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Local Governments in Chile Leonardo Letelier S.

Local Governments in Chile Leonardo Letelier S. Instituto de Asuntos Públicos Universidad de Chile. Measurements of FD. Expenditures (revenues) being made (being collected) by sub national governments. a. IMF (GFS) b. OECD c. Other Sources

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Local Governments in Chile Leonardo Letelier S.

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  1. Local Governments in ChileLeonardo Letelier S. Instituto de Asuntos Públicos Universidad de Chile

  2. Measurements of FD • Expenditures (revenues) being made (being collected) by sub national governments. a. IMF (GFS) b. OECD c. Other Sources 2. Range of functions being performed by sub national governments. a. OECD b. Other Sources

  3. Expenditure (Revenue) measurements of FD • Source: IMF (GFS). • It only includes China as a Federal Country. • It includes India and China as federal countries.

  4. How much more decentralized should be ? Taking a sample of 64 countries, Letelier (2005) concludes that: 1. The model explains between 92-97% of FD. Chile should have about 12% of its general government’s expenditures being made by sub national governments. 2. Since Chile has only 8.7 %, it follows that more decentralization is needed. More specifically, at least 3.3% more of the general government’s expenditures should be decentralized. That means between US$ (Mill) 450-500 more should be in the hands of regions and municipalities. 3. But even if we control by a wide range of observable variables, between 2 and 7% of the variance in FD is not explained by a well defined set of variables. So that on top of the above mentioned resources, the central government has an important leeway in proposing new decentralizing initiatives.

  5. School level Education School level Education and Primary Health CENTRAL GOVERNMENT MUNICIPALITY BENEFICIARIES Investment REGION Investment FCM Social Programs Government’s decentralized funds in Chile

  6. Decentralized Public Funds(Mill. of 2002 US$ dollars)

  7. Decentralized Public Investment Funds Primary Distributive Criteria

  8. Regionally Decided Public Investment Funds(Mill. US$ 2002)

  9. Sub national governments´ autonomy on the allocation of investment grants. • The only unconditional fund is the FNDR which represents 52.5% (2003) of all decentralized investment funds. 2. However, in 2003 almost 55% of the same fund was made in the form of “provisions”, which in practice impose a conditionality on the type of investment being made. Thefore, no more than 28% of all decentralized public investment funds is genuily unconditional.

  10. Common Municipal Fund(Mill. of US$ 2002)

  11. Problems of the CMF • Since all municipalities are legally committed to contribute. The net effect is that only 58% of the resources being collected by the FCM is strictly redistributed. The remaining 42% is returned to the contributors. (SUBDERE). 2. The CMF assigns some weight (10%) to management performance and catastrophic events. Although this appears to be an important source of revenues for some small municipalities, it is a clear deviation from the general aim of targeting redistribution.

  12. Delegated Functions(Mill. 2002 US$ dollars)

  13. Social Programs allocated by the CAS-II Card (Mill. of US$ 2002)

  14. Proposals • Basic Assumptions: 1. Chile might improve the allocation of public funds by having a more decentralized general governemnt. 2. If we agree on point 1, it should be recognized that not all regions or all municipalities are the same as far as management capacities are concerned.

  15. What might be done • Let municipalities borrow. Chilean municipalities do borrow in practice: leasing and payment postponement. Interesting point: the british law on LGs establishes limits to the leasing contracts. a. American-Canadian approach. b. Western European approach. Basic Challanage: Most important problem: Municipalities should have a collateral. This requires well defined property rights over local governments´ assets and more autonomy in the definition of local taxes (property tax) 2. A higher share of unconditioned Decentralized Investment Funds. • A redesign of the CMF: a. A contribution by the Central Government. b. Definition of an equalization criteria to redistribute municipal resources. Ej: It might be defined a % of equalization between municipalities. Various unitary countries have this.

  16. Resources needed to acheive a % of the average municipal income per head without the CMF. (Estimations for 2002)

  17. Conclusions • Chile is a relativelly centralised country by international standards. • If we compare the Chilean case with other countries with a similar set of characteristics, we conclude that roughly between US$ (Mill.) 450 and 500 more should be transferred from the central government to sub national governments every year. • Initiatives for farther decentralization should be based on two premises; i) Chile is below the optimum degree of decentralization ii) Sub national governments differ between each other in their managerial capacities. • Proposals: i) Lift the municipal prohibition to borrow, ii) Rise the share of unconditional investments grants to regions. iii) Define (politically) a socially acceptable level of equalization across municipalities, and then grant municipalities below that level with additional funding from the central government.

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