Challenges of tax decentralization and regional development analyzed

(Lima, December 5, 2008).- Authorities and national and international specialists participated in the conference "Promises and realities of fiscal decentralization in Latin America" organized by the Andean Development Corporation, the Ministry of Economy and Finance, the Secretariat of Decentralization of the Presidency of the Council of Ministers (PCM), and Georgia State University. The event aims to enrich the discussion and help generate policy proposals to improve the fiscal decentralization process that is taking place in Peru.

The event was opened by Production Minister Elena Conterno and CAF Chief Economist Luis Miguel Castilla who said that even though decentralization processes can be an instrument of development, their results have been mixed in last 20 years in Latin American countries.

In Castilla’s opinion, the reforms have had an excessive fiscal bias and have not emphasized the need for local development. "Decentralization is not a panacea. It is a very complex subject with many aspects, for which simple answers need to be found. In some countries they are thinking about strengthening decentralization, while in others they are doing the opposite," he said.

A decentralization process requires greater participation by local actors in the design, execution and monitoring of the provision of public goods. It also requires a better definition of the legal framework which governs the process, in the form of clearer rules to define the responsibilities of expenditure, financing and the mechanisms of inter-governmental transfers, the CAF economist said.

"Problems persist in the legal framework which governs the decentralization process, as well as definition of competences, delegation of expenditure and in a series of distortions that the decentralization process very often introduces as regional inequities," Castilla said.

The CAF chief economist said that the challenges of subnational governments included: fostering inclusive and equitable development, expanding provision of public services, increasing capacity to generate their own tax revenue, promoting a suitable climate for business and attracting investment into the area, as well as encouraging citizen participation and accountability.

"We forget that one of the purposes of this process is to bring the State nearer to citizens, and that there are mechanisms to better identify their needs and introduce accountability," he added.

Later Castilla said that CAF had a very important role to play in the decentralization process. It is an entity which has been actively working on these efforts because all the actors in this area are committed. "CAF’s role has many facets; we are not only a bank that provides finance, we also offer technical support on project design, implementation and appraisal, along with technical cooperation and related contributions to concepts and public policy which can include collection of experiences and cases of good practices."

Next year CAF will analyze these issues in its Report on Economy and Development (RED) which will be cover decentralization and regional development.

During the conference, the theme Pillars of decentralization in Latin America was presented by Roy Bahl, academic from Georgia State University; Santiago Lago, University of Vigo, Spain; José Alfonso, BNDES, Brazil; and Carmen Alcolado, Ministry of Public Administration, Spain.

Jorge Martínez, Georgia State University; Luis Cabrera, University of Quintana Roo, Mexico; and Cristina Arango, Ministry of Finance and Public Credit, Colombia, spoke on the vertical structure of government and management of public expenditure.

Lastly, Andrés Rodríguez-Pose, London School of Economics; Michael Pendolf, IESA, Venezuela; Javier Loscos, Institute of Fiscal Studies, Spain; and César Villanueva, coordinator of the Peruvian National Assembly of Regional Governments, spoke on decentralization and regional and local economic development in Latin America.

The event was closed by Peruvian Economy Minister Luis Valdivieso who thanked CAF for organizing the conference and for the recent signing of a technical cooperation agreement with his government to develop the "fiscal policy assistance program."

"This effort aims to implement the quality of public investment at regional and local level by improving capacities in project identification, formulation, implementation and evaluation."

Minister Valdivieso reaffirmed the Peruvian government's decision to stimulate and implement an effective decentralization process in the country.

"I believe in decentralization. I believe that the fiscal decentralization model has to come from within through consensus building. As a government we are committed to implementing a Peruvian model of fiscal decentralization. We should not be sidetracked by criticisms on specific aspects but work toward a suitable model. This is the commitment that the ministry has made to local governments because we believe in decentralization. They are commitments which we have accepted and which we are going to meet," he said.

Lastly, Valdivieso said that hard work lay ahead but they had the political will to move ahead.

"We have the will and the cooperation of the presidents of regional governments, mayors, and civil society, and we are sure we can count on the political support of the president of the Republic to implement this process, and the president of the Council of Ministers who has had direct experience as president of a region. This greatly enriches the design and application of the policy and its implementation," he concluded.