Subnational Fiscal Disparities and Intergovermental Transfers in LAC

Abstract

We document the presence of fiscal disparities among subnational governments (SNG) in Latin America and show the limitations of existing intergovernmental transfer systems to reduce them. For 11 countries in the region during 2000-12, we find that, although transfers reduce disparities in own revenues, the remaining fiscal disparities among SNG are still considerable. We also show that fiscal transfers are distributed without consideration of fiscal capacity and explicit measures of expenditure needs, hampering their equalization potential. Our findings suggest that the introduction of equalization transfers can contribute to tackle more effectively the subnational fiscal disparities and hence improve regional equity.