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Second Global Report on Decentralization and Local Democracy. GOLD 2010 EXECUTIVE SUMMARY
that ensure fixed amounts of funds to each municipality, regardless of size.
The trade-off between economies of scale and representation The issue of the optimal scale of local governments presents an inherent tradeoff between the (potential) better political connection in terms of representation and accountability of smaller jurisdictions with the (potential) greater fiscal viability of larger jurisdictions. Thus, the issue of jurisdiction size is not only or primarily a technical issue, but also one that involves political considerations.
Local administrative capacity Closely associated with the problem of small size is the lack of administrative capacity of local governments in many countries in the region, particularly in small and rural local governments. The increased decentralization process in the regions in general has not brought increased collaboration and technical support by central government agencies to municipalities.
Issues in intergovernmental fiscal system design Lack of clarity in the assignment of expenditure responsibilities to local governments One of the weakest points of many decentralization programs in Latin America has been the scant attention given to a clear assignment of expenditure responsibilities of subnational governments; typically the focus has been almost exclusively on putting in place some form of financing scheme. The lack of clarity in the competencies of the different tiers often has been aggravated by: the insistence on uniform (as opposed to asymmetric) assignments, the practice of unfunded mandates, and the lack of
transparent methodologies to translate the assignment of functional responsibilities into the measurement of expenditure needs.
Insufficient revenue autonomy The level of tax revenue autonomy of local governments differs quite significantly across Latin American countries, relatively high in Brazil and Chile, but relatively low in El Salvador, Mexico and Peru where there is significantly less autonomy. But, in general, as in some other regions of the world (Africa, Asia, and many European countries), local revenue autonomy in Latin America remains below what is desirable. However, making a case for greater local tax autonomy is hurt by the perception that many local governments in the region do not make effective use of the tax autonomy that is currently granted to them in the law, for example, property taxes.
Unbundling revenue sharing Revenue sharing is the most common mechanism for arranging fiscal transfers to subnational governments in the region. The main problem with general revenue sharing is that generally there is confusion over what exactly the distribution formulas are trying to achieve; pursuing many objectives with essentially one instrument tends to be the source of that confusion. There is also confusion on whether the use of revenue sharing funds should be conditional or unconditional.
The need to rationalize the transfer system With the exception of a few countries, the current system of transfers to local governments in Latin America lacks clear structure. Most countries still have to introduce unconditional equalization grants that incorporate some formula-based measures of expenditure needs and fiscal capacity. Even though many countries have some form of
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