Fiscal Federalism in Latin America: From Entitlements to Market (Inter-American Development Bank)

Fiscal and political decentralization have transformed several Latin American countries over the past two decades, but the transformation has hardly been smooth. At times, unbridled expansion of unconditional transfers has led to macroeconomic instability and principal-agent problems have made public sector management cumbersome. Most worrisome, despite a consensus that decentralization can strengthen public sector performance, social development and democracy, its results have not matched expectations.

Fiscal Federalism in Latin America: From Entitlements to Markets examines decentralization policies that work as well as those that do not. The aim is to help Latin American policymakers meet the challenge of decentralization to improve public sector performance at all levels of government by appropriately assigning jurisdiction over public goods, services, tax authority and user charges.

The book offers "building blocks"towards decentralization, including new theoretical developments and accepted lessons on how government interventions can use market proxies to enhance effectiveness; the importance of market-based decentralization approaches; and recent contributions from new institutional economics, public choice theory and the "new theory of the firm,"which holds that political jurisdictions can be thought of as pseudo-firms. The final building block is the findings of evaluations of decentralization in Brazil, Bolivia, Chile and Ecuador. The case studies ensure a balance between empirical research and theoretical context and have important implications for policymakers interested in making decentralization more effective.