

5.8%

4.9%

Federal District

0.7%

0.3%

Espírito Santo

2.0%

1.8%

Goiás

2.9%

3.6%

Maranhão

6.4%

4.2%

5.3%

4.3%

States

➜

local governments of the more advanced regions. In important items of social expenditure, federal transfers therefore exist side-by-side with expenditure controlled by local governments.

Table 19. Brazil: transfers to states and municipalities, 2010

Minas Gerais

5.8%

12.4%

9.4%

7.5%

Mato Grosso do Sul

1.4%

1.7%

Mato Grosso

2.7%

2.0%

Pará

6.0%

3.9%

4.9%

4.0%

Paraíba

4.2%

3.2%

3.7%

3.0%

Pernambuco

6.1%

5.0%

5.3%

4.5%

Piauí

3.8%

2.8%

Paraná

3.6%

6.5%

5.2%

4.2%

Rio de Janeiro

2.7%

3.1%

Rio Grande do Norte

3.7%

2.5%

Rondônia

2.5%

1.0%

Roraima

2.1%

0.6%

Rio Grande do Sul

3.4%

6.5%

5.8%

4.0%

Santa Catarina

1.8%

3.6%

Sergipe

3.6%

1.5%

São Paulo

3.6%

12.5%

8.4%

6.7%

Tocantins

3.8%

1.6%

100.0%

1.27%

1.35%

3.20%

5.82%

Total % of GDP

Source: Secretary of the National Treasury (DOU).

➜

For states in Brazil intergovernmental transfers comprise several funds: the most significant are the State Participation

Fund (FPE) and the Municipalities Participation Fund (FPM), for which 21.5% of total national government

revenue from income tax (IR) and from industrial products (IPI) are destined to the states and 22.5% to the municipalities; states must allocate 25% of revenue from the Tax on the Circulation of Goods and Services (ICMS) to the municipalities. Other intergovernmental transfers are associated with other taxes (for example, states are entitled to receive 20% of any tax created by the federation and states allocate 50% of the rural territorial tax to their municipalities) and for different

5.5. Public expenditure and transfers in Chile

items associated with transferred public services contemplated in the federal budget. Transfers from the Unified Health System (SUS) provide states and municipalities access to federal resources in accordance with population criteria (50%) and with respect to the implementation of public health projects (50%).

State Participation Fund (FPE)

Municipalities Participation Fund (FPM)

• Amount: 21.5% of revenue from income tax and tax on industrial products. The base is established by the Constitution. • Distribution: fixed ratings determined by law whereby the share of São Paulo is limited to 1% and of the southern states to 15%. • Conditions: limited (25% must be allocated to education).

• Amount: 22.5% of revenue from income tax and tax on industrial products. The base is established by the Constitution. • Distribution: 10% for municipal capitals (directly proportional to population and inversely proportional to per capita income) and 90% for other municipalities. • Conditions: limited (25% must be allocated to education) while the central authorities can earmark specific funds for debts and for unemployment insurance funds.

Diagram 3. Brazil: main federal transfers

Transfers from the Unified Health System (USU) (states and municipalities) • Amount: budget process based on contributions and other items from the federal social security budget. • Distribution: 50% allocated by population and 50% by projects and programmes based on agreements between units of government and Ministry of Health bodies. • Conditions: conditional upon the financing of public networks and earmarked for the payment of care, projects and investments.

Tax rate levied on the Circulation of Goods and Services (from states to municipalities) • Amount: 21.5% of revenue from the Tax on the Circulation of Goods and Transportation and Communication Services. • Distribution: 75% of the added value generated by each municipality or upon criteria established by state law. • Conditions: limited (25% must be allocated to education).

Source: Aghón, Gabriel and Casas, Carlos (1996).

Diagram 4. Chile: main transfers to municipalities

Although Chile has a unitary government, its public expenditure structure envisages at least four types of transfers among central government and sub-national governments. Unlike federalist governments, however, in Chile resources are allocated directly by the General Treasury of the Republic in accordance with the following criteria: a) free fiscal

National Regional Development Fund (FNDR)

Specific-sector Regionally Allocated Investment (ISAR)

• Amount: budget resources. • Distribution: territorial compensation is sought. One of the variables that influences the amount of resources allocated is distance with respect to the capital of the Republic. Another is population density and, inversely proportional, regional product per capita. • Conditions: conditional and earmarked for financing investments in productive and social infrastructure of local interest (60% of investment is made through this channel).

• Amount: budget resources for investment of sectorial ministries. • Distribution: discretionary and project-based. • Conditions: regional levels of ministries are entrusted with implementation.

contribution; b) subsidies; c) complementary operations; and d) public debt service. Of the total revenue from territorial tax, 40% is transferred directly to the municipalities via adjunct accounts, and the remaining 60% form the common municipal fund. The institutions also transfer resources to the municipalities in accordance with fiscal contribution. This transfer takes place through the Local Development Programme, which is run by the Ministry of the Interior through the

Educational subsidies

• Amount: budget resources from the Ministry of Education. • Distribution: amounts are assigned in accordance with standards by student in class in each municipality. • Conditions: earmarked for the operating expenditure of the education system.

Financing of Municipal Health Services (FAPEM) • Amount: budget resources from the Ministry of Health. • Distribution: Ministry of Health. • Conditions: conditional upon agreements between municipalities and the Ministry of Health in proportion to the number of services and to the funds with which they will be financed.

Source: Aghón, Gabriel and Casas, Carlos (1996).

Neighbourhood Improvement Programme, the Urban and Communal Equipment Improvement Programme, and the ProRural Programme. Resources from external loans are likewise transferred to the municipalities to improve neighbourhoods. The Ministry of the Interior also assigns resources for the Municipal Management Enhancement Programme. The municipalities, meanwhile, make transfers to the institutions on the basis of the following criteria (MIDEH, 2010): a) to institutions given that, by law,

Year

Revenue from general government

Revenue from central government

Municipal revenue

1990

24.0

22.7

2.05

1991

23.6

22.1

2.10

1992

23.8

22.2

2.27

1993

23.4

21.7

2.42

1994

22.9

21.2

2.43

1995

23.4

21.7

2.47

1996

23.6

21.8

2.66

1997

23.5

21.6

2.86

1998

23.0

21.1

2.98

1999

22.4

20.3

3.25

2000

23.1

21.1

3.23

2001

23.6

21.7

3.23

Table 20. Chile: public revenue as a % of GDP

2002

23.0

21.0

3.26

2003

22.6

20.6

3.10

2004

23.7

22.0

2.72

2005

25.7

23.8

2.91

2006

27.5

25.8

2.65

2007

28.7

26.9

2.69

2008

27.1

25.4

2.85

2009

21.6

20.0

2.67

Source: Office of the Comptroller General.

5.6. Public expenditure and transfers in Mexico Public expenditure in Mexico is controlled both by the federal government and by state and municipal governments. Federative institutions are responsible for administrative expenditure, investment in public works, economic development and for the cost of financing state public debt. There are also federalised resources (Law of Fiscal Coordination, LCF) that are divided into two groups: federal sharing funds (section 28 of the federal expenditures budget, PEF), which include federal revenue sharing funds (RFP) and agreements of states or municipalities with the federation (Art. 10-A LCF); and federal contributions (section 33), which the federal government allocates to subnational governments. ➜

➜

municipalities transfer resources to the National Service for Minors; they also make transfers to the National School and Scholarship Assistance Council, which are deposited through adjunct accounts; and b) to municipalities. The initial deduction for transfers among municipalities corresponds to duplications that arise in operations of the Common Municipal Fund, to which municipalities contribute a percentage of their revenue from municipal taxes and charges.

a) Federal revenue sharing: this comprises a pool of resources from federal sharing funds (RFP): / General Revenue-Sharing Fund (FGP). As per Article 2 of the Law of Fiscal Coordination, it comprises 20% of federal revenue sharing funds (federation revenue from all taxation) in a financial year, and rights on the extraction for oil and mining, less the total refunds for these items. Additional or extraordinary rights on oil extraction, incentives established in administrative collaboration agreements, taxes on the possession or use of vehicles and on the new automobiles of institutions with administrative collaboration agreements regarding these taxes and other deductions established in the same article are excluded from this fund. Distribution of the fund is based on three criteria: equity (45.17%), collection efficiency (45.17%) and balance

(9.66%), and inversely proportional to the shares per inhabitant of each federative institution. / The Municipal Development Fund (FFM) comprises 1% of the General Revenue-Sharing Fund and is distributed as follows: a) 16.8% to a municipal development fund; and b) 83.2% for institutions coordinated on the basis of rights established in the provisions of article 10-A of LCF.

/ The contingency reserve equivalent to 0.25% of the RFP for each financial year. It is used to support those institutions for which total share in the FGP and the FFM falls short of the growth experienced by the RFP for the financial year in progress with respect to 1990. Distribution of this reserve starts with the institution with the lowest share rating and continues upwards successively, until resources in the fund have run out. This rating is calculated by dividing shares effectively received by each institution among the

General Revenue-Sharing Fund (FGP) (share to institutions)

Municipal Development Fund (FFM) (share to institutions)

• Amount: 20% of federal revenue sharing funds (RFP), which comprise income tax (ISR), single rate business tax (IETU), cash deposits tax (IDE), VAT, special tax on production and services (IEPS), ownership, tax on new automobiles (ISAN), rights on mining and on oil extraction. • Distribution: based on three principles: a) equity: 45.17% in direct proportion to the population of each institution; b) efficiency: 45.17% depending on revenue; c) balance: the remaining 9.66% is distributed on an inversely proportion basis to share per inhabitant. • Conditions: not applicable.

• Amount: 1.0% of federal assignable tax. • Distribution: a) 16.8% will be earmarked to a Municipal Development Fund; b) 83.2% for institutions coordinated on the basis of rights established in the provisions of Art. 10a of the Law of Fiscal Coordination • Conditions: not applicable.

Diagram 6. Mexico: transfer from federal government (contributions) Fund for Strengthening Municipalities and Federal District Zones

Diagram 5. Mexico: transfer from federal government (shares)

Multiple Contributions Fund

Technological and Adult Education Fund

Social Infrastructure Fund

Federal contributions:

Contingency reserve (assignable to institutions)

Compensation reserve (assignable to institutions)

• Amount: 0.25% of federal assignable tax. Allocated to institutions with a low and insufficient RFP. • Distribution: starts with the institution with the lowest RFP and continues in ascending order until resources run out (rating: received shares / paid shares). • Conditions: not applicable.

• Amount: 1%, intended to compensate losses resulting from changes in the share formula. • Distribution: starts with the institution least affected and continues successively to the most affected until resources run out. • Conditions: not applicable.

additional resources channelled to states and municipalities. Use thereof is conditional upon the performance and fulfilment of objectives established by law for each case. The amount is determined each year in section 33 of the expenditure budget of the Federation and is administered through the following funds:

Health Services Fund

Basic and Normal Education Fund

Fund for Strengthening Federative Institutions

State and Federal District Public Security Fund

Source: created by the author based on the Law of Fiscal Coordination.

total shares paid in the financial year in question. / The compensation reserve is intended to compensate those federative institutions affected by the change in the share formula. This reserve is constituted with the remainder of 1% of the RFP, and with the portion deriving from the FFM. The amount involved is determined by subtracting the effective share of the year in question from the shares that would

have been allocated in accordance with the provisions effective on 31 December 1990. It is distributed initially to the institution least affected and so on to the most affected, until the resources in the fund run out. b) Federal contributions, additional resources that the federation channels to states and municipalities on the condition that specific objectives established by law are achieved and fulfilled. These

Source: created by the author on the basis of the Law of Fiscal Coordination.

resources, known in the Federation expenditure budget as section 33, are governed by chapter V of the Law of Fiscal Coordination, and are distributed though eight funds: 1) the basic and normal education fund; 2) the health services fund; 3) the social infrastructure fund; 4) the fund for strengthening municipalities and Federal District zones; 5) the multiple contributions fund; 6) the technological and adult education fund; 7) the fund for state and Federal District public security; and 8) the fund for strengthening federative institutions.

➜

redistributing functions to state and municipal level rather than in seeking specific sectorial objectives geared to planning and promoting certain regions. The significance of transfers is limited and accounts for scarcely 7.2% of GDP, which is basically the result of the fiscal weakness of the Mexican state.

Table 21 shows that the most significant transfers for 2010 were those assigned to the General Revenue-Sharing Fund, and those earmarked for education, for decentralisation agreements and for health. This shows the interest in

Pesos (in millions)

% of GDP

Total shares in federal revenue and economic incentives (section 28)

437,334

3.33

General Revenue-Sharing Fund

332,308

2.53

Municipal Development Fund

16,587

0.13

Auditing Fund

20,138

0.15

Compensation Fund

3,859

0.03

Hydrocarbon Extraction Fund

3,252

0.02

Special tax on Production and Services

7,185

0.05

0.136% federal tax revenue assignable to border or maritime municipalities

2,253

0.02

Table 21. Mexico: shares in federal revenue and contributions paid to states, municipalities and Federal District from January to December 2010

Additional tax on oil extraction for border or coastal municipalities materially involved therein and through which goods are imported or exported

Economic incentives

256

0.00

51,516

0.39

Federal contributions (section 33)

434,246

3.31

Basic and Normal Education Fund

249,085

1.90

Health Services Fund

53,097

0.40

Social Infrastructure Fund

41,387

0.32

Multiple Contributions Fund

13,475

0.10

Fund for Strengthening Municipalities and Federal District Zones

42,418

0.32

Fund for State and Federal District Public Security

6,917

0.05

Technological and Adult Education Fund

4,692

0.04

Fund for Strengthening Federative Institutions

23,176

0.18

III

Decentralisation agreements

71,235

0.54

Total

942,815

7.18

Source: Secretariat of Finance and Public Credit (SHCP), web page, May 2011.

5.7. Overview of transfer systems Use of methodology applied by Finot (2005),13 which classifies the different transfer systems analysed and presents their characteristics and evolution

➜

13 Finot, Iván (2005). ‘Decentralization, territorial transfers and local development.’ CEPAL Review (no. 86, August, pages 29-46).

in diagram format, yields a model of distribution according to their local contribution and to their use (see table 22). This classification suggests the conclusions expressed in diagram 7, which sums up the situation in the countries in the study. The chart shows that, with the exceptions of the share system in Mexico and the emerging system in Colombia, the basic transfer

Table 22. Factors conditioning transfers and type of decentralisation

Local contribution Conditioning factors No

Yes

Political decentralisation of expenditure

Political decentralisation

Yes

Decentralisation of operational policy

Operational > political decentralisation

By use

Source: Finot (2005).

Autonomy of expenditure Argentina

Diagram 7. Latin America: system of transfers Mexico (section 28)

Brazil Chile

Associated with local effort

(-)

systems adopted in Latin America do not prompt expenditure to depend on local contributions. Given that they do not have this automatic control mechanism,

(-)

Funding from co-financing

there is therefore a tendency to increase administrative control mechanisms, as occurs regularly on programmes financed with earmarked transfers.

distribution, the latter of which is aimed at guaranteeing specific levels of access to the whole population. However, establishing such differentiation, which is rather harder for the federal countries, is precisely what is currently happening throughout the region. Although this can be observed in Brazil and, more clearly, in Chile, it is in Columbia where the differentiation has been the sharpest, as mentioned previously. To date, decentralisation processes have been addressed mainly to the implementation of social policies. Even the conditions imposed on multi-purpose transfers in the new Colombian system demonstrate this bias.

The reason for this situation â&#x20AC;&#x201C;as stated on other occasionsâ&#x20AC;&#x201C; is basically because in the political context in which the processes were initiated, the necessary difference was not made between territorial distribution and social

Colombia

Direct financing of social services (Brazil, Chile, Colombia, Mexico)

There is therefore a clear tendency towards abandonment of the political decentralisation part of expenditure, even in Chile. The Mexican system, meanwhile, may stimulate fiscal efficiency, but would not be yielding similar results in terms of equity: the fact that transfers are proportional to increases in tax collection may actually be multiplying disparities, as governments with fewer resources would be in a worse situation even to invest in improving their collection procedures.14 The Mexican system is, moreover, geared to the states and, only through these, to the municipalities. Lastly, the amounts involved in these unrestricted transfers are still notably lower than those for earmarked transfers, which leaves plenty of room to improve this system and even generate a similar system addressed to the municipalities, while maintaining the fundamental efficiency mechanism upon which it is based.

Source: based on Finot and complemented with the previous diagrams.

14 In the European Union, territorial transfers also depend on decisions that include the respective local (from intermediate and/or municipal levels) and national contributions. However, unlike in Mexico, such transfers are allocated exclusively to regions and localities the GDP per capita of which is lower than the European average, and in principle proportional to this difference. Currently, 41% are allocated to infrastructure and 34% to support productive development.

6. Latin America: welfare levels, decentralisation of basic services, overview and initial efforts to assess the impact

In the past few decades, great progress has been made towards improving living standards in Latin America and the living conditions of millions of people. This chapter begins with an overview of the efforts made so far and then moves on to explain how decentralisation has contributed to this process.

6.1. Improvements in living standards and social cohesion Between 2000 and 2008, the countries in Latin America managed to boost their health indicators dramatically towards achieving the targets set by the United Nationsâ&#x20AC;&#x2122; Millennium Development Goals. The infant mortality ratio was reduced from 26.5 to 19.2, although heterogeneity between countries was considerable. As shown in the following table, Chile managed to bring its ratio

Table 23. Infant mortality ratio (per 1,000 live births)

Country

2000

2008

â&#x2C6;&#x2020;2000-2008

Chile

9.4

7.2

-2.2

Costa Rica

11.5

9.8

-1.7

Uruguay

15.4

11.7

-3.7

Argentina

18.8

13.6

-5.2

Mexico

22.1

15.3

-6.8

El Salvador

27.8

15.6

-12.2

Venezuela

19.9

15.8

-4.1

Panama

19.5

16.2

-3.3

Colombia

22.0

16.7

-5.3

Brazil

28.2

18.3

-9.9

Paraguay

25.4

20.0

-5.4

Peru

35.1

20.7

-14.4

Ecuador

28.0

21.1

-6.9

Nicaragua

34.2

22.9

-11.3

Honduras

32.6

25.7

-6.9

Guatemala

38.6

33.3

-5.3

Bolivia

62.4

41.7

-20.7

LA Average (17)

26.5

19.2

-7.4

2008

> 35 12 to 35 < 12 No data

Source: World Bank, Millennium World Development Indicators.

down to 7.2; Bolivia has a ratio of 41.7, which reflects the extremely high range there is and it could, therefore, be said that the region lacks even minimum health standards. One constant, though, is that the countries with high rates of infant mortality in the baseline year show the greatest decrease during the period, as occurred in Bolivia, Peru, El Salvador and Nicaragua, whose reductions were substantial.

Table 25. Improved sources of drinking water (% of population with access)

The region also succeeded in reducing maternal mortality, down from a ratio of 111 to 87, but with great heterogeneity; the extremes are once again Chile, with a ratio of 26, compared to 180 in the case of Bolivia. As shown in the following table, the cases of Panama and Guatemala remained unchanged. In some countries, the improvements that had been achieved could not be maintained, such as in the case of Uruguay, Costa

Country

2000

2008

Chile

-3

Uruguay

Costa Rica

Brazil

-21

Venezuela

-14

Argentina

Panama

Colombia

110

-25

-5

Paraguay

110

-15

Peru

160

-62

Nicaragua

140

100

-40

Honduras

160

110

-50

El Salvador

140

110

-30

Guatemala

110

Mexico

â&#x2C6;&#x2020;2000-2008

Ecuador

170

140

-30

Bolivia

300

180

-120

LA Average (17)

111

-24

Source: World Bank, Millennium World Development Indicators.

2008

Table 24. Maternal mortality ratio (per 100,000 births)

Country

2000

2008

â&#x2C6;&#x2020;2000-2008

Uruguay

98.0

100.0

2.0

Brazil

93.0

97.0

4.0

Costa Rica

96.0

97.0

2.0

Argentina

96.0

97.0

1.0

Chile

94.0

96.0

2.0

Ecuador

86.0

94.0

8.0

Guatemala

89.0

94.0

5.0

Mexico

90.0

94.0

4.0

Panama

90.0

93.0

3.0

Venezuela*

92.0

93.0

1.0

Colombia

91.0

92.0

1.0

El Salvador

82.0

87.0

6.0

Paraguay

74.0

86.0

12.0

Bolivia

79.0

86.0

7.0

Honduras

80.0

86.0

6.0

Nicaragua

80.0

85.0

5.0

Peru

79.0

82.0

3.0

LA Average (17)

87.5

91.7

2008

> 99 87 to 99 < 86 No data

4.2

*Last available data 2005. Source: World Bank. Millennium World Development Indicators.

Rica and Argentina, and maternal mortality ratios even increased, meaning that these countries fell slightly behind again.

> 210 29 to 210 < 29 No data

With regard to the provision of basic health services, the figures show an increase in access to sources of drinking water: Uruguay reached 100% of the population, and the poorest case is Peru, where only 82% of the population was covered.

Improved health conditions have been reflected in the rise in life expectancy at birth, which rose from 71.8 to 73.7 years, with two cases of over 78 years found: Costa Rica, with 78.9, and Chile, with 78.6; the lowest figure was found in Bolivia, with an average life expectancy of 65.7 years. Nicaragua, Peru and Bolivia stand out as the countries with the greatest increases in life expectancy, with rises of 3.5, 2.7 and 2.7 years respectively, while Costa Rica, Uruguay, Mexico and Venezuela showed the smallest increase,

Country

2000

2008

â&#x2C6;&#x2020;2000-2008

2008

Table 26. Life expectancy at birth (years)

Table 27. Primary education completion rate (% of the total)

Country

2000

2008

â&#x2C6;&#x2020;2000-2008

Colombia

95.2

110.5

15.3

Costa Rica

77.8

78.9

1.1

Chile

76.8

78.6

1.8

Uruguay

97.3

106.0

8.7

Uruguay

74.9

76.0

1.1

Brazil*

107.7

105.8

-1.9

Panama

74.3

75.7

1.4

Mexico

99.9

104.1

4.2

Argentina

73.8

75.3

1.6

Ecuador

98.2

102.6

4.4

Ecuador

73.4

75.1

1.8

Argentina

100.2

102.4

2.2

Mexico

74.0

75.9

1.1

Panama

94.1

101.9

7.8

Venezuela

73.3

73.5

0.3

Peru

101.7

101.0

-0.8

Peru

70.5

73.3

2.7

Bolivia

98.9

98.8

-0.1

Nicaragua

69.7

73.1

3.5

Venezuela

83.4

95.4

12.0

Colombia

71.0

73.0

2.0

Chile

98.1

94.8

-3.3

Brazil

70.2

72.4

2.2

Paraguay

91.9

94.2

2.3

Honduras

70.3

72.2

1.9

Costa Rica

86.5

92.9

6.3

Paraguay

70.1

71.9

1.8

El Salvador

87.7

89.4

1.6

El Salvador

69.7

71.3

1.6

Guatemala

57.7

80.0

22.3

Nicaragua

65.8

74.5

8.8

Guatemala

67.7

70.3

2.6

Bolivia

63.0

65.7

2.7

LA Average (17)

71.8

73.7

1.9

> 74 67 to 74 < 67 No data

LA Average (16)

91.5

97.1

5.6

2008*

> 98 88 to 98 < 88 No data

*Last available data 2005. Source: World Bank, Millennium World Development Indicators.

Source: World Bank, Millennium World Development Indicators.

of just 1.1 years for the first three and 0.3 for the last case. In education, improvements were made to primary education completion rates, with a group of eight countries achieving this goal; however, the rest of the countries need to redesign their education strategies in order to meet this target, especially the Central American countries.

As we have seen throughout this section, these indicators assess the efforts made in the region in terms of social cohesion, but there is great heterogeneity in the progress made and levels reached. In terms of the issue we are interested in, the question that arises is: can decentralisation processes help to accelerate this increase in living standards?

6.2. Decentralisation to support the there is no central body responsible for planning and setting standards, as in rise in living standards Throughout the history of decentralisation in Latin America, the discussion has centred on ensuring that basic services are provided by the level of government that can most effectively deliver them; this perspective is dominated by the European idea of subsidiarity. However, given that

the European case, the mechanism that has been used in this process involves political-institutional agreements determined by the situation in each country. For this reason, the rhythm and quality of the efforts made vary across the region. The following table shows the areas of decentralised expenditure in four

countries; as can be seen, decentralisation essentially occurs on a sub-national scale, and basic infrastructure is decentralised on a municipal level in Brazil and Mexico, while education and primary healthcare are decentralised in Chile. The next section presents a summary of how this strategy has worked in Brazil, Chile and Mexico in terms of increasing minimum welfare levels. This information is based on the results of the document ‘Decentralisation of essential services. The cases of Brazil, Chile, Colombia,

Services

made by Brazil’s institutions, with a clear leadership by the different states in the implementation of priority action and with the growing involvement of municipal authorities. The decentralisation process shows the following characteristics:

Costa Rica and Mexico in health services, education, waste disposal, security and promotion.’15 In Brazil, progress has been made in designing a broad coverage strategy for essential services that includes programmes for social infrastructure, education, health services, sanitation, pensions and productive development, which have been accompanied by large budgets. These efforts have gained a basic social consensus regarding these priority actions and programmes, the commitment being

Argentina

Brazil

Chile

Mexico

Basic infrastructure

Education

Primary healthcare

2nd and 3rd level healthcare

National (N)

State (S)

Municipal (M)

i) A sustained increase in the resources that Brazil devotes to essential services. Increased investment in social infrastructure, education, health services, sanitation, pensions and productive development has far exceeded the average increases in annual budgets, which is a clear Table 28. Latin America, selected countries: principal areas of decentralised expenditure

Table 29. Brazil: literacy in persons aged 15 years and above (percentage)

indication of the priority being given to social issues in central, state and municipal government action. Tables 22 to 26 show the developments in terms of literacy, coverage of education, reduction of infant mortality, basic services, and housing conditions. ii) A society founded on ‘guaranteed rights’ has started to become established, i.e. the universalisation of social benefits, and therefore governmental responsibility for these services. This does not only involve

2000

2007

∆ 2000-2007

Federal District

94.97%

96.27%

1.30%

Rio de Janeiro

93.98%

95.65%

1.67%

Santa Catarina

93.17%

95.56%

2.39%

São Paulo

93.83%

95.39%

1.57%

Rio Grande do Sul

93.94%

95.03%

1.09%

Paraná

89.81%

93.44%

3.64%

Amapá

90.44%

93.20%

2.76%

Amazonas

91.25%

92.02%

0.77%

Mato Grosso do Sul

88.99%

91.65%

2.66%

Espírito Santo

88.87%

91.48%

2.61%

Goiás

87.46%

91.17%

3.71%

Minas Gerais

87.83%

91.11%

3.28%

Source: Finot (2007).

15 ECLAC (2011). ‘Decentralisation of essential services. The cases of Brazil, Chile, Colombia, Costa Rica and Mexico in health services, education, waste disposal, security and promotion.’ Project Collection Document, compiled by Sergio Galilea, O., Leonardo Letelier, S. and Katherine Ross, S.

➜

➜ Rondônia

90.31%

90.32%

0.00%

Rio de Janeiro

92.65

97.68

5.03

83.19

86.53

3.34

Mato Grosso

88.20%

89.92%

1.72%

São Paulo

95.57

97.61

2.04

83.93

85.96

2.03

Roraima

91.27%

89.63%

-1.65%

Rio Grande do Sul

96.59

97.61

1.02

76.54

80.00

3.46

Pará

87.52%

88.26%

0.75%

Mato Grosso do Sul

94.24

97.42

3.18

71.99

76.35

4.36

Tocantins

78.86%

85.66%

6.80%

Federal District

96.09

97.33

1.24

84.26

88.02

3.76

Acre

84.35%

84.18%

-0.17%

Paraná

94.95

97.25

2.30

74.72

81.49

6.77

Sergipe

76.06%

83.21%

7.15%

Roraima

97.48

97.24

-0.24

81.57

87.83

6.25

Bahia

75.43%

81.54%

6.12%

Minas Gerais

94.60

97.13

2.54

75.31

81.17

5.86

Pernambuco

75.17%

81.50%

6.33%

Amapá

96.07

97.13

1.07

78.72

87.15

8.43

Ceará

71.96%

80.84%

8.88%

Rio Grande do Norte

93.22

97.13

3.91

75.88

83.02

7.14

Rio Grande do Norte

74.48%

80.39%

5.91%

Piauí

89.63

97.04

7.41

75.64

82.07

6.43

Maranhão

71.05%

78.50%

7.45%

Ceará

90.80

96.75

5.95

79.94

79.41

-0.52

Paraíba

74.02%

76.52%

2.50%

Pernambuco

89.49

96.62

7.13

72.98

78.50

5.52

Piauí

68.38%

76.48%

8.10%

Bahia

90.42

96.31

5.90

79.53

83.15

3.62

Alagoas

67.27%

74.80%

7.54%

Mato Grosso

92.66

96.22

3.56

76.03

79.65

3.62

Amazonas

91.75

96.21

4.46

81.96

85.68

3.72

Espírito Santo

93.73

96.15

2.42

73.10

75.47

2.37

Paraíba

93.10

96.13

3.03

77.18

79.11

1.93

Sergipe

90.45

95.55

5.09

78.09

82.46

4.37

Pará

91.44

95.29

3.85

79.58

78.11

-1.47

Rondônia

95.19

0.00

75.93

73.80

-2.13

Alagoas

84.76

94.93

10.18

71.43

77.81

6.38

Source: Institute for Applied Economic Research (IPEA).

Primary/1

Secondary/2

2000

2007

∆ 2000-2007

2000

2007

Santa Catarina

97.07

98.61

1.54

Tocantins

90.72

97.88

Goiás

94.40

97.69

∆ 2000-2007

74.57

80.59

6.03

7.16

83.17

82.30

-0.87

3.28

78.75

82.66

3.90

➜

Table 30. Brazil: coverage of basic education (percentage)

➜

➜ Maranhão

85.45

94.62

9.18

75.38

82.04

6.66

Acre

90.24

91.24

1.00

79.45

75.07

-4.38

1/ Percentage of people between 6 and 11 years of age. 2/ Percentage of people between 12 and 14 years of age. Source: IPEA.

1990

2000

Acre

37.51

25.88

-11.63

Alagoas

59.64

37.58

-22.06

Amazonas

48.38

36.67

-11.71

Amapá

38.50

30.15

-8.35

Bahia

59.20

40.38

-18.82

Ceará

49.87

34.82

-15.05

Federal District

22.20

19.07

-3.13

Espírito Santo

30.23

18.42

-11.81

Goiás

25.16

19.88

-5.28

Maranhão

69.58

45.93

-23.65

Minas Gerais

27.38

20.70

-6.68

Mato Grosso do Sul

30.60

20.91

-9.69

Mato Grosso

29.25

24.13

-5.12

Pará

47.10

29.82

Paraíba

58.87

Pernambuco

50.03

Table 31. Brazil: infant mortality ratio* (under one year of age)

∆ 1990 - 2000

58.69

39.36

-19.33

Paraná

33.42

17.55

-15.87

Rio de Janeiro

25.20

18.73

-6.48

Rio Grande do Norte

55.67

34.48

-21.19

Rondônia

35.63

24.68

-10.95

Roraima

37.74

30.79

-6.94

Rio Grande do Sul

20.77

16.30

-4.47

Santa Catarina

23.49

16.14

-7.35

Sergipe

53.28

39.72

-13.56

São Paulo

24.69

16.18

-8.51

Tocantins

54.32

38.93

-15.38

* Ratio per 1,000 live births. Source: IPEA.

Table 32. Brazil: percentage of homes with access to drainage and electricity

Drainage

Electricity

1990

2000

∆1990-2000

1990

2000

∆1990-2000

Federal District

75.3%

83.5%

8.1%

98%

100%

1.3%

São Paulo

75.9%

81.7%

5.7%

99%

100%

0.5%

Minas Gerais

55.8%

68.2%

12.4%

87%

96%

9.5%

-17.28

Rio de Janeiro

45.7%

62.5%

16.8%

98%

100%

1.1%

41.69

-17.19

Espírito Santo

42.9%

56.2%

13.3%

94%

99%

4.8%

41.95

-8.08

Paraná

21.5%

37.7%

16.2%

92%

98%

6.1%

➜

Piauí

➜

➜ Bahia

6.9%

34.5%

27.6%

71%

83%

11.7%

Pernambuco

15.5%

34.2%

18.7%

82%

96%

14.4%

Goiás

26.9%

30.4%

3.5%

87%

97%

9.7%

Paraíba

12.5%

28.9%

16.4%

74%

95%

20.5%

Sergipe

17.0%

27.8%

10.9%

81%

92%

11.7%

Rio Grande do Sul

11.3%

27.4%

16.1%

93%

98%

5.1%

Ceará

6.3%

21.4%

15.1%

67%

89%

22.1%

Amazonas

1.0%

20.0%

19.0%

75%

85%

9.5%

Acre

3.6%

19.5%

15.9%

66%

79%

12.7%

Santa Catarina

4.3%

19.5%

15.2%

95%

99%

3.5%

Rio Grande do Norte

6.9%

16.5%

9.6%

83%

94%

Mato Grosso

5.5%

15.7%

10.2%

75%

Alagoas

7.2%

15.3%

8.1%

Mato Grosso do Sul

8.7%

11.8%

Roraima

4.7%

Maranhão

Drinking water

Solid floor

2000

2007

∆2000-2007

2000

2007

∆2000-2007

Acre

60%

63%

97%

88%

-9%

Alagoas

70%

76%

94%

97%

Amazonas

83%

75%

-8%

98%

94%

-3%

Amapá

76%

90%

14%

96%

97%

Bahia

62%

80%

18%

93%

97%

Ceará

57%

80%

23%

90%

95%

Federal District

95%

98%

97%

99%

Espírito Santo

93%

99%

97%

99%

Goiás

90%

97%

98%

10.9%

Maranhão

40%

62%

22%

54%

78%

24%

90%

14.2%

Minas Gerais

90%

96%

99%

77%

91%

14.1%

Mato Grosso do Sul

89%

98%

96%

100%

3.1%

88%

96%

7.2%

Mato Grosso

78%

92%

14%

95%

97%

10.7%

6.0%

78%

87%

9.2%

Pará

64%

69%

92%

94%

7.1%

9.2%

2.1%

59%

80%

20.8%

Paraíba

66%

81%

15%

97%

98%

Pará

1.4%

7.4%

6.0%

66%

79%

12.9%

Pernambuco

68%

78%

96%

98%

Amapá

5.6%

6.1%

0.6%

85%

95%

10.4%

Piauí

49%

65%

16%

85%

90%

Piauí

1.3%

4.0%

2.7%

55%

76%

20.7%

Paraná

95%

99%

98%

99%

Rondônia

0.2%

3.7%

3.4%

63%

85%

22.2%

Rio de Janeiro

96%

98%

99%

100%

Tocantins

0.0%

2.8%

54%

78%

24.3%

Rio Grande do Norte

73%

86%

13%

95%

97%

Source: IPEA.

Table 33. Brazil: percentage of people living in homes with access to drinking water and a solid floor

➜

Table 34. Brazil: reduction of poverty, 2005-2009

➜ Rondônia

85%

83%

-2%

97%

96%

-1%

Roraima

95%

84%

-11%

90%

95%

Rio Grande do Sul

96%

98%

-1%

Santa Catarina

96%

98%

99%

98%

-1%

Sergipe

75%

91%

16%

96%

98%

São Paulo

99%

Tocantins

61%

82%

20%

80%

Households with income per inhabitant below the poverty line

Federative institution

Reduction of poverty (percentage)

Poverty 2005

Poverty 2009

Bahia

7,124,570

5,512,234

-22.6

São Paulo

6,851,905

4,241,855

-38.1

Pernambuco

4,615,651

3,594,917

-22.1

99%

Ceará

4,147,391

3,085,040

-25.6

91%

11%

Maranhão

3,669,384

2,666,266

-27.3

Pará

3,081,463

2,631,946

-14.6

Minas Gerais

3,744,857

2,356,776

-37.1

Rio de Janeiro

3,125,793

1,982,933

-36.6

Paraíba

1,854,780

1,542,919

-16.8

Alagoas

1,838,558

1,515,188

-17.6

Rio Grande do Sul

2,164,979

1,456,403

-32.7

Paraná

2,204,955

1,304,080

-40.9

Piauí

1,732,289

1,205,435

-30.4

Rio Grande do Norte

1,440,177

1,088,596

-24.4

Amazonas

1,279,359

1,051,497

-17.8

904,947

765,272

-15.4

1,141,578

689,425

-39.6

Espírito Santo

645,193

435,309

-32.5

Santa Catarina

598,344

379,701

-36.5

Mato Grosso

595,776

371,824

-37.6

Source: IPEA.

guarantees provided by the Constitution and laws, but also sustained public actions to this end. These efforts can be seen in the increase of guaranteed schooling, and the provision of essential medical services and pension schemes. iii) Special national programmes have been set up specifically to meet the basic needs of Brazilian society, such as, for example, the Fame Zero (‘Zero Hunger’) programme. These national actions have access to special resources, are clear presidential priorities and are applied differently in those states of the Union where the problems are more severe. This became particularly relevant when the Institute for Applied Economic Research (known by its Portuguese initials, IPEA) indicated recently

100

that, in Brazil, it should be possible to eradicate extreme poverty before 2016 – a goal that would have seemed impossible a decade ago but which is today seen as feasible. iv) Despite all the progress made in the coverage of programmes focused on essential services, these programmes still have serious quality problems and there is a notable inequality in the standards to which these services are delivered to the different sectors of the population. These are the most important and persistent challenges facing the situation in Brazil. v) Very marked differences can be seen in terms of coverage, quality and equality if we analyse the essential services provided in the different states and territories in the country;

Sergipe Goiás

➜

101

➜

2000

2009

∆2000-2009

I Tarapacá*

99.4

97.9

-1.5

II Antofagasta

99.5

99.7

0.2

III Atacama

98.4

99.4

1.0

IV Coquimbo

98.0

98.8

0.8

V Valparaíso

98.5

99.0

0.4

VI O´Higgins

98.5

99.3

0.9

VII Maule

98.3

99.3

1.0

VIII Biobío

98.8

99.2

0.4

IX Araucanía

98.2

98.7

0.5

In the case of Chile, basic services, those delivered to the community and which basically are incumbent on public action, have had an interesting evolution over recent years. Of particular note from among the relevant aspects are:

X Los Lagos**

98.0

99.2

1.2

XI Aisén

98.6

98.8

0.2

XII Magallanes and Antártica

98.6

100.0

1.4

Metropolitan Region

98.5

99.3

0.8

i) In the past decade, systematic efforts have been made towards development with equality, which basically involves significantly increasing state obligations and implementing an extensive set of ‘guaranteed rights’ regarding education and health services. This has been extended to a universal pension scheme (Basic Solidarity Pensions), to the spread of pre-school education and healthcare for new-born babies and children (Chile Crece Contigo, ‘Chile Grows With You’), among other governmental initiatives. These initiatives consist of a set of active

Chile

98.6

99.1

0.6

Rondônia

555,303

351,858

-36.6

Tocantins

534,990

340,396

-36.4

Federal District

459,634

272,652

-40.7

Mato Grosso do Sul

467,083

240,178

-48.6

Acre

305,182

224,345

-26.5

Amapá

218,565

206,168

-5.7

Roraima

174,006

118,337

-32.0

Nacional

55,476,712

39,631,550

-28.6

Fuente: IPEA

more qualitatively severe problems still persist in parts of the north-east. Also, in general, the figures show particularly important problems in rural areas and metropolitan settlements which continue to attract large numbers of migrant populations. These forms of rural and metropolitan marginalisation continue to be the most serious social challenges facing the country. vi) Finally, the issue of citizen security has become an extremely important national, regional and local problem. Organised crime, drug-trafficking networks and crime are the most serious national issues. This situation is severely detrimental to stability, growth and the fight against poverty in Brazilian society.

102

Table 35. Chile: coverage of basic education (% of students of typical age)

* Also includes the region of Arica and Parinacota. ** Also includes the region of Los Ríos. Source: National Socio-Economic Survey (CASEN). 2000 and 2009.

and positive policies, programmes and social actions. ii) The budgets of ministries and services have been dramatically increased in terms of social services. Thus, in a decade of extensive public investment and increased essential services, the average global increase has been doubled.

The coverage of public services grew substantially; in national terms, coverage rose from 67% during 2000 to slightly over 80% in 2009. The thirteen regions all improved during the period, with region II Antofagasta showing the best results, with an increase of 24%. i) There has been a preference for social programmes that focus on social

103

Table 36. Chile: coverage of public health services (% of total population)

Table 37. Chile: people living in poverty (% of total population)

2000

2009

I Tarapacá*

20.8

14.3

-6.5

II Antofagasta

13.4

8.0

-5.4

5.23

III Atacama

23.9

17.5

-6.3

87.51

11.66

IV Coquimbo

24.8

16.6

-8.3

68.39

81.80

13.41

V Valparaíso

18.8

15.1

-3.7

VI O´Higgins

72.95

81.81

8.86

VI O´Higgins

20.9

12.8

-8.1

VII Maule

75.67

88.13

12.47

VII Maule

25.3

20.7

-4.6

VIII Biobío

76.92

86.66

9.73

VIII Biobío

27.1

21.0

-6.2

IX Araucanía

76.57

86.81

10.24

IX Araucanía

32.7

27.1

-5.6

X Los Lagos**

71.65

86.07

14.43

X Los Lagos**

25.6

17.3

-8.3

XI Aisén

63.85

79.13

15.27

XI Aisén

14.3

15.1

0.9

XII Magallanes and Antártica

50.94

74.86

23.92

XII Magallanes and Antártica

11.1

9.1

-2.0

Metropolitan Region

56.64

71.38

14.74

Metropolitan Region

15.1

11.5

-3.6

Chile

67.02

80.88

13.86

Chile

21.1

15.9

-5.2

2000

2009

∆2000-2009

I Tarapacá*

60.48

76.68

16.20

II Antofagasta

47.72

71.77

24.05

III Atacama

73.57

78.80

IV Coquimbo

75.85

V Valparaíso

* Also includes the region of Arica and Parinacota. ** Also includes the region of Los Ríos. Source: CASEN, 2000 and 2009.

sectors with lower relative incomes; this is the case of programmes such as Chile Solidario (‘Solidary Chile’), the Basic Solidarity Pension and the Chile Barrio (‘Chile Neighbourhood’) Programme. This focus involves a programmatic approach to social issues aimed at targeting the poorest social sectors (destitution) that are less cohesive and organised, and also more

104

∆2000-2009

marginalised from the usual public action. All of this has enabled poverty levels to be cut significantly, from 21% of the Chilean population living in some kind of poverty, whether poverty or destitution, to only 15.9% in 2009.

ii) In the previous context, the territorial dimension of the programmes –especially the most innovative and recent ones– is stronger than before, meaning that there is greater relative trust in regional and local subnational authorities’ management capacities, expressed in a greater management commitment from regional and municipal governments.

The following table allows us to assess the efficiency of sub-national governments in providing basic public services such as electricity, drainage and drinking water. The provision of drainage is the area that shows the greatest improvement, with 8.7% more homes covered, enabling coverage to be increased up to 92.5% of total homes. The supply of electricity and drinking water to homes also shows

105

Table 38. Chile: coverage of basic services (% of total homes with access to the service)

Electricity

Region

2000

2009

I Tarapacá*

99.1

99.3

II Antofagasta

99.6

III Atacama

Drainage

∆2000-2009

2000

2009

0.2

91.8

95.5

99.9

0.3

98.1

99.3

99.5

0.2

IV Coquimbo

93.9

99.2

V Valparaíso

99.3

VI O´Higgins

important increases, meaning that in these three indicators the country can claim coverage of over 90% of the total number of homes. iii) For over twenty years now, social programmes and projects have been subject to a social performance

Drinking water ∆2000-2009

2000

2009

∆2000-2009

3.7

90.9

95.8

4.9

98.4

0.3

98.7

98.5

-0.2

93.5

96.1

2.7

93.5

96.2

2.7

5.2

81.9

93.1

11.2

82.9

94.5

11.6

99.8

0.5

89.9

95.6

5.7

90.9

95.2

4.2

98.4

99.7

1.3

74.5

88.5

14.0

82.1

93.4

VII Maule

97.4

99.6

2.2

74.6

89.3

14.6

75.4

VIII Biobío

97.6

99.6

1.9

76.9

90.8

13.9

IX Araucanía

91.7

98.4

6.7

68.3

79.2

X Los Lagos**

92.7

98.7

6.0

72.2

XI Aisén

89.3

98.8

9.5

XII Magallanes and Antártica

98.8

99.6

Metropolitan Region

99.9

Chile

96.7

Table 39. Chile: life expectancy at birth (years)

rating awarded by the National Investment System, which is led and managed by Chile’s Ministry of Planning and Cooperation (MIDEPLAN), and which to a certain extent guarantees the proper allocation of resources, a clear focus and more active sub-national

2000

2007

∆2000-2007

I Tarapacá*

77.59

78.03

0.44

II Antofagasta

75.67

76.05

0.38

11.2

III Atacama

77.42

78.24

0.81

88.7

13.3

IV Coquimbo

77.95

79.08

1.12

80.7

87.1

6.4

V Valparaíso

76.86

77.60

0.75

11.0

70.0

74.7

4.7

VI O´Higgins

76.30

77.59

1.29

86.4

14.2

69.8

79.0

9.2

VII Maule

75.87

77.07

1.20

78.1

94.5

16.4

83.1

90.0

6.9

VIII Biobío

75.76

77.39

1.63

0.8

96.6

97.5

0.9

96.6

96.2

-0.4

IX Araucanía

76.36

77.50

1.14

X Los Lagos**

75.69

76.72

1.03

99.9

0.0

94.3

98.3

3.9

95.7

98.6

2.9 XI Aisén

74.48

78.87

4.39

99.4

2.7

83.9

92.5

8.7

85.4

91.4

6.0 XII Magallanes and Antártica

75.13

77.08

1.95

Metropolitan Region

77.67

78.34

0.67

Chile

76.84

77.81

0.97

* Also includes the region of Arica and Parinacota. ** Also includes the region of Los Ríos. Source: CASEN, 2000 and 2009.

106

107

management scales. With regard to improving quality of life standards of the population, the increasing life expectancy at birth

in Chile clearly supports the positive results. It has been possible to extend life expectancy by almost one extra year in just seven years; in fact, all regions show improvement in this area.

2000

2009

∆2000-2009

I Tarapacá*

10.4

10.9

0.56

II Antofagasta

10.9

10.6

-0.28

III Atacama

9.8

10.3

0.56

IV Coquimbo

9.3

9.7

0.38

V Valparaíso

10.2

10.6

0.47

VI O´Higgins

8.8

9.5

0.70

VII Maule

8.6

9.0

0.42

VIII Biobío

9.4

9.9

0.52

IX Araucanía

8.8

9.1

0.37

X Los Lagos**

8.5

9.2

0.66

XI Aisén

8.8

9.5

0.64

XII Magallanes and Antártica

10.4

10.2

-0.24

Metropolitan Region

10.7

11.2

0.50

Chile

9.6

10.0

0.40

* Also includes the region of Arica and Parinacota. ** Also includes the region of Los Ríos. Source: CASEN, 2000 and 2009.

108

Table 40. Chile: average schooling of the population aged 15 and above (years)

iv) The Ministry of Finance (Budget Department) has carried out ex post evaluations on most of these actions involving essential services, which also generates suitable monitoring and adjustments to the programmes. The capacity for readapting the programmes has usually recognised decentralisation as the preferred management method. Thus, the population has benefitted widely from decentralisation processes, both in terms of infrastructure and of transfers and social programmes. The levels of schooling achieved perfectly illustrate the effects of extending the coverage of education throughout the region, as well as the implementation of social programmes. Both factors permitted levels of schooling to rise from 9.6 to 10 years on average, during the period 2000-2009. In the case of Mexico, a group of particularly important phenomena occurred in the last decade (which is the reference time span) such as the acute crisis that has affected the country and which has significantly compromised productive growth, generating a relative increase in unemployment and the even wider spread of labour informality. This has hindered the extent and quality of many proposals to address the main deficiencies, increasing the numbers of people in employment programmes, on basic incomes and public subsidies. In Mexican society a more representative

democracy and heterogeneous policy has taken root, which is evidenced by both multiparty politics and the emphasis that elected state and municipal authorities place on national political dynamics. State governments and municipal administrations, and the associative action between them, have taken on greater importance. In this varied, extensive and unequal territorial and regional situation, Mexico is developing a complex process of decentralisation; according to the National Council for the Evaluation of Social Development Policy (CONEVAL), of the 253 federal social development programmes identified, 89% involved the participation of state governments, and 59% of municipal governments, while in 36% of the cases there was some significant mechanism of intergovernmental coordination. In terms of social investment, it is very important that state revenues have practically tripled in ten years and that, additionally, the use of discretion when allocating transfers has been reduced. The Mexican states depend on a very high proportion of federal transfers (with an average index of around 82%), and these same states decide the final destination of an estimated figure of less than 40% of their spending. All the experts agree that states and municipalities are very ineffective tax collectors. This is why this special decentralisation process has not always involved gaining more state and municipal autonomy.

109

Table 41. Mexico: literacy rate

Among other relevant aspects, we would highlight: i) There is now a greater variety of parties in the Mexican political process which has resulted in leadership by state governors. The greater political importance of the states and their administrations means that other important mediating and political forces coexist alongside the president of the Republic. This relatively ‘increased political power’ provides more support for state governments’ management, despite the centralist constraints that arise in budget management and in the established direction of transfers in what are known as ‘earmarked programmes’. ii) Municipalities have been gaining strength and presence in the country, in terms of their responsibilities, competencies and greater resources (albeit mainly earmarked) and local leaders have more relative importance. The varied electoral timetable contributes to preferential political attention in increasingly important local contests. Not being re-elected also influences an interesting exchange of functions between federal and state members of parliament and municipal administrations. iii) There is an important increase in the demand for essential services, both as a result of the crisis, weak growth and

110

other vulnerabilities affecting Mexican society. This is basically expressed in the high rate of unemployment and general job insecurity. With its particularities, the situation can be found in the different states and territories in the country. iv) Some traditional social investment actions from the Secretariat of Social Development (SEDESOL) have seen a reduction in their importance, significance and coverage. Although the Oportunidades (‘Opportunities’) programme continues to be an initiative with a direct influence on the fight against rural poverty, SEDESOL’s special national programmes have less relative influence today. v) As regards basic indicators of education, literacy rates of around 93% of the population have been recorded, although there are problems of coverage in states with indigenous populations. The federative institutions with the greatest coverage are, in this case, the Federal District and Nuevo León, where there is a more homogeneous population. vi) Educational coverage at basic and secondary levels increased at the secondary level, to the point where a continuous growth in coverage was achieved; almost all of the federative institutions reached coverage of 90%.

Federative institution

2000

2010

∆2010-2000

Aguascalientes

95.1%

96.7%

1.6%

Baja California

96.3%

97.4%

1.1%

Baja California Sur

95.7%

96.8%

1.1%

Campeche

88.1%

91.7%

3.6%

Coahuila

96.0%

97.4%

1.3%

Colima

92.7%

94.9%

2.1%

Chiapas

77.0%

82.2%

5.2%

Chihuahua

95.1%

96.3%

1.2%

Federal District

97.0%

97.9%

0.9%

Durango

94.5%

96.2%

1.7%

Guanajuato

87.9%

91.8%

3.9%

Guerrero

78.4%

83.3%

5.0%

Hidalgo

85.0%

89.8%

4.7%

Jalisco

93.5%

95.6%

2.2%

Mexico

93.5%

95.6%

2.1%

Michoacán

86.0%

89.8%

3.8%

Morelos

90.7%

93.6%

2.9%

Nayarit

90.9%

93.7%

2.8%

Nuevo León

96.6%

97.8%

1.2%

Oaxaca

78.4%

83.7%

5.3%

Puebla

85.3%

89.6%

4.3%

➜

111

➜

➜ Querétaro

90.1%

93.7%

3.6%

05 Coahuila

95.9%

88.9%

97.2%

92.7%

1.3%

3.8%

Quintana Roo

92.4%

95.2%

2.8%

06 Colima

94.1%

86.7%

96.0%

91.1%

1.9%

4.4%

San Luis Potosí

88.6%

92.1%

3.5%

07 Chiapas

87.0%

76.2%

93.1%

86.0%

6.2%

9.8%

Sinaloa

92.0%

95.0%

3.1%

08 Chihuahua

94.0%

84.3%

95.5%

90.8%

1.5%

6.4%

Sonora

95.5%

97.0%

1.5%

09 Federal District

96.9%

94.1%

96.9%

95.2%

0.0%

1.1%

Tabasco

90.2%

92.9%

2.7%

10 Durango

95.0%

83.8%

96.1%

91.1%

1.1%

7.3%

Tamaulipas

94.8%

96.4%

1.6%

11 Guanajuato

94.9%

78.0%

97.0%

90.4%

2.2%

12.4%

Tlaxcala

92.1%

94.8%

2.7%

12 Guerrero

90.8%

83.6%

95.1%

89.3%

4.3%

5.7%

Veracruz

85.1%

88.6%

3.5%

13 Hidalgo

96.2%

88.6%

97.5%

93.9%

1.4%

5.3%

Yucatán

87.6%

90.8%

3.2%

14 Jalisco

95.1%

82.7%

96.2%

90.2%

1.1%

7.5%

Zacatecas

92.0%

94.5%

2.5%

15 Mexico

95.8%

89.3%

96.9%

93.4%

1.0%

4.0%

National total

90.5%

93.1%

2.7%

16 Michoacán

92.8%

77.5%

95.6%

86.3%

2.7%

8.8%

17 Morelos

93.7%

86.6%

96.1%

91.4%

2.4%

4.8%

18 Nayarit

94.7%

87.9%

97.0%

92.8%

2.2%

4.9%

19 Nuevo León

96.4%

91.1%

96.6%

94.0%

0.2%

2.9%

20 Oaxaca

92.2%

83.4%

95.9%

90.4%

3.7%

7.0%

21 Puebla

93.3%

80.4%

96.0%

89.3%

2.7%

8.9%

22 Querétaro

95.2%

84.5%

97.4%

92.4%

2.3%

7.9%

Source: INEGI, Population and Housing Census, 2000 and 2010.

Table 42. Mexico: coverage of primary and secondary education

2000 Federative institution

2010

2010-2000

Primary

Secondary

Primary

Secondary

∆ Primary

∆ Secondary

01 Aguascalientes

96.1%

85.4%

97.2%

91.8%

1.1%

6.4%

23 Quintana Roo

94.4%

89.0%

95.6%

92.7%

1.1%

3.8%

02 Baja California

93.1%

88.1%

96.2%

93.9%

3.0%

5.8%

24 San Luis Potosí

95.3%

87.7%

97.5%

93.4%

2.1%

5.8%

03 Baja California Sur

95.3%

90.5%

97.1%

93.8%

1.8%

3.3%

25 Sinaloa

93.3%

85.7%

97.0%

93.3%

3.7%

7.5%

04 Campeche

94.0%

86.1%

96.4%

91.4%

2.4%

5.3%

26 Sonora

95.3%

90.5%

97.1%

94.3%

1.8%

3.7%

➜

112

➜

113

➜

➜ 27 Tabasco

94.7%

87.0%

96.6%

92.7%

1.9%

5.7%

Sinaloa

8.0

9.1

1.1

28 Tamaulipas

95.0%

88.3%

96.3%

92.2%

1.2%

4.0%

Tamaulipas

8.0

9.1

1.1

29 Tlaxcala

96.0%

87.4%

97.7%

93.6%

1.7%

6.2%

Colima

8.0

9.0

0.9

30 Veracruz

92.7%

83.6%

95.7%

90.5%

3.0%

6.9%

Morelos

8.0

8.9

0.9

31 Yucatán

95.1%

88.0%

97.1%

93.4%

2.0%

5.4%

Querétaro

8.0

8.9

0.9

32 Zacatecas

95.2%

80.8%

96.9%

91.4%

1.7%

10.6%

Chihuahua

8.0

8.8

0.8

United Mexican States

94.2%

85.3%

96.3%

91.5%

2.1%

6.3%

Jalisco

8.0

8.8

0.8

Tlaxcala

8.0

8.8

0.8

Durango

7.0

8.6

1.6

Nayarit

7.0

8.6

1.6

Tabasco

7.0

8.6

1.6

Campeche

7.0

8.5

1.5

San Luis Potosí

7.0

8.3

1.3

Yucatán

7.0

8.2

1.2

Hidalgo

7.0

8.1

1.1

Puebla

7.0

8.0

1.0

Zacatecas

6.0

7.9

1.9

Guanajuato

6.0

7.7

1.7

Veracruz

6.0

7.7

1.7

Michoacán

6.0

7.4

1.4

Guerrero

6.0

7.3

1.3

Oaxaca

6.0

6.9

0.9

Source: INEGI, Population and Housing Census, 2000 and 2010.

vii) Improvements in literacy and in access to basic and secondary education allowed the country to raise its level of schooling: from

an average of 7.4 to 8.6 years, with exceptional cases like the Federal District, which achieved 10.5 years, and the lowest, Chiapas, with 6.7 years

Federative institution

2000

2010

∆2010-2000

Federal District

10.0

10.5

0.5

Nuevo León

9.0

9.8

0.8

Coahuila

8.0

9.5

1.5

Baja California Sur

8.0

9.4

1.4

Sonora

8.0

9.4

1.4

Baja California

8.0

9.3

1.3

Aguascalientes

8.0

9.2

1.2

Mexico

8.0

9.1

1.1

Quintana Roo

8.0

9.1

1.1

Table 43. Mexico: average level of schooling

➜

114

➜

115

➜

➜ Chiapas

5.0

6.7

1.7

San Luis Potosí

12.8

9.1

-3.7

National total

7.4

8.6

1.2

Baja California Sur

12.7

9.2

-3.5

Morelos

12.2

9.8

-2.4

Zacatecas

11.7

10.4

-1.4

Quintana Roo

11.4

11.3

-0.1

Veracruz

11.3

10.7

-0.6

Chiapas

11.2

7.3

-4.0

Oaxaca

10.7

8.2

-2.6

Colima

10.7

8.8

-1.8

Hidalgo

10.6

9.5

-1.2

Tamaulipas

9.8

10.5

0.7

Michoacán

8.9

0.0

Campeche

8.8

7.8

-1.0

Coahuila

8.0

6.8

-1.2

Nayarit

6.4

6.6

0.3

Sinaloa

3.9

6.3

2.5

Guerrero

3.7

6.8

3.2

Durango

2.2

9.0

6.8

13.9

11.3

-2.6

Sourde: INEGI, Population and Housing Census, basic tables, 2000 and 2010.

viii) In terms of health, infant mortality was cut from 13.9 to 11.3 in the period 2000-2008; coverage of health services grew to 65% of

the population in 2010; and these elements contributed towards a rise in life expectancy at birth, reaching 76 years.

Federative institution

2000

2008

∆2008-2000

Puebla

22.7

14.9

-7.8

Federal District

21.1

17.2

-3.8

Mexico

20.3

14.3

-6.0

Tlaxcala

19.6

13.7

-5.9

Baja California

19.1

13.6

-5.5

Guanajuato

18.1

12.5

-5.6

Tabasco

17.7

11.7

-6.0

Querétaro

17.3

11.7

-5.6

Yucatán

15.5

13.5

-2.0

Sonora

14.5

11.5

-3.0

Aguascalientes

14.3

10.7

-3.6

Jalisco

14.2

12.0

-2.2

Chihuahua

13.7

12.7

-1.0

Nuevo León

13.3

10.4

-2.9

Table 44. Mexico: infant mortality ratio* (under one year of age)

National total

*Per 1,000 live births. Source: INEGI, birth statistics.

➜

116

117

Table 45. Mexico: life expectancy at birth

Federative institution

2000

2007

∆2007-2000

Baja California

75.36

77.07

1.70

Federal District

75.33

77.04

1.71

Nuevo León

75.02

76.77

1.75

Chihuahua

74.95

76.72

1.76

Coahuila

74.87

76.64

1.77

Aguascalientes

74.76

76.55

1.79

Sonora

74.71

76.50

1.80

Baja California Sur

74.65

76.46

1.81

Jalisco

74.60

76.41

1.81

Mexico

74.54

76.36

1.82

Colima

74.52

76.34

1.83

Tamaulipas

74.47

76.30

1.83

Quintana Roo

74.34

76.18

1.84

Morelos

74.31

76.16

1.85

Sinaloa

74.11

75.99

1.88

Tlaxcala

74.11

75.99

1.88

Querétaro

74.06

75.94

1.89

Nayarit

73.95

75.86

1.91

Durango

73.94

75.85

1.90

Guanajuato

73.90

75.81

1.91

Michoacán

73.66

75.61

1.94

➜ Zacatecas

73.59

75.54

1.95

San Luis Potosí

73.50

75.47

1.96

Puebla

73.48

75.45

1.97

Yucatán

73.49

75.45

1.97

Tabasco

73.44

75.42

1.98

Campeche

73.44

75.41

1.98

Hidalgo

73.18

75.19

2.01

Veracruz

73.09

75.11

2.02

Guerrero

72.54

74.64

2.10

Oaxaca

72.52

74.62

2.11

Chiapas

72.29

74.42

2.14

National total

74.03

75.94

1.90

Source: National Population Council (CONAPO). 2002. Population Projections for Mexico. 2000-2050.

Table 46. Mexico: coverage of health services

Coverage of health services Federative institution

2000

2010

∆2010-2000

Aguascalientes

55.4%

78.5%

23.1%

Baja California

51.2%

69.1%

17.9%

Baja California Sur

58.9%

75.6%

16.7%

Campeche

38.4%

76.8%

38.4%

Coahuila

69.7%

76.5%

6.8%

Colima

45.6%

81.3%

35.6%

➜ ➜

118

119

➜

➜ Chiapas

17.6%

56.8%

39.2%

Tlaxcala

29.8%

61.6%

31.8%

Chihuahua

56.2%

73.1%

16.9%

Veracruz

30.7%

58.7%

28.0%

Federal District

51.3%

63.8%

12.5%

Yucatán

45.1%

74.9%

29.8%

Durango

48.9%

68.2%

19.3%

Zacatecas

32.4%

68.5%

36.1%

Guanajuato

33.9%

69.7%

35.8%

National

40.1%

64.6%

24.4%

Guerrero

20.3%

53.3%

33.0%

Hidalgo

29.1%

65.3%

36.1%

Jalisco

44.3%

64.1%

19.8%

Mexico

39.7%

58.1%

18.4%

Michoacán

26.2%

54.2%

28.0%

Morelos

34.2%

63.2%

29.0%

Nayarit

40.5%

76.3%

35.8%

Nuevo León

65.9%

77.1%

11.2%

Federative institution

Oaxaca

22.6%

56.0%

33.4%

Puebla

24.9%

49.5%

Querétaro

45.4%

Quintana Roo

Source: INEGI, Population and Housing Census, ITER 2000 and 2010.

Table 47. Mexico: evolution of the coverage of basic services and conditions in homes

ix) With regard to housing conditions, an increase was seen in the number of households with electricity,

Households with access to electricity

People living in homes with dirt floors

∆20102000

2000

2010

∆20102000

98.7%

1.5%

3.5%

1.7%

88.7%

95.9%

7.2%

4.9%

Baja California Sur

92.9%

94.0%

1.1%

21.4%

Campeche

90.5%

95.8%

73.0%

35.6%

Coahuila

96.9%

53.0%

74.9%

21.9%

Colima

Sonora

56.4%

74.0%

17.6%

Tabasco

29.4%

73.5%

Tamaulipas

51.2%

73.4%

2000

2010

Aguascalientes

97.2%

24.5%

Baja California

73.9%

28.5%

46.2%

67.6%

San Luis Potosí

37.4%

Sinaloa

the number of homes with a dirt floor was reduced and coverage of drainage and drinking water rose.

Households with access to drainage

2000

2010

-1.9%

95.0%

98.1%

3.3%

-1.7%

81.8%

10.8%

5.7%

-5.1%

5.3%

14.4%

4.7%

97.5%

0.5%

4.9%

91.4%

97.1%

5.7%

Chiapas

84.7%

94.5%

44.1%

Chihuahua

90.9%

22.2%

Federal District

97.8%

∆20102000

Households with access to drinking water ∆20102000

2000

2010

3.1%

96.7%

97.8%

1.0%

92.9%

11.1%

89.3%

94.1%

4.8%

80.5%

93.3%

12.8%

87.0%

87.4%

0.3%

-9.8%

63.8%

85.5%

21.7%

80.2%

84.8%

4.6%

1.6%

-3.3%

83.5%

95.1%

11.6%

93.5%

96.4%

2.9%

11.9%

4.5%

-7.5%

93.3%

98.3%

5.0%

94.0%

96.8%

2.8%

9.8%

38.5%

14.7%

-23.8%

62.3%

83.3%

21.0%

68.0%

73.5%

5.4%

93.1%

2.2%

6.6%

3.2%

-3.5%

85.2%

92.8%

7.6%

92.1%

94.4%

2.3%

96.6%

-1.2%

1.9%

1.0%

-0.9%

98.2%

98.9%

0.7%

97.0%

96.9%

-0.1%

➜ ➜

120

121

➜

➜ Durango

92.4%

94.3%

1.8%

12.8%

6.3%

-6.5%

73.5%

88.5%

15.0%

89.9%

92.5%

2.6%

Zacatecas

94.9%

97.3%

2.4%

8.9%

3.4%

-5.5%

70.2%

89.1%

18.8%

83.5%

91.4%

7.8%

Guanajuato

95.4%

97.5%

2.1%

10.7%

4.1%

-6.6%

76.2%

90.5%

14.3%

88.2%

91.6%

3.4%

National

92.9%

96.2%

3.3%

14.1%

6.3%

-7.9%

77.7%

90.1%

12.4%

84.0%

87.9%

3.9%

Guerrero

88.2%

94.6%

6.4%

36.9%

18.4%

-18.6%

53.5%

76.5%

23.0%

59.8%

61.6%

1.8%

Hidalgo

91.3%

95.8%

4.5%

18.2%

7.1%

-11.1%

65.8%

85.3%

19.5%

79.6%

86.8%

7.2%

Jalisco

96.1%

97.2%

1.1%

7.3%

3.0%

-4.2%

91.7%

97.3%

5.6%

89.2%

94.1%

4.9%

Mexico

93.3%

97.6%

4.3%

7.1%

3.8%

-3.4%

86.4%

94.2%

7.9%

89.9%

91.8%

1.9%

Michoacán

94.1%

96.5%

2.4%

18.6%

10.2%

-8.3%

74.7%

88.5%

13.8%

82.7%

87.7%

5.0%

Morelos

94.1%

97.0%

2.9%

13.9%

7.2%

-6.7%

84.9%

95.1%

10.1%

86.0%

87.2%

1.2%

Nayarit

94.1%

95.6%

1.5%

12.1%

4.0%

-8.1%

80.2%

94.0%

13.8%

84.7%

88.1%

3.4%

Nuevo León

97.1%

96.8%

-0.3%

3.8%

2.0%

-1.8%

90.7%

95.7%

5.0%

93.4%

95.4%

1.9%

Oaxaca

86.8%

93.6%

6.9%

39.7%

18.7%

-21.0%

45.6%

70.8%

25.2%

65.5%

69.5%

Puebla

91.8%

96.6%

4.8%

22.7%

9.5%

-13.2%

65.6%

87.0%

21.4%

77.3%

Querétaro

92.9%

96.7%

3.8%

9.9%

3.7%

-6.1%

75.7%

90.9%

15.2%

Quintana Roo

93.8%

94.5%

0.7%

10.6%

3.7%

-6.9%

83.7%

92.8%

San Luis Potosí

87.8%

94.6%

6.7%

22.1%

8.7%

-13.4%

62.1%

Sinaloa

95.4%

97.7%

2.3%

14.2%

6.1%

-8.0%

Sonora

94.7%

96.0%

1.4%

12.8%

5.3%

Tabasco

93.1%

97.0%

3.9%

13.1%

Tamaulipas

93.6%

93.7%

0.1%

Tlaxcala

96.2%

97.9%

Veracruz

88.7%

Yucatán

94.6%

Source: INEGI, Population and Housing Census, ITER 2000 and 2010.

x) In terms of levels of inequality, the country managed to reduce its Gini coefficient from 0.546 to 0.506 between 2000 and 2008, although in some federative institutions an Table 48. Mexico: evolution of the Gini coefficient, 2000-2008

Federative institution

2000

2008

∆2000-2008

Yucatán

0.590

0.487

-0.103

4.0%

Quintana Roo

0.571

0.502

-0.069

83.4%

6.0%

Oaxaca

0.565

0.508

-0.057

88.2%

91.4%

3.3%

Morelos

0.561

0.478

-0.083

9.0%

90.0%

89.7%

-0.4%

Veracruz

0.558

0.495

-0.063

80.6%

18.5%

76.2%

82.8%

6.6%

Puebla

0.554

0.476

-0.078

74.3%

91.2%

16.9%

84.9%

89.7%

4.8%

Guerrero

0.549

0.539

-0.010

-7.5%

79.1%

89.5%

10.4%

91.5%

93.8%

2.3%

San Luis Potosí

0.545

0.503

-0.042

6.4%

-6.7%

85.3%

95.1%

9.8%

69.2%

73.4%

4.2%

Chiapas

0.542

0.557

0.015

9.1%

3.3%

-5.7%

74.4%

86.9%

12.4%

90.4%

93.7%

3.3%

Hidalgo

0.531

0.491

-0.040

1.8%

9.4%

3.9%

-5.6%

82.1%

94.2%

12.1%

90.2%

95.3%

5.1%

Querétaro

0.529

0.504

-0.025

95.3%

6.6%

26.5%

11.7%

-14.9%

67.8%

83.8%

16.0%

66.1%

76.0%

10.0%

Guanajuato

0.525

0.443

-0.082

96.4%

1.8%

5.9%

2.8%

-3.1%

58.4%

79.6%

21.2%

89.5%

93.6%

4.1%

Zacatecas

0.523

0.510

-0.013

➜

122

increase was seen, such as in the cases of Chiapas, Federal District, Sinaloa, Durango, Nuevo León, Chihuahua, Aguascalientes and Baja California.

➜

123

6.3. The impact of decentralised expenditure and its repercussion on welfare levels

➜ 0.523

0.465

-0.058

Campeche

0.520

0.523

0.003

Tabasco

0.520

0.526

0.006

Tlaxcala

0.518

0.425

-0.093

Coahuila

0.511

0.472

-0.039

Colima

0.507

0.450

-0.057

Federal District

0.505

0.511

0.006

Michoacán

0.502

0.482

-0.020

Tamaulipas

0.500

0.483

-0.017

Mexico

0.498

0.426

-0.072

Sonora

0.495

0.471

-0.024

Nayarit

0.493

0.478

-0.015

Baja California Sur

0.493

0.488

-0.005

Sinaloa

0.481

0.485

0.004

Durango

0.478

0.495

0.017

Nuevo León

0.469

0.490

0.021

Chihuahua

0.465

0.531

0.066

Aguascalientes

0.454

0.509

0.055

Baja California

0.446

0.451

0.005

National

0.546

0.506

-0.040

Source: Inequality maps. Multidimensional poverty.

124

In order to evaluate the way in which decentralised expenditure has affected basic services, an exercise was carried out: the provision of decentralised health services was correlated with the reduction of infant mortality, as was the effect that decentralised expenditure has had on education, and in this way measuring one of the principal Millennium Development

Goals in this area, consisting of the population that begins primary education completing the whole cycle. In both cases, we can state that the results are positive. In the first, Argentina and Mexico reduced infant mortality to 15% and 16% respectively; Brazil, despite its success, remained at 20%. In this regard, decentralised spending appears to have been a key element in achieving this progress, as can be seen in the following chart.

Chart 11. Impact of decentralisation on infant mortality

1995

31 Infant mortality ratio (per 1,000 inhabitants)

Jalisco

1995

27 25 1995

23 21

2006

19 17 2006 15 2006

Source: INEGI, the Brazilian Institute of Geography and Statistics (IBGE), the Argentinean Institute of Statistics and Censuses (INDEC), World Bank.

13 5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

Average share of decentralised expenditure Argentina

Brazil

Mexico

125

Decentralised education, in turn, has been highly successful in terms of achieving the objective of ensuring that most of the students who begin primary education complete the entire course. In Argentina and Chile this goal has been accomplished by reaching 95% â&#x20AC;&#x201C; a percentage which in Mexico lies at 92% and in Colombia, at

88%. The only case in which acceptable levels have not been reached is in Brazil. A final indicator for measuring the effectiveness of decentralised expenditure on welfare levels was analysed using the Gini coefficient.16 The result is also positive, showing a reduction in all cases,

0.65

Chart 13. Spending and inequality, an approach based on the Gini coefficient

0.63

0.59

Chart 12. Students who reach the final grade of primary education

110

Gini coefficient

Percentage of the total number of students who reach the final grade of primary education

0.61

100

0.57

0.55 90 0.53 80 0.51 70 0.49 7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

Average share of decentralised expenditure Source: ECLAC.

1999

2000 Argentina

2001 Brazil

2002

2003 Mexico

2004 Colombia

2005

2006

2007

Argentina

Brazil

Mexico

2008

Chile

Source: UNESCO - Institute for Statistics (IEU).

which also demonstrates that wider decentralisation does indeed generate a process of greater income distribution.

16 The Gini coefficient is a statistical measure for analysing the distribution of income without using average income as a reference parameter; it is a measure of income concentration. This index takes values from 0 to 1; the higher it is (closer to 1), the greater inequality exists in income distribution. Due to its simplicity of calculation and interpretation, it is one of the most used indicators of inequality for measuring and comparing inequality among populations (CONEVAL).

126

127

7. Latin America: an analysis of the impact of decentralised expenditure on building productive capacities

Processes of decentralisation not only lead to the development of fiscal capacities in the countries concerned, but also, by strengthening democratic processes in the regions, they encourage initiatives among all the economic stakeholders that were previously concentrated in the large Latin American cities. Moreover, these processes tend to generate a territorial distribution of companies that contribute to local development. Viewed from this perspective, decentralisation can be successful as long as it manages to boost the structural complexity of the productive area. Otherwise, the forces of local development will be dependent on transfers from national or sub-national governments which generate a certain level of spending and employment in the communities. In this section we explore the way in which this structurally complex process has performed in Brazil and Mexico, looking at some basic relationships and measuring what this change has meant for the territory.

Ramón Cuadrado Roura (2002), Alburquerque (2004), the Organisation for Economic Cooperation and Development (2005), the World Bank (2003), Andrés Rodríguez Pose (2008) and Vázquez Barquero (2010). All of them refer to the conditions required for these processes to be successful. From this point of view, decentralisation processes require part of the central government’s development work to be reassigned to local authorities, which will lead to the promotion of business policies. In Latin America, these processes have been linked to two fundamental concepts: firstly, attracting cores of foreign investment to form business clusters and secondly, in a complementary way, encouraging micro and small enterprises to join in the process of supplying large businesses in order to create production networks and value chains in each of the Latin American regions. Thus, policies for supporting micro and small businesses should fall within the framework of local development strategies and even territorial development strategies.

7.1. Latin America: local development as a starting point

Local development must identify where the productive units are, but at the same time it has a broader scope relating to local public management, public-private cooperation and creating an environment that ensures real opportunities for business development. Local development is not simply a financial matter; businesses do not operate in a vacuum or in a census, but are instead part of a set of productive linkages with suppliers and clients (with backward or forward

One of the assumptions of the theory behind decentralisation is that it contributes towards generating endogenous processes of local economic growth. This is the fundamental idea expressed in the theory of local economic development, which has been explored by many economists, among others Blakely and Bradshaw (2002), Juan

128

129

productive linkages), and it is therefore necessary to understand the character of these networks, of these productive chains and the degree to which the territory helps to facilitate the incorporation of elements that boost productive efficiency in competitiveness. In other words, a company does not compete alone: it is the network of backward and forward productive linkages, as well as the character and provision of territorial elements (not only economic and financial, but also social and cultural) that help to facilitate access to strategic information. Therefore, it cannot be treated as a specific sector if we want to go beyond an approach based on projects carried out by isolated units or nongovernmental development organisations. To discuss development, we must leave macro-balances aside and start talking about the territory as a stakeholder, as an asset. Consequently, the territory must be included in discussions on development and this dialogue must also involve all the stakeholders, the environment, their organisations and strategies. In the last two decades, the governments of Latin America have gradually shifted the focus from policies favouring macro-economic stability towards one which also includes a development strategy in line with the complexity of the national productive structure in the different territories in these countries. A crucial part of development is the introduction of socioinstitutional and managerial productive innovations throughout the entire business fabric, which is composed mainly of micro and small enterprises (currently

130

more than 90% of businesses are micro and small). Thus, the idea behind this system of development is to take the local entrepreneurial culture into account, which stimulates the creation of new businesses and channels the population’s entrepreneurial spirit in the different territories in the region. There is an asymmetrical situation between micro and small businesses with regard to their importance in terms of number, people, employment and income; importance therefore from an economic and social point of view, and due to the unequal treatment they receive compared with large and medium-sized businesses. In order to equalise competitiveness conditions, it is necessary to defend policies that support micro and small businesses, trying to reduce the difficulties these face and even establishing positive discrimination in favour of these micro and small businesses, as already occurs in many countries, among them those in the European Union, the United States and all the countries in East Asia. Positive discrimination consists of giving priority to small local suppliers, trying to ensure that they meet standards of quality and competitiveness. This is an example of active policy; just as has occurred with employment, it is necessary to adopt a proactive position and apply positive discrimination in favour of micro and small businesses. This applies both for reasons of social cohesion and economic development. However, it is common to find that support for agricultural activity, for

example, is usually based on reasons of social investment, leaving these activities to a certain extent held captive to an aid dynamic or very closely tied to international cooperation. The countryside should be seen as something that must be helped by cooperation. On the contrary, national development strategies should incorporate what is today a very common element in northern countries, where regional and local governments have created policies to support micro and small businesses for economic and social cohesion reasons. These types of strategies, or proactive policies, can be justified for reasons other than generating employment or income for much of the population because they are a fundamental tool for strengthening the socioeconomic, productive and institutional fabric of the different local spheres. Faced with the problem of development compared with under-development, or articulation compared with disarticulation, what are needed are development proposals aimed at strengthening coordination between the socio-institutional, economic and social networks in the different local spheres. Likewise, reinforcing the local productive systems formed by micro and small businesses will make the entire national economic system less vulnerable to any possible external shock or unexpected macro-economic change. The strong presence of a network of micro and small businesses also helps to better distribute economic power in society and acts as a channel for the local population’s

entrepreneurial spirit. In addition, this presence throughout the territory facilitates learning and innovation, helping to increase the involvement of local innovation in the different territorial spheres. Micro and small businesses form national capital, domestic capital, whose owners live and work in different territorial areas – something we could consider as local capital and which is the basis for establishing a more balanced domestic economic and social development project. A very high percentage of the purchases made by these businesses correspond to local or domestic products, which makes these micro and small businesses very important from the point of view of increasing the level of domestic productive coordination. Recent history shows us that most industrialised countries have not based their development strategies exclusively on foreign investment; this would not be sustainable without a solid base of micro, small and medium businesses that participate in the learning and innovation processes of the different territorial spheres. The ultimate aim of local development strategies should be to strengthen the local productive and business sector so that it can collaborate in increasing employment and income and, along with it, the standard and quality of life of the local population. The vast majority of Latin America’s productive activity is generated in local settings by micro and small businesses, which demonstrates the

131

size and relevance of local production and the importance of policies that promote these types of businesses. This promotion cannot be applied solely through aid programmes and policies, nor can we assume that an international approach alone will lead to modernisation, i.e., to fill the gaps that national development policies have expected the market to cover. In Latin America, establishments considered to be formal micro and small businesses make up most of the region’s business sector (around 96.2% of the total) and they employ almost half of the working population. These enterprises are found throughout the territory, representing most of the business fabric,

and it is these micro and small businesses that are facing the demands of structural changes. Despite this, these businesses are not protected by any development policy; they are not eligible for strategic development plans and are instead treated as a social investment fund for international cooperation; they are, however, eligible for aid policies launched by governments and international organisations. There are some exceptions to this last statement; in Brazil, for example, some projects have managed to involve state and international institutions. This situation reveals that it is important to

Employment

Sales

Exports

Argentina

43.6

41.0

8.4

Brazil

42.,6

25.9

12.5

Chile

21.2

18.3

3.7

Colombia

32.0

17.1

Ecuador

24.0

15.9

< 2.0 %

El Salvador

27.7

34.3

< 2.0 %

Mexico

30.8

26.0

< 2.0 %

Peru

11.9

27.0

< 2.0 %

Uruguay

47.0

< 2.0 %

Source: ECLAC (2010). The situation of SMEs in Latin America.

132

Table 49. Latin America: contribution of SMEs (% of total)

continue supporting those processes being developed in favour of micro and small businesses, and to establish them as priorities. Their importance, in terms of generating employment and income, in addition to territorial coverage, could complement development policies that exclusively emphasize macro-economic stability which, despite being a necessary condition, is not sufficient in itself if we consider figures on income, employment and territorial presence. The goal of eradicating poverty should be addressed with a more consistent strategy and, therefore, a sound basis for growth must be established in a similar way to what has been done in developed countries. It is necessary to combine the institutional strengthening of local governments, the momentum of citizen participation in cooperation between public and private sectors, the progress of democracy and the promotion of micro, small and medium-sized enterprises. This means that we must move towards territorial development of democracy, governability, sustainable growth, and everything that concerns development. Local development must not be seen as a lesser version of development; on the contrary, local development is the basis of all development. Local development should not only take macro-economic aggregates into account. The most important thing is to consider the population and the environment they live in taking a comprehensive look at the differences that characterise the stakeholders in each territorial unit and at their alliances and institutional

relationships. An active territorial policy for business development should be developed, but bearing in mind the limitations of centralised bodies that work in charitable cooperation and are run by personnel who are not specialised in the matter. An international context does not guarantee the sufficient spread of the technical progress made by all these micro, small and medium-sized enterprises in the local productive system, as their activity is not directly linked to exportation. Technological progress will have an effect on those businesses that are interlinked with productive systems in the globalised world, but this will hardly be felt in micro, small and medium-sized enterprises, which are estimated to have very limited linkages with international markets. The effects of spreading innovation, which also involve the socio-institutional area, do not come from integration into external markets or from foreign investment. An international approach has a limited influence on the net creation of skilled jobs and does not guarantee the crucial aspects needed for introducing innovation. Productive innovations do not only mean technology –whether in productive processes or products, new equipment, new facilities and new materials–, they also include innovations in management, in organisation, and those that increase flexibility, productive efficiency, the capacities of human resources according to the needs of the different local productive systems, access

133

to information networks and relationships with suppliers. The majority presence of micro and small enterprises in all countries calls for huge efforts to be made in terms of productive and entrepreneurial innovation – a matter that is inefficiently handled by general policies implemented by central governments, which lack the flexibility needed to be able to adapt to the individual needs of each territory. Without a specific development policy for the different local productive systems it is not possible to properly modernise businesses, or support micro and small enterprises. These policies must be accompanied by instruments, including those that incorporate the use of new technologies, for example, territorial information systems or the support of geographical information and georeferenced systems. While development analyses have typically had a macroeconomic focus, in the phase of technostructural transition we currently find ourselves in, it is important to know how to successfully break into the micro area and introduce productive and commercial innovations across the board. These range from technological management capacity to labour relations suitable for the horizontal structure needed for disseminating information, as well as integration into networks. This is essential if innovation is to reach the basic productive and business fabric at the micro level. Innovative environments for business promotion must be established in each territory and these should have a strategy and incorporate socio-cultural

134

changes and values that foster mid-level cooperation that will effectively influence the micro level. Ultimately it comes down to demonstrating that competitiveness and development depend on creating the right territorial conditions to encourage the introduction of innovation at a micro level; this should be done by fostering social capital and coordinating publicprivate stakeholders from within the territory. In Latin America this is not an established approach to development; governments have argued that it was not necessary to have an industrial policy, as this was covered by the market. But micro, small and medium-sized enterprises cannot be asked to do this, as it is something that must be implemented through policies on development and employment. In this regard, cooperation must go much deeper if we truly want to move away from aid-based solutions to building an agenda that leads to genuine development. The importance we give to micro, meso and territorial levels is reflected in the importance that this attention to the micro level receives in our local development agendas. We must understand the adaptations required on a meso-economic level to ensure the introduction of technological, social and management innovations into the productive base and the business sector of each territorial area. Placing the emphasis on development must involve the territory and social capital. Because environmental issues –which are not unrelated to building the capacities of human resources which, in turn, are closely

linked to labour markets with specific employment opportunities that differ from one place to another– can only be tackled on a territorial level. Innovation is also related to the problems in each territory’s productive network, and resolving these problems call for a territorial vision. The main goal of local development is coordination between the productive base and the local business sector, something which can be seen in most micro and small businesses. Thus, when helping to build favourable territorial environments what are needed are social, cultural and institutional changes and adaptations. The construction of social capital, of rules, agreements and forms of relating to each other enables coexistence to be organised within a territory. These aspects are fundamental for development which, occasionally, takes only quantitative indicators into account. Development must be focused by encouraging all the stakeholders to work together towards incorporating the territory, conventional economic reflection, the basic infrastructures for development (adapting these for development in the territory), business development services (both financial and real), productive services, and the territorial promotion of micro-enterprises, SMEs and cooperatives. Essentially, the idea is that central governments should not hold the monopoly on development policy and that this policy can become part of the development strategy in the cooperation agenda. Local development, human capital, education, nutrition, health, and women’s rights are not just social

policies, they are development policies. If we accept that human capital is a crucial element in the information era, then we should consider it as an essential preinvestment for development. It is not just an element of social policies: it is a central asset necessary for undertaking any development approach. Local development has a priority: internal productive and social coordination to make better use of endogenous resources and external opportunities. Local development does not only involve using endogenous resources, but is also the capacity to endogenise the way we take advantage of existing external opportunities. To do this, a strong economic base is needed as well as a strategy agreed with the stakeholders capable of carrying it out. To strengthen negotiating power it is important to investigate the possibility of, for example, building local networks of suppliers or contractors, which will help to form relationships with large companies – which are rarely interested in unstable or uncertain contexts. In any case, only by strengthening the local economic base can the segments of international markets be sustained in the long term. There is a link between the domestic productive system and environmental sustainability and also macro-economic stability, but the action agenda also involves attending to basic needs, and selecting suitable technologies for this priority attention, which is in turn related to building the capacities of human resources and the local labour market. With this approach, it is possible to start building an economic

135

base by attending to local needs that can be covered by promoting businesses that address this type of need, i.e., by working on productive coordination right from the start, which requires a meso-level effort of creative interaction between public and private stakeholders. Thus, foreign investment can be improved if it is supported by integration platforms, as demonstrated throughout the history of development. Sometimes, local development is confused with municipal development. However, local business systems do not stop at municipal limits and, on most occasions, the coherence of the productive linkage itself exceeds the boundaries of the municipality. Identifying the geoeconomic units of intervention in local productive systems is an important step in designing a local development policy, differentiating these units from political-administrative boundaries in the provincial, regional or national area. It is also common for local productive systems to be constrained by politicaladministrative boundaries, which is a serious obstacle for local economic development because it hides information about the commercial relationships that exist between different communities. This forces a greater emphasis to be placed on creating territorial information systems for development, as sectorial or other statistics are either inappropriate or insufficient. Micro and small businesses, although they are not organised in censuses or cadastres, are grouped into networks within a

136

territory. This indicates their importance; they form significant territorial groups, mostly in commercial and service activities, but also in manufacturing, in productive chains or clusters. Nevertheless, there is no information available on this subject. This requires an on-the-spot assessment and knowledge of the partners so that this information is accessible to them, i.e., identify their territorial location, the location of their productive linkage and use of territorial or geo-referenced information systems. This has become essential today, as competitiveness does not depend on isolated businesses but on networks of linkages and on the characteristics of the territorial environment they are based in. This enables an innovationfriendly environment to be built. Likewise, businesses are affected by the level of quality planning in their urban, environmental and territorial surroundings, taking into account territorial productive systems projects and strategies to resolve the issues of moving people or goods: which, in economic terms, are known as transaction costs. Improving the surrounding infrastructure and quality of urban services is fundamental for productivity and competitiveness. This involves addressing fairly obvious issues, but an integrated theoretical approach is fairly new for economists and in discussions about development. These are the first things to consider when launching development cooperation actions. An isolated business plan has no future. It is necessary for the territory to introduce an active policy,

agreed with stakeholders, in order to support business development innovations for SMEs in the different territories. This should, therefore, be a territorial policy that enables cooperation to be viewed in this manner. Interventions by nongovernmental organisations through projects should be agreed and must fit within a development strategy that takes into account the different production profiles in the various territories, and the different profiles of the stakeholders involved, of their social capital, their history and their culture. Likewise, capacity-building actions for human resources must be adapted to the existing needs in the different local productive systems and to the underlying demand for innovation. The importance of addressing environmental characteristics brings with it a need for flexible territorial design to seek public-private cooperation in the different territorial areas and, therefore, find the right productive development policy. Micro and small and medium-sized enterprises do not always have a clear vision of the strategic data that must be considered when making structural changes, which reveals that in terms of demand there are no indications that the underlying innovation exists to address these changes. Furthermore, services for dealing with new situations have not been set up in the territories. So no market has been built, and it is therefore necessary to mediate in order to build these markets, i.e., based on the underlying demand for innovation

and by establishing, introducing, using and guiding the promotion instruments that already exist. Each territory must create the different strategic service environments and markets for supporting micro-enterprises’ and SMEs’ production, which requires public administrators and local development agents to adopt an active policy, in order to help identify the weaknesses in the various local productive systems and adapt the appropriate supply of instruments for productive and business promotion. An analysis of international best practices by municipalities to meet the demands of the meso-economic level of introducing innovations reveals an important level of effectiveness and efficiency. This has enabled significant progress to be made, as we can see in our own countries. When institutions have a greater capacity for representation and legitimacy before the electorate –and this is something that occurs on a local scale and through decentralised cooperation–, they can then become agents for the social and cultural integration of territorial communities with a greater capacity for adapting to variable contexts; this is an essential advantage when trying to build social capital. Decentralisation in Latin America is usually limited to fiscal decentralisation, or to capacity-building courses so that those who are going to manage from local levels do so correctly and do not alter the vertical fiscal balance or spend more than they should. In the case of Europe, decentralisation is based on the transfer of power and resources, which has freed the potential

137

for generating more growth, development and employment. Constructing collaboration networks among territorial stakeholders and cooperation between different levels of territorial administration enables the progress of democracy, decentralisation, productive business innovation, employment, and social and cultural integration. Fiscal decentralisation must include the new and decisive functions of promoting productive and business development in the territorial area and, considering the restriction on applying free trade policies in southern countries, it has to be part of a cooperation strategy. Productive development and business innovations are not the exclusive domain of the public sector, instead these components should be implemented through public-private cooperation; learning the lesson that new forms of local public administration should focus on creating opportunities for collaboration with the private sector and, therefore, move towards methods of shared management, although, until now, there has been no agreement on how to achieve this. This hampers the design of a strategy for publicprivate cooperation. In cooperation, the public sector is the catalyst, the facilitator that provides democratic spaces, organises, and gathers everyone together, but it is the entire group of stakeholders that create development. Institutional coordination in the different territorial levels of administration is important. This means that the issue of sharing management with the private

138

sector forms part of a strategy for promoting micro and small businesses. This shared management results in development research and administrative modernisation. New local public administration should be introduced, overcoming centralist approaches and providing territorial entities promoting productive development with the capacity to carry out their work effectively and permanently. Micro-enterprises represent a huge majority of the existing businesses in the region and they make up the productive and entrepreneurial sectors of the region’s different countries. They are important from the point of view of employment and the income of much of the population, which makes them an intelligent policy for economic development or development cooperation policy in any country. Without questioning the efforts made towards macro-economic stability in the promotion of exportations, this concept must be accompanied by more consistent and not only aid-based approaches to the problem of poverty. It is necessary to incorporate a micro and small business strategy into this approach to genuine local development as suggested: not as a secondary agenda, but as the most important challenge.

7.2. Latin America: decentralisation hypothesis was that the increase in spending was positively correlated with and development of local the creation of new businesses (∂EU), with productive capacities Local development in recent decades has been strengthened by business development; in the cases of Brazil and Mexico, the different regions of both countries have shown consistent expansion according to the information available in economic censuses. The example of Brazil, despite being more robust, tends to be more concentrated in large urban zones; the difference between the number of businesses in São Paulo and Amapá is 210 times greater, while in Mexico the number of businesses in the State of Mexico is 20 times greater than in Baja California Sur. To this we must add that the growth dynamic is higher in Mexico than in Brazil, even though the number of businesses in Brazil is almost double that of Mexico, as can be seen in tables 50 and 51. In an effort to analyse the impact that decentralisation has had on the development of new productive capacities in Brazil and Mexico, a correlation exercise was carried out between the increase in decentralised expenditure and the main census variables on economic unit growth, the rise of added value, increases in employment and the rise in formation of capital. The exercise was carried out in the case of Brazil with census data for 2002 and 2006, and with data corresponding to the increase in decentralised expenditure for the same period, by first-level national government (the twenty-seven federal states). The

an increase in production (∂EU) and with an increase in employment (∂E); thus, what was being tested was whether there was a positive elasticity, as indicated by the following formulas:

∂EU ∂DE

∂AV ∂DE

∂E ∂DE

The results obtained were positive in the case of a stimulus for the creation of new businesses in the federative institutions with the lowest gross domestic product. In this regard, it could be argued that decentralised expenditure has stimulated economic activity and, with this, it has managed to generate a greater number of businesses that, according to the economic census, are small and medium enterprises. The results, in this case, were negative for Goiás and Santa Catarina, which are the entities with the highest level of productive value and in which decentralised expenditure did not grow. The effect on the amount of added value generated in real terms was greater than in the case of entrepreneurship, which could suggest a growth in productivity, due to decentralisation. As regards employment, there seems to have been less impact: the elasticity was lower on average, which could indicate that the processes are less intensive in

139

Entity

2000

2006

Variation %

1,339,138

1,854,518

5.58%

Minas Gerais

527,374

690,664

4.60%

Rio Grande do Sul

468,046

621,926

4.85%

Paraná

337,313

484,942

6.24%

Rio de Janeiro

334,397

439,549

4.66%

Santa Catarina

235,051

327,104

5.66%

Bahia

201,694

292,435

6.39%

Ceará

128,644

182,788

6.03%

Goiás

123,098

176,945

6.23%

Pernambuco

111,038

152,035

5.38%

Espírito Santo

84,355

116,611

5.55%

Mato Grosso

66,068

98,849

Federal District

68,492

Pará

São Paulo

Table 50. Brazil: subnational business development (number of businesses)

➜ Rondônia

27,155

37,126

5.35%

Sergipe

22,366

30,796

5.48%

Tocantins

21,352

27,985

4.61%

Acre

8,121

12,067

6.82%

Roraima

6,500

9,585

6.69%

Amapá

6,136

8,800

6.19%

4,454,179

6,144,178

5.51%

National total

Source: created by the author based on data from economic censuses, IBGE and the Treasury Secretariat.

Table 51. Mexico: sub-national business development (number of businesses)

2003

2008

Variation %

Mexico

364,921

456,563

25.1

6.95%

Federal District

342,454

382,056

11.6

88,994

4.46%

Jalisco

214,623

264,361

23.2

51,062

78,770

7.49%

Veracruz

184,668

225,773

22.3

Maranhão

48,034

74,404

7.57%

Puebla

165,237

215,177

30.2

Mato Grosso do Sul

52,556

69,059

4.66%

Guanajuato

150,746

179,819

19.3

Paraíba

46,916

66,512

5.99%

Michoacán

141,426

176,186

24.6

Río Grande do Norte

44,549

64,334

6.32%

Oaxaca

107,075

144,372

34.8

Piauí

36,598

53,021

6.37%

Chiapas

93,814

129,863

38.4

Alagoas

32,186

42,867

4.89%

Nuevo León

110,148

129,427

17.5

Amazonas

25,940

41,492

8.14%

Guerrero

95,016

127,978

34.7

Tamaulipas

85,274

102,130

19.8

➜ ➜

140

141

➜ 79,185

89,248

12.7

Yucatán

62,799

85,597

36.3

Sonora

66,660

83,141

24.7

Hidalgo

62,521

81,570

30.5

Coahuila

66,456

80,880

21.7

Sinaloa

64,611

80,540

24.7

Baja California

61,807

80,368

30.0

Morelos

63,647

79,404

24.8

San Luis Potosí

63,762

79,211

24.2

Querétaro

42,491

56,345

32.6

Tabasco

44,186

52,616

19.1

Tlaxcala

38,241

49,337

29.0

Zacatecas

40,869

48,127

17.8

Durango

37,864

45,135

19.2

Aguascalientes

33,604

40,960

21.9

Nayarit

29,896

39,283

31.4

Quintana Roo

29,079

38,768

33.3

Campeche

22,900

29,980

30.9

Colima

20,438

26,046

27.4

Baja California Sur National

Source: INEGI, economic censuses 2009.

142

16,905

22,784

34.8

3,005,157

3,724,019

23.9

employment of workforce, and this would be a question to consider for public policies on decentralised expenditure.

like Tabasco, Campeche and Veracruz, which even recorded negative growth. In the case of increasing productive capacities, we can see that certain federative institutions had a greater impact, as is the case of Zacatecas, where transfers of capital contributed to an increase in the entity’s fixed assets.

In the case of Mexico, the effects of decentralised expenditure in the 32 federative institutions were also positive on business development in the federative institutions with lower relative levels of development, such as those in the south, affecting petrol-producing areas such as Tabasco.

As regards employment, the results are equally positive, even exceeding those observed in Brazil; this would seem to indicate that there is a more intensive growth process in workforce in Mexico, which should also be taken into account in decentralisation policies, as this could have positive implications for employment if suitable rules are

In terms of added value, growth was seen in the federative institutions with lower levels of economic development; however, in this case, decentralised expenditure does not seem to have a positive correlation with petrol-producing entities Chart 14. Brazil: impact of decentralised expenditure on the generation of economic units, 2000-2006

0.085 Amazonas

0.080 Average annual growth of economic units

Chihuahua

Maranh ão

0.075 0.070

Acre

Mato Grosso

0.065

Goiás

Roraima

Bahia

Rio Grande do Norte

Paraná 0.060

Santa Catarina

Pernambuco 0.050

0.040 -0.02

Ceará

Paraíba S ão Paulo

0.055

0.045 Source: created by the author based on data from economic censuses, IBGE and the Treasury Secretariat.

Pará

Piauí Amapá

Espírito Santo Sergipe

Rondônia

Alagoas Río Grande do Sul Rio de Janeiro Minas Gerais Mato Grosso do Sul Tocantins Federal District 0

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

Variation in decentralised expenditure as a proportion of GDP

143

0.16

Chart 15. Brazil: impact of decentralised expenditure on the generation of added value, 2000-2006

Tocantins

Roraima

0.12 0.10 0.08 0.06 0.04 0.02

Acre

Federal District Mato Grosso Sergipe

Goiás

Espírito Santo

0.02

Rondônia

0.04

0.06

0.08

Piauí

0.10

0.12

0.14

0.16

Variation in decentralised expenditure as a proportion of GDP

0.105

Average annual growth of economic units

0.085

Rondônia Roraima

Maranh ão

Pará Mato Grosso Rio Grande do Norte Espírito Santo Goiás Mato Grosso do Sul Bahia Sergipe Alagoas Ceará Paraná

Santa Catarina 0.065

Paraíba Pernambuco S ão Paulo

Rio Grande do Sul

0.025

Chart 17. Mexico: impact of decentralised expenditure on the opening of economic units, 2003-2008

Piauí Acre

Minas Gerais 0.045

Source: created by the author based on data from economic censuses, IBGE and the Treasury Secretariat.

Chart 16. Brazil: impact of decentralised expenditure on the generation of employment, 2000-2006

Amazonas Tocantins

The results obtained from this exercise constitute an initial attempt to evaluate the effect of decentralised expenditure on key variables of regional economy in a country. Decentralisation can not only increase standards of living for the population –by decentralising public services–, but can also affect business development, generating with it a more endogenous model of growth in local economies. Nevertheless, it is always

Amapá

Pará Ceará Alagoas Santa Catarina Rio Grande do Norte Paraíba S ão Paulo Paraná Amazonas Minas Gerais Mato Grosso do Sul Bahia Rio de Janeiro Pernambuco Rio Grande do Sul

0 -0.02

dangerous to make generalisations given the variety of experiences, the changing and prolonged history of decentralisation, its multiple aims and the profound differences in the conditions in which this occurs. Here, the principal objective is to assess the exogenous and endogenous factors that affect the outlook of economic growth on the local level.

7.3. Latin America: some considerations

Maranh ão

Rio de Janeiro

Federal District

0.005

In this regard, as highlighted in the book Local Alternative (IDB 2009), the effects can be divided into four main groups: firstly, at a national or macro-scale level, a regulatory framework is needed to ensure lively competitiveness, efficient markets and solid and stable macroeconomic conditions; secondly, and just like the exogenous macro-economic

Chiapas

0.065

Yucatán Baja California Sur

Average annual growth of economic units

Average annual growth of added value

0.14

established for its development.

Campeche

0.055

0.035

Nayarit Baja California Puebla

Hidalgo

Tabasco

0.025

Oaxaca Quintana Roo Tlaxcala

Colima

Michoacán

Morelos Mexico Sonora Jalisco Veracruz Aguascalientes Coahuila Tamaulipas Guanajuato Durango Zacatecas Nuevo León

San Luis Potosí

0.045

Guerrero

Querétaro

Sinaloa

Chihuahua Federal District

-0.015 -0.02

Amapá 0

0.02

0.04

0.06

0.08

0.10

0.12

Variation in decentralised expenditure as a proportion of GDP

144

0.14

0.16

Source: created by the author based on data from economic censuses, IBGE and the Treasury Secretariat.

Source: INEGI, Economic Censuses 2004, Bank of Mexico.

0.015 -0.04

-0.03

-0.02

-0.01

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Variation in decentralised expenditure as a proportion of GDP

145

Baja California Sur

Tabasco

0.10

Chiapas

Sonora

0.08

Querétaro

San Luis Potosí Baja California

0.06

Colima

Nayarit Coahuila

Zacatecas

Nuevo León

Mexico Aguascalientes Sinaloa Guanajuato Jalisco Quintana Roo Yucatán Hidalgo Morelos Federal District Chihuahua Guerrero Puebla Michoacán

0.04

Tamaulipas Durango

0.02 0 -0.02 -0.04 -0.06 -0.035

Chart 20. Mexico: impact of decentralised expenditure on the generation of employment, 2003-2008

Tlaxcala

Oaxaca -0.025

-0.015

-0.005

0.005

0.015

0.025

0.035

0.045

0.055

0.065

Source: INEGI, Economic Censuses 2004, Bank of Mexico.

0.11 Average annual growth of occupied personnel (percentage)

Average annual growth of added value (percentage)

0.12

Chart 18. Mexico: impact of decentralised expenditure on the growth of added value, 2003-2008

Veracruz Campeche

0.14

Baja California Sur 0.09

0.07

Hidalgo Veracruz

0.05

Tabasco

0.03

Querétaro

Quintana Roo Colima Morelos

Chiapas Oaxaca Tlaxcala

Michoacán Sonora Mexico Zacatecas Yucatán San Luis Potosí Jalisco Guanajuato Nuevo León Sinaloa Aguascalientes Baja California Tamaulipas Federal District Puebla

0.01

-0.02

Guerrero

Campeche

Chihuahua

-0.01 -0.04

Nayarit

Coahuila Durango

0.02

0.04

0.06

Variation in decentralised expenditure as a proportion of GDP (base 2003)

Chart 19. Mexico: impact of decentralised expenditure on the accumulation of capital, 2003-2008

Average annual growth of occupied personnel (percentage)

Zacatecas 0.38

0.28 Tamaulipas Sinaloa 0.18

0.08

San Luis Potosí Baja California Tabasco

-0.02

-0.12 -0.035

Baja California Sur Quintana Roo

Michoacán Yucatán Jalisco

Guerrero -0.025

-0.015

-0.005

0.005

0.015

0.025

0.035

0.045

0.055

Variation in decentralised expenditure as a proportion of GDP (base 2003)

146

Tlaxcala

Campeche Morelos Chihuahua Guanajuato Colima Puebla Aguascalientes Nuevo León Durango Coahuila Mexico Querétaro Federal District Oaxaca Sonora Nayarit Hidalgo Chiapas Veracruz

0.065

Source: INEGI, Economic Censuses 2004, Bank of Mexico.

issues in a local area, it is important to determine whether there is a dynamic culture of innovation focused on boosting the private business sector and civil society; thirdly, and on a more local level, it is necessary for a suitable physical infrastructure to exist; and fourthly, as well as requiring a suitable infrastructure, the local level must also have social cohesion, a favourable business climate, coordinated programmes and instruments and a strategy to be implemented by teams that promote investment and growth.

other elements depend on a more varied and complex blend of governments, shareholders, private businesses and power relations, many of them on a subnational level and all of them subject to or partially affected by the variable balance of decentralisation.

There is a general consensus that national and supranational levels of government should be in charge of managing regulatory frameworks, market operation and macro-economic conditions. The

147

Conclusions: at the start of an agenda for democratic strengthening

Even though a positive review of Latin American decentralisation and its impact on local development can be made, this effort must be evaluated in the context of the launch of different strategies in the region from the 1980s onwards. On the one hand, the northern region of Latin America, with Mexico, began a process of integration with the United States, through the Free Trade Treaty, at the same time as the process of integration into Mercosur was initiated in the south. However, none of these cases involved a supra-regional planning process, but instead national policies on public finances were maintained. The common denominator in all these experiences is a strengthening of democracy, which has provided a broad base for the demands of decentralisation in all the regions in Latin America. In the 1980s, after the debt crisis, the region began to discuss the process of decentralisation, at the same time as many local initiatives, in this context, started to adopt decentralisation policies based on diverse public financing schemes; in some cases, such as Brazil and Bolivia, levels of revenue and expenditure reached 40% of the GDP, but in most cases the level was between 20% and 30% –demonstrating the limited room for manoeuvre for driving decentralisation, added to the institutional weakness making it difficult for sub-national levels of government to have their own sources of revenue. Thus, in federal countries, the state governments’ spending is situated within a range of 8% to 12% of GDP and that of the municipal governments within 1.9%

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and 7.5% of GDP, which indicates the sub-national governments’ narrow scope of action. The process of decentralisation has become institutionalised by the definition of transfer policies, which could be called the institutional elements of concerted decentralisation. The system has been developing and is extremely broad, but it has not been stimulated by any efforts to grant the receiving bodies the power to set their own taxes, which would allow them to increase their revenue, as occurs, for example, in the United States, where there is a surcharge on sales tax in each state. In Mexico this possibility exists, but it has not been used by the federative institutions, either due to (political) precaution or a lack of local initiative. Central governments’ compensatory action, by creating support funds, has inhibited local action. The greatest success of the decentralisation processes carried out by the governments in the region has been the transfer of basic public services to sub-national levels of government, which have been able to involve civil society in the efforts to provide a basic social floor for all. This effort measured against the increase in decentralised expenditure shows a positive trend. This first step towards constructing a basic social floor has contributed to a relative reduction in inequality between the regions in Brazil, Chile and Mexico; however, in Argentina and Colombia, levels of inequality seem to have remained the same. Finally, we should mention that decentralisation

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efforts have generated a process of promoting local activity, by fostering the construction of a new culture of productive self-sufficiency in each community. This has been reflected in a rise in the number of businesses, higher levels of local employment, greater generation of added value and greater capitalisation of companies, at least in the cases of Brazil and Mexico. We could deduce from all of this that the decentralisation effort launched three decades ago is an irreversible process, because society has begun to organise itself, triggering processes of local development that did not exist a few decades ago. The main problem with this process is a lack of strategic planning that would boost decentralisation efforts and reinforce local initiatives, which creates a state of confusion and obstructs the efforts being made. The next step in this task is to draw up a strategic planning framework that reconciles the different interests and prevents excessive bureaucracy from blocking the construction of a more decentralised society. The various reforms undertaken to distribute powers should safeguard and clearly establish which powers are exclusive to each level of government and which are shared and concurrent, as well as detailing which level is responsible for the remaining competences in order to avoid duplicating efforts and leaving possible gaps in any of these areas. In addition, at the same time as delegating administrative competences, sub-national

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governments should also be granted the real authority to make their own decisions (political and fiscal decentralisation). On the other hand, it is very unlikely that political decentralisation alone will lead to greater levels of citizen participation in sub-national governments. This would also require strengthening civic culture. Promoting citizen participation and creating suitable spaces and mechanisms for participation is something that must be more firmly incorporated into the process of political decentralisation. Higher levels of participation and control by citizens and civil society could also contribute to reducing political clientelism and the local elite wielding control over the political process (usually, in their own interests). This is particularly relevant in small sub-national governments with strong socioeconomic inequality, and where the elite hold great power. Moreover, the virtuous link between citizens and democracy has still not been consolidated in Latin America. Decentralisation can be seen as a phenomenon, whether from the point of view of a process or a state. Furthermore, it is multidimensional (fiscal, administrative and political) and this requires a solid social commitment as it establishes the relationships and hierarchies of public power. This calls for a sustained effort to build consensus, especially between legislators and representatives of civil society, as well as sub-national governments themselves.

Without this support, the reforms underpinning the decentralisation process in Latin America may become stalled in central ministries or blocked by powerful interest groups. In Latin America, problems of overlapping competences still exist between different levels of government and many competences have not been duly accompanied by the resources needed to exercise these competences. With regard to fiscal decentralisation, there has been greater decentralisation in spending than revenue. In particular, unitary governments have little power to collect their own taxes at sub-national levels. This makes them highly dependent on fiscal transfer systems. One point in favour of all this is that great progress has been made with political decentralisation; practically all of the countries in the region are able to democratically select their sub-national authorities through representation systems at all territorial levels. Nevertheless, processes of citizen participation in public decision-making are still incipient at best.

distribute political authority and the capacity to govern among the different levels of government. Latin America has a long agenda for moving towards a more participative decentralisation; reflection together with the European Union on this issue will enable a dialogue to be initiated in the region which supports a more suitable institutional framework for decentralisation and permits the establishment of better standards of living in all regions with a view to increasing social cohesion.

We must also bear in mind that the changes decentralisation brings with it are not free from conflict, given that â&#x20AC;&#x2DC;there may be a national elite that could be increasing the dependence of local regional governments to develop their fiscal autonomy and therefore resisting any change that may threaten their position in the decision-making process.â&#x20AC;&#x2122; When the political world argues about decentralisation, what is at stake are precisely those institutional rules that

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Collection of Studies into Local and Regional Public Policies on Social Cohesion

URB-AL III is a regional decentralised cooperation programme run by the European Commission, the aim of which is to contribute towards increasing the level of social cohesion in sub-national and regional groups in Latin America. Led by Diputació de Barcelona, the URB-AL III Programme Orientation and Coordination Office’s mission is to facilitate the implementation of the programme by providing technical assistance and support in the different projects in order to help achieve the programme’s objectives.