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Second Global Report on Decentralization and Local Democracy. GOLD 2010 EXECUTIVE SUMMARY
Local government borrowing and fiscal responsibility frameworks. These frameworks are often weakly developed and poorly implemented. Some frameworks are highly restrictive, effectively precluding local government borrowing (from Denmark, to Chile, to Kenya or Tunisia), while others are too lax, potentially allowing for risky behavior. This was the case in the 1990s in Brazil and Argentina. Access to credit. In many cases, especially in poor developing countries, local governments often have poor and unreliable access to credit. Financial markets are not well developed, and many local governments do not have credit histories, or do not meet technical standards required by lenders. The situation is brighter in the short and medium term in emerging economies where financial markets tend to be more developed with the introduction of systems for disclosure, credit ratings, pricing benchmarks, and so forth. Special institutions. Special credit institutions that have been set up to lend to local governments (as is the case in more than 60 countries, often with support from international organizations in developing countries) have rarely performed well. The often disappointing results have been associated with the politicization of lending decisions and problematic design issues. Many of the intermediary institutions are not sufficiently independent from the government, and they are not allowed or have not attempted to link with domestic credit markets. In this regard, local governments are not supported in learning how to become familiar with and develop capacity to comply with market expectations regarding financial capacities, disclosures, provisioning, and so on. Central government practices. A number of central government practices, such as weak appraisal mechanisms for loans from government affiliated credit institutions, local
government bailouts and automatic intercepts, have disrupted the normal development of local credit markets. There has been a pervasive problem with approval by government associated lending mechanisms of inadequately vetted loans for non-viable projects. The practice of bailouts when local governments cannot or will not repay their loans undermines their fiscal discipline and distorts the credit market. Although reliance on automatic intercepts from transfers are generally associated with better repayment to special credit institutions and can help to develop access to credit, maintaining them for long periods, without encouraging local government graduation to more market oriented sources, can create poor incentives for local governments to properly consider and lenders to properly appraise local government projects. Links to the broader intergovernmental fiscal system. Other aspects of local government finance covered above are sometimes not conducive to borrowing. Borrowing can be curtailed if local governments have insufficient access to discretionary sources of revenue to make loan payments or if intergovernmental transfers undermine incentives for even relatively wealthy local governments to borrow, for self-financing development projects. Lack of appropriate financial management practices also undermines the ability of local governments to properly prepare development projects, qualify for credit, and manage their debt portfolios.
Recommendations The findings of GOLD II clearly indicate that local governments around the world —from the most industrialized to the least developed countries— suffer from problems and challenges in their local government finance systems, and in some respects the situation has stagnated or worsened in recent years. In Africa local governments represent well under 10 percent of public expenditures and less of
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