WORLD BANK LATIN AMERICAN AND CARIBBEAN STUDIES ( ) U Vwwpoints Work in progress 1 7 ( * for public discussion Fc bqq7 i It"J,W0, !,i\> 4 -pr George E. Peterson WORLD BANK LATIN AMERICAN AND CARIBBEAN STUDIES ,ewpoints Decentralization in Latin America Learning through Experience George E. Peterson The World Bank Washington, D. C Copyright (C 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing February 1997 The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Di- rectors or the countries they represent. 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The painting on the cover is L'interrompu, by Roberto Matta, reproduced courtesy of Christie's. © 1987 Artists' Right Society (ARS) N.Y./ADAGP Paris. Library of Congress Cataloging-in-Publication Data Peterson, George E. Decentralization in Latin America: learning through experience / George E. Peterson. p. cm. - (World Bank Latin American and Caribbean studies) "Viewpoints." Includes bibliographical references. ISBN 0-8213-3865-X 1. Decentralization in government-Latin America. 2. Intergovernmental fiscal relations-Latin America. 3. Political participation-Latin America. I. Title. II. Series. JL959.5.D42L47 1997 336.8--dc2l 96-53608 CIP George E. Peterson is a senior fellow at the Urban Institute in Washington, D.C. He has published several books on decentralization and local govemment, in both the United States and the developing world. The publication is part of the World Bank Latin American and Caribbean Studies series. Although these publications do not represent World Bank policy, they are intended to be thought-provoking and worthy of discussion, and they are de- signed to open a dialogue to explore creative solutions to pressing problems. Comments on this paper are welcome and will be published on the LAC Home Page, which is part of the World Bank's site on the World Wide Web. Please send comments via e-mail to laffairs@worldbank.org or via post to LAC Extemal Affairs, The World Bank, 1818 H St. N.W., Washington, D.C. 20433, U.S.A. This paper was originally prepared for the World Bank in March 1996. It was edited in December 1996 by Marcus D. Rosenbaum for this series. CON'TENTS FOREWORD ............................................................... v INTRODUCTION .............................................................. 1 Purpose and Organization of This Publication ............................................................... 2 II. ESTABLISHING THE NATIONAL FISCAL FRAMEWORK .......4 Latin American Fiscal Decentralization: Revenues First .........................................................5 The Risks of ]Fiscally Unbalanced Decentralization and High Levels of Automatic Revenue Sharing ...............................................................7 Risks for National Fiscal Management ...............................................................7 Risks for Intergovernmental Financing ...............................................................8 Risks for Local Government Efficiency ................................................................8 The Assignment of Functions ............................................................... 10 Emerging Lessons for Better Implementation ............................................................... 11 III. MOVING GOVERNMENT CLOSER TO THE PEOPLE .13 Elected Local Representation .13 Cabildos Abiertos and Other Public Meetings .15 Municipal Partnership with Commnunity Organizations .16 Referendums .18 Do Citizens Trust Municipal Governments To Set Priorities? .19 Emerging Lessons for Better Implementation .20 IV. IMPROV][NG MUNICIPAL SERVICE DELIVERY .................. 22 Strengtheniing Municipal Service Capacity ...................................................... 23 Professionalization of Municipal Staffs ...................................................... 23 Upgrading Output Expectations of Local Public Employees .......................................... 24 Stability in the Public Work Force ...................................................... 24 Accountability and Service Delivery ...................................................... 25 Output Measurement, Comparison, and Accountability ................................................. 26 Incorporating Market Principles into Municipal Service Delivery .................................. 27 Efficient Intergovernmental Grant Structures ...................................................... 27 Emerging Lessons for Better Implementation ...................................................... 29 V. CONCLUDING THOUGHTS ............................................... 31 TABLES Table 1. Decentralization of Public-Sector Revenues and Spending ...................................2 Table 2. Changes in Local Resource Mobilization, Mexico City Federal District ............. 10 Table 3. Election of Mayors ................................................... 14 Table 4. Selected Features of Local Electoral Systems .................................................... 15 iv DECENTRALIZATION IN LATIN AMERICA Table 5. Whoi DoYou Trust More? ........................................................ 20 Table 6. InYour Opinion, Has Service Performance Changed Since the Popular Election of Mayors? ........................................................ 23 Table 7. Changes in Structure of Municipal Work Forces ................................................ 24 BOXES Box 1. Two Versions of Intergovernmental Gridlock ........................................................ 6 Box 2. Fiscal Reform in the Face of Revenue-Sharing Commitments ............................ 7 Box 3. Participatory Budgeting in Brazil ........................................................ 17 Box 4. La Florida, Chile: A Partnership with Community Groups in Capital Planning and Budgeting ........................................................ 18 Box 5. Bolivia: Community Oversight of Municipalities ................................................ 19 Box 6. Worker Implementation of the Ceari (Brazil) Preventive Health Program .......... 25 Box 7. Proposed Civil Service Coinpronlise (Brazil) ...................................................... 26 Box 8. Incorporating Market Principles into Municipal Service Delivery ...................... 28 Box 9. School and Health Care Grants in Chile; Matching Grants in Mexico ............... 29 SELECTED BIBLIOGRAPHY .33 NOTES .37 E OREWORD THIS DOCUIVIENT HAS BEEN prepared to help educate the public-voters and taxpayers in Latin America, as well as public officials and policy-makers throughout the Hermisphere-about the critical choices facing nations undergoing what I have called the "quiet revolution" of decentrahization in Latin disciplines and country departments at the America and the Caribbean. Nations throughout World Bank. the region have extended power-sharing arrange- George Peterson provides trenchant and ments to local governments, backed by automatic penetrating insight into these issues and has a gift revenue transfers that double, even quadruple local for clarity in expository writing. Dr. Peterson has government incomes compared with a decade a distinguished career in economics and finance ago. From Mexico to Argentina, cities are now of intergovernmental affairs and has published spending 20 to 40 percent of public-sector rev- and lectured widely on these subjects. He was enues, amounting to significant fr7actions of GDP. co-author of the Technical Department's found- In tandem with these changes, and possibly ing study on decentralization, published in 1991. of greater importance, the region has achieved a That report laid down the basic analytical frame- democratic transition.Virtually every mayor and work, which is also seen in the present volume.' councilmember in the more than 13,000 units of Inteps ieyas h ehIclDprmn state (or intermediate) and local governments is has conducted numerous follow-up studies now chosen byv democratic vote. All but a few focusing on intergovernmental affairs in spend- places have completed this transition. These shifts ing assignments, finance and management, as well of decision-making power, shared revenue, and as specific sectoral concerns like health and edu- democratic reforms h-ave changed the face of cation. The most recent study analyzes the ori- local government and have posed challenges for gins and dissemination of innovation in best central- and local-government leaders, as well as practice among local governments. 2 for civil society and financial and technical assis- Interested readers can find text files or ref- tance organizations. erences to these and other works on the World This report was commnissioned by the Tech- Bank's web site or by contacting the Public nical Department for Latin America and the Affairs Office of the World Bank or its Infra- Caribbean to provide perspective and insight structure Network. into important issues of public choice raised by the quiet revolution. This work is in keeping Tim Campbell with the Technical Department's mandate to Principal Urban Sector Specialist address issues that are "'upstream" from the lend- Latin America and the Caribbean ing operations anad that cut across the several Techinical Department V NTRODUCTION FOR ALMOSTr A DECADE, a wave of decentralization has been sweeping through Latin America. Governments that have traditionally been centralized have transferred many of their service responsibilities, and much of their revenue, to local governments or to states and provinces. No single motivation lies behind this tranls- makes them less accessible to the populace than fer of authority. Howvever, most decentralization central-goverrnment offices in the capital. A citi- initiatives embrace two fundamental proposi- zen's first taste of municipal political life may in- tions. Each implies a critique of past governing volve corruption or extreme favoritism toward patterns as well as a set of priorities for reform. adherents of the party in local office. Decentraliza- First, decentralization can strengthen democ- tion creates an opportun-ity for greater citizen con- ratic participation in government. Decentraliza- trol in governance, but other reforms must occur tion has been accompanied by popular election simultaneously if this opportunity is to be realized. of mayors and by oth-er steps designed to expand Second, decentralization can improve the the participation of ordinary citizens in local quality and coverage of local public services. Frus- governance. Citizens form their first expectations tration with the way national institutions supply of how government should work by observation local services like drinking water, road improve- at the local level. If they are able to take part in ments, schooling, and primary health care under- setting priorities for municipal budgets, to hold lies much of the demand for local control. The public officials accountable for their performance desire to be served more effectively by the public while in office, and to collaborate with munici- sector adds a crucial practical dimension to cur- pal authorities in delivering services through rent decentralization initiatives. It distinguishes neighborhood groups or other organizations, them from earlier efforts at enhancing municipal their in.1itial experience is likely to strengthen the authority, which often were prermised on ideo- demand for participatory democracy at all levels, logical opposition to central government or the Of course, decentralization does not guaran- desire to maintain regional life of a separate tee that local governments will listen to the voices character from the rest of the nation. of ordinary citizens. Local elites may operate Decentralization's potential for improving muinicipal institutions in a closed mannier that public services stems largely from the efficiency I g I g I 8~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 2 DECENTRALIZATION IN LATIN AmER iCA of incorporating local citizens' demands into to respond to macroeconomic shocks or less expenditure decisions. Local residents are better able to implement nationwide investment plans. positioned than anyone else to determine their Budget pressures at the central level will increase own priorities for government services and local if revenue sources are relinquished to lower lev- public works. And if they are required to raise els of government more rapidly than service part of the resources to pay for service improve- responsibilities can be transferred. The very act ments, they almost certainly will have opinions of fine-tuning intergovernmental financing about how public funds should be spent. A sys- arrangements or modifying service assignments, tem that permits residents to participate in local so necessary to an implementation process that budget choice should satisfy public-service proceeds by trial and error, can inject instability demands more effectively than a system that pre- into the national fiscal picture. Successful decen- scribes local service levels from central-govern- tralization cannot treat these repercussions on ment ministries. central budgets as an afterthought. Central Through aggressive oversight of local ser- authorities are critical partners in the decentral- vice providers or the use of self-help construc- ization process. Their roles need clarification and tion, municipalities may also be able to build adequate budget support as much as those of roads and schools more cheaply than national other levels of government. institutions, or to find wavs to restrain the oper- ating costs and to improve the quality of local PURPOSE AND ORGANIZATION OF schools and health clinics. In this way, decentral- THIS PUBLICATION ization opens the possibility for greater efficiency in service production as well as greater attention This publication takes stock of Latin Ameri- to public preferences when setting priorities. ca's experience with the new wave of decentral- The potential efficiencies of decentralization ization. Major changes in government structure are not self-executing, any more than is the link- clearly are under way. Table 1 illustrates just how age between decentralization and democracy. strongly revenues and expenditure responsibilities There must be mechanisms that accurately cap- ture the public's service demands and make clear Table I the connection between services received and Decentralization of Public-Sector fees or taxes paid. Even when citizens' demands Revenues and Spending are clearly expressed and local governments wish to be responsive, they may be unable to deliver Country and Decentralization Measure Years services efficiently. Municipal employees may Stae and Muicipal Share of 1980 1991 lack technical skills. Economies of scale may Pub ic-Sector Expend ture 30.8% 47.0% make it impossible for small municipahties to Chile 1980 1992 provide certain types of services effectively. Regional and Municipal Share of For all these reasons, decentralization is a Public-Sector Expenditure .7% 19.5% venture into the uncertain. Practical-decentraliza- Colombia 19Y1 1997P tion does not end with a one-time transfer of Departmental ard Municipal Share of revenues and responsibilities, achieved by consti- Centrally Co lected Revenue 38.3% 5.2% tutional amendment or new legislation. It Boliv a 1993 995 requires the work of at least a generation devot- Municipal Share of Centrally ed to creating new institutions, then modifying Collected Revenue 10% 20% them in the light of experience. p=projected under current aw Sources: Brazil: Werneck (1992); Villela (1993); Wiesner (1994) Decentralization also introduces new risks Chile: Yahez (1994) into national governance. Central authorities Colombia: Valenzuela (1995); Salto Social (1994) lose some control over the aggregate pubhc-sec- Bc//va Mo/ma (l994) tor budget, and they may be less well equipped LEARNING THROUGH EXPERIrENCE 3 are shifting from central authorities to munici- record that mayors, finance ministers, and donor palities and intermediate levels of government. institutions can consult in deciding on their own It is premature to speculate about the ulti- next steps in consolidating the shift of governing mate consequences of restructuring government authority. on this scale, but it is not too early to look at This paper is organized around three main different countries' experience for lessons as to challenges to making decentralization succeed- which decentralization strategies work best in both as an efficient arrangement for service the Latin American context. In weighing imple- delivery and financing and as a support for mentation approaches, we can now draw upon a democracy: wealth of institutional experiments carried out at * Establishing the National Fiscal Framework the local level, as well as national differences in * Moving Government Closer to the People the approach to intergovernmental finance. This * Improving Municipal Service Delivery practical experience forms part of the collective ES TAB LI SH I NG THE NAT I ONAL i F I SCAL FRAMEWO RK DECENTRALIZATION CHANGES THE RULES of the game in public finance. It shifts some of the responsibility for providing public services to lower levels of gov- ernment, along with some of the revenues formerly collected and retained by the central gov- ernment. The fiscal framework that is established for this transfer goes far to establish the effi- ciency of the new arrangements, both for local governments and for central authorities. In principle, a decentralization plan can be ties like housing supply and water provision to designed that will shift service responsibilities local authorities to run at their own expense. and revenue sources in any mix that central Sometimes they have only partially compensated authorities and their negotiating partners decide. municipalities for the costs of assuming responsibil- In some parts of the world, decentralization has ity for school and health services. These decentral- been adopted explicitly as a mechanism for ization measures have formed part of an explicit reducing central-government deficits and cutting strategy for balancing central-government budgets. aggregate public-sector expenditures. For exam- In Latin America, fears that the central gov- ple, in the United States during the 1980s, feder- ernment will try to export its budget deficits to al grants to states and localities were cut, reduc- provinces or municipalities also have influenced ing federal outlays, with the expectation (partially the debate over decentralization. Local authori- fulfilled) that lower levels of government, once ties have sought to establish guarantees that this confronted with the full costs of sustaining pro- will not happen. Colombia's 1991 constitution, gram spending, would choose not to replace a for example, requires that all transfers of service good part of the lost federal funds. This strategy responsibilities from the central government be was designed first as a federal deficit-reduction accompanied by a resource transfer adequate to measure and second as a means of restraining finance the services at their current or mandated total public-sector spending. level. Other national legislatures are debating Central governments in Central and Eastern similar laws. In Brazil and Colombia, the future Europe have turned over highly subsidized activi- growth of intergovernmental revenue sharing 4 LEARNING THROUGH EXPERIENCE * 5 was guaranteed in new constitutions; in Bolivia, there were essentially no expenditure savings to Venezuela, Argentina, and other countries, rev- the central budget. Colombia's 1991 constitution enue-sharing commitments for several years into attempted to correct this problem and achieve the future were spelled out in national laws. greater fiscal balance by assigning a growing por- These laws were intended to reduce the financial tion of centrally collected revenues to lower level risks of decentralization for local governments. governments, while at the same time seeking to offset the revenue transfers with new spending LATIN AMERICAN FISCAL obligations, especially for basic health care and DECENTRALIZATION: education. Revenue transfers continued to REVENUES FIRST exceed expenditure transfers, however. Other countries show a similar fiscal pat- In actuality, however, fiscal decentralization tern. InVenezuela decentralization legislation throughout most of Latin America has been exe- increased the states' share of centrally collected cuted in a way that favors local government ordinary revenues from 15 percent to 20 percent budgets.The decentralization process has started over a five-year period ending in 1995. A legal by transferring to localities or provinces a larg- framework is in place for transferring service and er-often, much larger-share of centrally col- expenditure responsibilities to the states, but lected revenues. These transfers typically are actual transfers require voluntary, negotiated specified as a percentage of central revenue col- agreements, which are running well behind lections. At first, few offsetting spending obliga- expenditure transfers. In Guatemala a constitu- tions have been shifted to local authorities. Only tional amendment prescribing the transfer of 8 after the transfer of revenues is well under way percent of central-level revenues to local govern- has the devolution of service functions, or nego- ments (subsequently raised to 10 percent) was tiations over service devolution, begun. not offset by a transfer of central-government In Brazil, the 1988 constitutional changes cut expenditure responsibilities. Rather, the action approximately six percentage points from the cen- was intended to boost municipalities' incomes so tral government's share of the final retention of that they could embark on a new program of public-sector revenues.' These revenues were reas- public improvements.The transfer of additional signed to state and local authorities. The new con- central-government revenues to municipalities in stitution did not formally transfer any expenditure Bolivia, effected in 1994, had the same rationale. responsibilities from the central level to states or The political motivation for a fiscal strategy municipalities, nor was a plan drawn up to ensure like this is easy to understand. Subnational gov- that actual transfers achieved fiscal neutrality.The ernments start off by receiving net fiscal benefits result has been a redistribution of resources that from decentralization.This fiscal gain has made created a windfall gain for municipalities while them more enthusiastic partners in devolution, tightening the squeeze on the central budget. or at least has muted the opposition to decen- In Colombia, the controller general estimat- tralization among local governments often found ed that the expenditure transfers proposed in the in other parts of the world. But there are clear initial decentralization decree, Decree 77, would dangers to central-government finances if rev- by 1992 reduce central-government expenditures enue is transferrcd without concurrent responsi- by 6.1 billion pesos (1987 pesos), compared with bilities for providing services. a loss of 39.0 billion pesos in revenue to the cen- On the other hand, local governments tral budget from the additional sharing of value- often have a legitimate reluctance to accept new added taxes prescribed by law.2 Thus, decentral- responsibilities. That's because the revenue- ization from the outset was recognized to be a sharing formulas being introduced today are financially costly proposition for the central gov- designed in part to rectify past fiscal mismatches: ernment. Even this calculation, however, turned Traditionally, municipal legislation assigned local out to be optimistic, because in the early years governments a vast array of functions but did 6 I)L L N 1I A L I Z A T I N I N L A I I N A .Mi F RI A BOX I Two Versions o Intergovernmental Gridlock, razil's central gov0 :adminitration proposed olombia initiated signed to the departments, eminent:now revapieng the revenue- decentralization in wile municipalities keeps only slightly sharing arrangements.Vari- the 1980s by retained responsiblity for more than a third of pub-o p* ous alternatives were float- transferingi lrge and con and main- lic-sector revenue collec- ed.Olne proposal called increasing am u o tainschool buildings. tions. The rest is distibuted for a new federationalpact shared taxes to depa nts So,e of I e larger munic- to states andmunicipalities, that would explicitly and, munpalities.Service ipa iies have refused to mostly thg* automatic transferexpenditureand fuinctions devolvdol a-surrender ontrol over revenue sharing, or assigned service functions to stateS er in annocal schools. The teachers' to states by granting them and local authorities to 1991 constition t ui wat to restore a exclusive access to ipor- offset the revenues0 alr ed t natina v nt role tant revenue sources, like traser noter cAled by assigi p b in curric and pa-set- the value-a tax. Rev- r reucin t p - for education, he and ting. The iintrgovernmen- enue sharing wit :sub- age of revenues shared basic :intr e systems tal logam is being resolved national governments was with states and municipali- to subnational units, while larl hrough case-by- accelerated by the 1988 ties. A third called for giv- broadening generlrevenue ;case not by constitution. The constitu- ing states further taxing sh an aHlocat nds m ipalties, depart- tion did&nor prescribe cor- powers, but requiring to pay,fort ic ser- ments and thect respondingservce:trans-; ;0them to financeaater vie that wr t ovn t fers, and l calauthriis are theiroprti C,:' s by Cea ues have been relctant to from own-source rev- step ross has part i C a l he assume them voluntarily. enues. None of these pro- ly successful, but it has announced thatl they wil The federal administration posals made headway in generated tension between try to cut back the growth miaintains that, as a result of Congre. Resolution of0 levels of government. For : of reen sharin promised the constitutional changes, the impasse has been made example, revenuesi for edu- in the constitution for the revenues remaiing to more difficult by the fact cation were-fist trats- futiur years. Thya e that it are insufficient to carry that changes in the consti- ferred fi00rom e rrs ;are inr g out the functons it still tution nst be approved governmento ica aegpucctor must perorm. y a 6 perentmaority ties. Then th nsbi- defit. centrl The 1988 consttu- vote in Congress.- ty and rev s or per- gove nt has :been tion pres crbed, a review o s manag,mnt unable to, ct its other the constituitonwalrprovi curriculum development,: speningdeep enough to sions five years after adop- I and other operating func- make toom fur the I tion. At that time the tions of schools were reat - pos e rs. not provide for adequate resources to perfor-m to perfor, not as additional inCome that should these functions. Thus, local authorities soIlme- be offset by the transfer of new expeniditure times view the new revenue transfers from the responsibilities.This is particularly true of poor central government as compenisatinig them nmore localities, where the combinatioln of government adequately for funlctions they already are trvin g transfers and ownI-source revenues historically [I I \ . I'. I I X _ has beein iisutiticienit to tinance even rtudimilenita- expendittiu-e resporlsibilitiles inijects n tit rv services, and linstabilitv ilnto thle national 111acrloeCimmiC picture. The transfer of revenue streailnls makc, THE RISK S OF FISC ALLY necessary a seconid-r-ouniid debate over- ho\\ to UNBALANCED) D)EC ENTR1ALIZATION restoe- central-i:overnment hudcetarv baiance. A,, AN I) Hi G H LEVELS O) F AU TO) M AT IC indicated in Box I . this debate can easflv lead to REVENUE SHARING irridlock. Once local governi nents posNe'C; a tor- ial -uaraiitee ot hligher levels of revenue dhar- I )ecentralizinig revenutes befor- expeniditures carries in-., they have few inlcenltives to negotiate away dlan,ers for the inltelrgovernmental tinaliCilla sytilstem, thesAe fis a l gain l by accepti, i t g i-thier service obli-,ationll. Risks Thr Natioial Fiscal Alanagecment The legal obligationi to maintain hi-hli level jo~~~~~~~~~~~~~~~~tI.X ll>ll i 111l Cll 1t. ]< X i- of revenue diaring can become partictilarv bur- A strategy that transters uinr-estr-icted. -en- denil"olmle whell tle central lovernm-'11ent 1i eral-purpose reveniues first, thell ie-.otiates over attem11pting to carry olut fiscal res-tructuriilm to cut BOX 2 Fiscal Reform in the Face of Revenue-Sharing Comnitments rgentina is a fed- The country's rev- tax receipts were automat- ers in the provincial gov- eration in which enue-sharing pact, howev- ically distributed to the ernments that have been the provinces er, has hampered the cen- provinces. Some provincial least aggressive in exercis- have equal legal standing tral government's ability to governments refused to ing cost control. The fed- with the central govern- implement national fiscal participate in spending eral government reacted ment. Revenue-sharing policy. In the 1990s, cen- restraint. They added to by requesting emergency "pacts" are negotiated tral authorities have sought civil service rolls and used powers that would give it between the two levels of to address structural imbal- revenue-sharing transfers greater control over inter- government, and, in prin- ances through an austerity to avoid provincial tax governmental tax and ciple, are fully binding on package that combines tax increases. In effect, the spending decisions. both parties. reforms, increased tax col- provinces negated part of Eventually, in 1996 a More than most lections, and expenditure the fiscal retrenchment fiscal compromise was countries in the region, cuts, including large-scale implemented at the central negotiated that allowed the Argentina has attempted to public work-force reduc- level. The provinces that central government to decentralize through the tions. These measures were added most substantially to retain more of the bud- simultaneous devolution of intended to close the pub- public employment were getary benefits of its belt- both functions and sector- lic-sector deficit. those that rely most heavi- tightening and to reduce specific revenues. Between However, because ly on federal transfers. This the share of additional tax 1990 and 1993, for exam- the austerity package presents the paradox of a revenues automatically ple, it transferred some increased central-govern- federal government mak- transferred to the provinces. 210,000 employees to ment tax collections, rev- ing steep cuts in its own provincial governments as enue-sharing payments work force, while transfer- Sources: Tanzi (1995); Porto part of the transfer of health also had to increase. About ring funds that make it and Saniguinetti (1993); Nega and education services. 57 percent of incremental possible to hire new work- (1995). 8 DECENTRALIZATION IN LATIN AMERICA the public-sector deficit. Argentina's experience new set of risks. From a central-government (Box 2) exemplifies the difficulties of imple- perspective they have restricted the flexibility menting structural reform when intergovern- of macroeconomic managers to adjust all parts mental financing is exempted from adjustment. of the public-sector budget, including inter- The International Monetary Fund has expressed governmental transfers, to cope with changing concern that, in various countries throughout economic conditions or to correct structural the region, automatic revenue sharing of the imbalances. magnitude now in effect limits central authori- Fiscal flexibility has been further reduced by ties' ability to make the structural adjustments the fact that provincial and local governments that are needed for macroeconomic often have pledged their future intergovernmen- stabilization.3 tal transfers as security for borrowing. In Colom- bia, once transfer growth was formalized in the Risksfor Intergovernmental Financing 1991 constitution, there followed an explosion of local indebtedness. Municipal debt to banks rose It is ironic that formula-driven revenue from 494 billion pesos in 1992 to 1,278 billion sharing should now be seen as an obstacle to pesos in 1994; municipal bond issues grew equal- good fiscal management. For many years, the ly rapidly.5 This new level of debt can be ser- multilateral banks have urged Latin American viced adequately by the transfers prescribed in countries to adopt more transparent, predictable, the constitution, but it makes it even more diffi- and stable revenue-sharing and grant systems.4 cult to reduce the speed of transfer growth in the Formerly, central governments tended to negoti- future, if this is deemed necessary. Future rev- ate fiscal transfers on a case-by-case basis. At its enue-sharing payments represent the only securi- worst, this system created incentives for lower- ty for much of the local borrowing. level governments to run budget deficits, since Another kind of fiscal imbalance resulting the state or local authorities in the worst finan- from decentralized authority has troubled Brazil cial condition could show the greatest "need" for and Argentina. State governments have been central-government assistance. Almost every- allowed to finance their deficits by borrowing where, the system hampered long-term invest- from state banks. Brazilian state and local govern- ment and service planning because local govern- ments now are estimated to owe $140 billion, ments could not accurately predict their future mostly to state banks.6 Much of this debt never revenues. The lack of transparency in the grant will be paid. These borrowing arrangements system exaggerated political factors in resource effectively decentralhze monetary authority, allocation. because states and provinces can borrow from Recent decentralization initiatives have banks they control, without meeting normal gone far to substitute clearly defined revenue- commercial standards of creditworthiness or debt sharing and grant formulas for ad hoc transfers. repayment. Recent legal changes are supposed to The constitutions or basic laws of Argentina, have curtailed these practices in both Argentina Brazil, Colombia,Venezuela, the countries of and Brazil, but the de facto decentralization of Central America, and other nations now contain the money supply stands as an extreme example formulas that establish transfer entitlements. of crippling central government's control of the These changes have increased the predictability economy by ceding the wrong functions to sub- of local revenues and removed many of the national levels of government. incentives to local fiscal mismanagement. But the rigidity of formula-driven revenue Risks for Local Government Efficiency sharing can add to intergovernmental strain, as happened in Argentina's fiscal adjustment, for The efficiency claims for decentralization example (see Box 2). And the very certainty and rest on the presumption that local governments growth of revenue sharing have precipitated a pay for goods having purely local benefits from LEARNING THROUGH EXPERIENCE * 9 local resources. They then must balance the com- of critical local public services rather than the munal gains from expanding services against the consumers. costs. This linkage between costs and benefits can General tax and revenue sharing is more be decentralized still further, to the individual difficult to fit into an efficient financing frame- consumer, in the form of user charges. work.Transfers of this kind support all of a local Both user charges and local taxes serve as government's spending, regardless of whether pricing mechanisms, allowing consumers to buy there is a national interest in the expenditures. It different kinds or armounts of service depending is appropriate to use general revenue sharing to upon their preferences. Decentralization makes reduce differences in local governments' general possible a different choice of priorities in each taxing capacity, as a means of equalizing community. User charges are a suitable mecha- resources across communities. Or it can be justi- nism for paying for services having private bene- fied on the grounds that the central government fits, and where the collection of fees is adminis- is a more efficient tax collector than local gov- tratively feasible. Local taxes, imposed on local ernments. Central authorities can collect rev- tax bases, are the appropriate way to pay for local enues through national taxes, then return the collective goods, which benefit the entire local revenues either to the communities where they community but not those outside it. In each were generated, or share them among all com- case, either the individual citizen or the commu- munities according to formulas that introduce an nity collectively must exercise consumer choice element of redistribution in favor of poorer within a budget constraint. This process produces communities. a more efficient matching of local services with However, once general revenue-sharing citizen demand than does central government transfers become the principal source of local prescription of local service levels. revenues, it becomes difficult to maintain the Nevertheless, national subsidies still have a connection between local services and local costs role to play in a decentralized financing system. that lies at the heart of efficient decentralization. The challenge is to design subsidy supports in a Broad-based revenue sharing in Latin America way that reinforces local choice within a budget has become such an important element in local constraint rather than overrides it. One option is budgets that it threatens to sever the linkage to provide poor households with vouchers that between service costs and local service demands. they can use to buy services of their own selec- Even functional transfers can have a similar tion. Chile, for example, provides vouchers for all problem, often bundling a number of different school-aged children; these can be used to buy kinds of assistance into a single grant. In Colom- schooling from either municipal or private-sector bia, for example, in addition to general tax shar- schools. The voucher amount is sufficient to pay ing, national assistance for education and health for full basic schooling in either sector.Vouchers are bundled together in the situadofiscal, which is have been used similarly to help pay for the distributed according to a complicated set of health-care expenses of lower-income families. local needs factors.This makes it difficult to Alternatively, the central government can relate intergovernmental transfers to actual ser- give grants to local governments to help pay for vice costs. the cost of providing individual services. A health And from the perspective of linking the grant to a municipality can help pay for basic funding of services to the services themselves, health care; a schooling grant can help pay for large increases in unrestricted revenue sharing basic education. Grant amounts vary according have been found to discourage own-source rev- to the number of local services users, but also enue generation. Studies in Brazil, Colombia, may take into account the special needs of cer- Ecuador, Guatemala, and Mexico, among other tain communities or the limited capacity of a countries, have reported a decline in local own- community to raise revenues on its own.This source revenues in the face of increased general approach uses transfers to subsidize the producers purpose grants. Central-government transfers end 10 DECENTRALIZATION IN LATIN AMERICA up being used to reduce local taxes and user er, may be beginning to disappear. As municipali- charges, even for services that have purely local ties face the reality of strong citizen demand for benefits and are most efficiently financed at the services, they have proved willing to raise the local level.7 revenues to pay for them-especially in larger Brazilian municipalities illustrate a situation and wealthier cities. In Mexico, a new political commonly found in the region. In the 1988 administration in Le6n, considered a leader in constitution local governments were given more citizen responsiveness, negotiated the transfer of taxing powers and greater control over local tax property tax authority to the city from the state, rates, as well as more revenue-sharing entitle- then nearly quadrupled property tax receipts ments.Two new local taxes were established-a between 1988 and 1991.9 Mid-sized and eco- tax on property sales and a retail sales tax on nomically prosperous cities in Colombia likewise fuels. Local governments have the freedom to set have substantially raised local tax collections as a local property-tax rates and can establish discre- result of decentralization, even in the face of tionary user fees over a broad range of services. larger central-government transfers.10 Table 2 They also can levy betterment taxes to finance illustrates the rapid growth of own-source rev- capital improvements. In practice, however, enues in Mexico City, partly necessitated by cen- Brazilian municipalities have made meager use of tral-government fiscal pressures that led to reduc- their taxing authority. Property taxes are imposed tions in the growth of revenue sharing and at very low rates; even then, collection is spotty. central transfers. As these pressures become more User fees hardly figure in local budgets; they widespread, nmunicipalities will be obliged to account for only 3.7 percent of total revenues in raise own-source revenues if they wish to satisfy capital cities. Betterment taxes, an ideal mecha- citizen service demands. nism for financing medium-sized capital projects, Of course, own-source revenue generation are very rarely used. Instead, the share of transfer is more feasible for cities possessing strong tax revenues in local budgets has increased.8 bases than for small and poor commnunities. For Elsewhere the same behavior can be found. the latter, access to nationally collected revenues Venezuelan municipalities have flexibility of rate will have to remain a large part of any realistic setting over the two most important local sources strategy for financing local budgets. Even in these of revenue, the business tax and the property tax. communities, however, the linkage between ser- They also can set user-fee levels. Despite this vices received and local taxes or fees paid can be flexibility, local governments inVenezuela collect strengthened by requiring local participation in an insignificant 3 percent of total public-sector covering service costs. revenues. In Mexico, municipalities have proved reluctant to ask states for the authority to levy THE ASSIGNMENT OF FUNCTIONS property taxes and set property tax rates, even though local control is provided for by law. Fiscal decentralization requires clarity of Throughout the region municipal authorities functional assignments among the levels of gov- have tended to resist increasing water fees to lev- ernment, as much as clarity of revenue distribu- els adequate for cost recovery. In short, local governments tend to prefer Table 2 "free" central transfers to the politically costly Changes in Local Resource Mobilization, course of raising own-source revenues. The polit- exico City Federal District Share of Local Bujdget ical appeal of avoiding local taxes is obvious. But Item 1983-88 1988 94 municipalities' unwillingness to pay for their own Own-Source Income 16% 56% Revenue Sharing 60% 40% expenditures leaves them with less control over Central Transfers 15% 2% their budgets-and makes them vulnerable to Debt Financing 9% 2% changes in central-government grant policy. Source: Beristain (1995). The aversion to local self-financing, howev- LEARNING TIHROUGH EXPERIENCE * 11 tion. The greatest controversies in implementing sector. Local government managers want a stable, decentralization have arisen when national laws predictable, and transparent intergovernmental leave functional responsibilities unclear, or assign financing system that is not subject to the central the same functions to more than one level of government's unilateral change.These potentially government. Both Mexico and Brazil, for exam- conflicting goals have to be reconciled as far as ple, have relied on so-called "common compe- possible in designing revenue-transfer systems. tencies" -functions that can be carried out by * The fiscal risks from decentralization municipalities or by states or sometimes by the are greatest under an unbalanced financing federal government. On occasion this approach strategy that creates large windfall gains has permitted innovative collaborations to spring and losses. A fiscally neutral policy that matches up, as state and local authorities work out their revenue transfers with service responsibilities own forms of cooperation in the field. At other goes far to "sterilize" decentralization's macro- times, however, it has produced vacuums in ser- economic impact. Unbalanced fiscal decentraliza- vice coverage when no governmental authority tion-where centrally financed revenue sharing wants to accept service responsibility, or colli- greatly exceeds the costs of the services being sions in policy when overlapping levels of gov- transferred to local control-not only creates ernment operate separately designed programs in central-government budget problems but pro- the same field. motes inefficiency in local service delivery. Con- Under fiscal stress, it is tempting for any stitutional commitments to future revenue-shar- level of government to walk away from costly ing levels need to ensure that spending from service provision.Without a clear assignment of central budgets can realistically be reduced at the service responsibilities, withdrawal is easier. In speed necessary to make room for the increased both Brazil1' and Mexico,12 state governments transfers being promised. have sometimes unilaterally suspended service * There must be controls over sub- activities, asserting that municipalities will have national indebtedness. Debt discipline can be to use their own resources to provide these ser- exerted by the credit market if subnational vices if they want them to continue. authorities borrow from private financial institu- tions. Or it can be exerted by central-govern- EMERGING LESSONS FOR BETTER ment regulation. (In Chile, municipal govern- IMPLEMENTATION ments cannot incur debt, forcing capital spending to be financed from central-level grants, local In their haste to begin the task of decentral- current-account savings, or private-sector firms' ization, countries often have constructed fiscal investing in "public" infrastructure.) Debt disci- frameworks they later discovered, through expe- pline is subverted when state or local authorities rience, did not fully serve their purposes. In fact, are able to borrow from decentralized public among central-government fiscal managers there financial institutions under their control, without has developed something of a backlash against being obliged to meet market standards of cred- decentralization initiatives, on the grounds that itworthiness. these have curtailed central authorities' ability to * Decentralization of local fiscal con- carry out fiscal restructuring.13 trol has lagged behind the sharing of rev- - There is a trade-off between the fis- enues and should be accelerated. The great- cal framework that works best for macro- est promise of decentralization lies in local economic management and the framework authorities' making their own decisions about that works best for municipal or provincial both the revenue and expenditure sides of the management. Macroeconomic managers do budget. Central authorities until very recently not want to be locked into large revenue-sharing have been reluctant to cede control over matters or other financial commitments that restrict their like local tax rates and local fees schedules, or to ability to shape fiscal policy for the entire public broaden the menu of taxes from which sub- 12 DECENTRALIZATION IN LATIN AMERICA national authorities can choose. Local govern- in each country, and the importance of bringing ments have been reluctant to ask for more fiscal service management closer to the people. Once independence-or to exercise the revenue-rais- there is agreement on which functions should ing options now available to them preferring be transferred to the local (or state) level, the the security of central transfers. Realization of cost of these functions can be calculated.Then the full promise of decentralization will require revenues (or revenue-raising capacity) can be greater use of own-source revenues, especially in transferred to pay for them. This process is the larger municipalities with adequate tax potential. reverse of that followed in many Latin American Municipal self-financing through user fees and countries, where revenues have been devolved local taxes has the additional advantage of being first; then a search has been initiated for expen- entirely neutral with respect to central-govern- diture functions that can be transferred to absorb ment fiscal policy. the revenues. a Finance should follow function. If Of course, the decentralization process can- the architects of the most recent round of not be restarted. However, as intergovernmental decentralization in Latin America were to start sorting-out moves ahead, there will be opportu- anew, they probably would give more attention nities for restoring equilibrium.The first ques- from the beginning to the assignment of func- tion always to ask is: Can this function be most tions. Local governments have a comparative effectively performed at the local, state, or advantage in providing certain kinds of ser- national level? Answering that question will vices-based on the qualifications of municipal allow countries to adjust financing arrangements personnel, the special goals for decentralization accordingly. MOV'ING GOVERNMENT CLOSER TO THE PEOPLE PROPONENTS OF DECENTRALIZATION OFTEN SAY they want to shift government authority "closer to the people." The expression is not without its ambi- guities. Political scientist Morton Grodzins once considered six different meanings that "closer to the people" had been asked to bear in political writings. He concluded that, under all of the meanings, the proposition that local government automatically is closer to the people in the way it functions is impossible to verify.l4 Decentralization only provides a framework largely from the top down. Elected civilian for governance. It cannot guarantee more effec- regimes were first instituted at the national level. tive citizen participation in civic life or higher Only later did local voting for mayors and coun- standards of public accountability. To incorporate cils take root, typically as part of the decentral- the voice of the citizenry, decentralization has to ization process."5 Table 3 illustrates how recently be supplemented by other types of institutional local democratic elections were established (or, reforms. Fortunately, throughout Latin America often, re-established) in selected countries of the there are now numerous examples of how region. decentralized government is giving specific By the middle of 1996, elected mayors meaning to the phrase "closer to the people"- headed local governments virtually everywhere in and in the process becoming more effective. Latin America. The only exceptions were Mexico City (where elections are scheduled for 1997), ELECTED LOCAL REPRESENTATION Costa Rica (where elected city councils appoint city managers as chief executives), and a few rural One of the most fundamental transforma- regions where indigenous peoples have retained tions in local governance has involved the traditional forms of selecting their leaders. strengthening of elected leadership. The spread of Elections are a fundamental tool that the democratic elections in Latin America has been citizenry can use to choose leaders and to hold 13 14 ]DECENTRALIZATION IN LATIN AMERICA them accountable for performance in office. municipal elections, voters must focus on local However, not all electoral systems are equally matters, such as the performance of a mayor in effective in strengthening public accountability. office or the specific platform of reform of a Countries in the region are gradually modifying mayoral candidate. Now combined local and their voting methods, both to sharpen voter con- national ballots are becoming rare. In fact, it is trol over officeholders and to give mayors a bet- increasingly common to find large municipalities ter chance to establish a track record of perfor- governed by opposition parties that do not hold mance that voters can judge. office at the national or state level. In some Direct, popular election of mayors has now places, local civic groups have put together can- largely replaced the former practice of indirect didate slates to run for office without national election of mayors by city council members from party affiliation. All of these changes have among their number (see Table 3). Indirect elec- strengthened the ability of local election cam- tion of mayors tended to perpetuate the strength paigns to identify and resolve, through voting, of political insiders, who often were more major choices about municipal priorities. accountable to their party hierarchy than to the The concept of accountability through vot- public at large. ing also can be reinforced by lengthening may- Another step in sharpening local account- ors' terms of office. Short terms of office do not ability has been to separate voting for local offi- allow mayors to establish a track record to put cials from voting for national representatives. In before the voters. Bolivia is an example of a Latin America, when citizens have been asked to country that has extended the mayoral term of vote for candidates at all levels on a combined office as part of an effort to strengthen account- ballot, local issues have tended to be over- ability. It found that the previous mayoral pern- whelmed by national or state issues and by con- od-two years-was too brief a period to allow tests between national political parties. This ten- a new mayor to become familiar with govern- dency was reinforced in some countries by the ment, enact a prograin, and canmpaign for re- requirement that voters support the same party's election on the results of that program. The may- slate at the local and national level. In separate oral term was lengthened to five years at the same time the country adopted direct elections. Table 3 Likewise, accountability could be improved Election of Mayors by eliminating prohibitions against mayoral re- Year Local Popular or election. The prohibitions against re-election Elections Indirect Election originally were intended to prevent local regimes Country Established (Year indicates date from entrenching themselves in power, but they Country or Resumed of last change) Argentina 1983a Direct also have prevented voters from renewing the Bolivia 1985 Direct (1995) mandates of mayors who perform well. Chi e 1992 Indirectb Table 4 compares some of the features of Colombia 1988 Direct Ecuador 1978 Direct fcr large cit es onlyc local electoral systems as of early 1996.The vot- Nicaragua 1990 Indirect ing structure by itself cannot guarantee that local Panama 1994 Direct Paraguay 1991 Direct government will be responsive to the people, but Peru 1993 Direct most of the changes that have been made have aExcept Buenos Aires. The first mayoral elections were held been designed to give mayors a stronger and bet- in Buenos Aires in 1996. ter defined popular mandate. The election of council members is more bLeg slation has been proposed for direct e ection of mayors in Chile. problematic.Voting for councilors often is still by blocked party lists. That is, voters must vote a cCities over 100,000 population and those that are provincial capitals have direct elections. Others have indirect elections straight party line; they cannot divide their votes of mayors. between candidates of different parties.Voting often is also by closed list. That is, each party LEAPRNING TIHROUGH EXPERIENCE * 15 ranks its candidates, determining who will sit on experience contributed to a much stronger con- the council at different levels of total voting sup- sumer orientation in the conduct of municipal port; a voter cannot single out individual candi- affairs. Sirmilarly, in Northern Mexico, where dates to vote for.This practice tends to obscure party competition has been introduced into voter accountability in the municipal council."6 mayoral elections, a large proportion of newly Although under such a system voters theoretical- elected mayors have private-sector management ly could hold parties, rather than individuals, experience. These mayors have been assertive in accountable, in Latin America the result has been introducing the idea of a more entrepreneurial, the creation of party machines, where lifetime self-reliant city. politicians get ahead by being accountable only Innovations in electoral accountability to the party apparatus, not to the electorate.The stretch beyond Election Day. The new genera- weak public mandate of councilors appears to tion of mayors has found a variety of ways to have contributed to generally weak oversight by stay in contact with voters between elections. councils of the local executive branch. As a Many issue quarterly or more frequent reports result, strong mayors having individual identities on the progress made in implementing their before the electorate commonly dominate campaign promises, or hold open sessions municipal authority.The Mexicans term this where citizens can comment on public services local balance of power "presidencialismo."17 and other matters. Municipal budgets have The practical significance of popular elec- become public documents. A number of mayors tions depends on communities' willingness to routinely conduct public opinion polling to use voting as a stimulus to more comprehensive uncover citizen service and investment change. In Colombia, the combination of popu- priorities. lar elections and greater local budget responsi- bilities has brought a new kind of mayor into CABILDOS ABIERTOS AND OTHER politics.A national suarvey of mayors conducted PUBLIC MEETINGS in 1994 found that 52 percent had university degrees. More than half (53 percent) had As important as local elections have been worked in the private sector immediately before to developing democratic accountability in the taking office, and most of the rest had private- region, periodic mass voting is a blunt instru- sector work histories."8 This private-sector ment for expressing the popular will on con- Table 4 Selected Features of Local Electoral Systems Mayoral Term of Office Re-electlon Local Elections at (Years) of Mayor Same Time as Nationa.? Argentina 4 Yes Yes Bol via 5 Yes No Brazil 5 No No Chile 4 Yes No Colombia 3 No No Ecuador 4 No No Guatomala 2a Yes Yes Honduras 4 Yes No Mex co 3 No No Panama 5 Yes Yes Peru 3 Yes No Venezuela 3 Yes No aGuatemala City has a four year term of office. Sources: Nickson (1995); Blanc (1994). Updated by author. 16 DECENTRALIZATION IN LATIN AMERICA crete issues. For this reason, public authorities MUNICIPAL PARTNERSHIP WITH have introduced a number of practices that allow COMMUNITY ORGANIZATIONS for more extensive consultation with the public. Several countries-especially those in Cen- Latin America has a rich fabric of commu- tral America-have revived the practice of open nity and grassroots organizations. These range town meetings or cabildos abiertos. For example, El from neighborhood and block associations to Salvador's 1986 revision of the municipal code mothers' committees, workers' organizations, and and Honduras' 1990 municipal law both require school associations. A tradition of self-help flour- that all towns hold regular cabildos abiertos to dis- ishes among these associations, but cooperation cuss community priorities. with municipal government has not always been One of the few empirical studies of how easy. Many of the community groups were mayors and citizens view these institutions was formed during periods of mnilitary rule. They recently conducted in El Salvador.19 Citizens have had a history either of opposition to gov- viewed the town meetings as valuable opportu- ernment or of solving community problems out- nities to express their requests for public works side the formal framework of government. projects. They considered the town meetings to The democratization of municipal govern- be open to all and attendance to be representa- ment has produced numerous attempts to tive of the community. However, they com- increase civic participation by coordinating the plained that the cabildos abiertos were used only to activities of community groups with those of the identify project requests. Citizens were not municipality. These efforts are illustrated in Boxes allowed to participate in actual project selection. 3-5. From this experience it is clear that success- Nor was there public discussion of broader ful collaboration between municipal government development plans. and community organizations requires ceding Mayors revealed a more negative attitude real power over resources. Citizen "advisory toward the cabildos abiertos. They did not see the committees" are not highly valued by the popu- meetings as beneficial and actively resisted citizen lation. Effective popular participation with local involvement in the priority-setting process. May- government has been organized mostly around ors said that they did not feel the cabildos abiertos public works projects that bring immediate ben- were useful settings for discussing project costs efits to participants, and around a process that and did not believe it was possible to deny proj- allows participation in budget allocation (Boxes 3 ect requests in a public setting. Mayors as a and 4). whole did not convene the number of meetings Simple and clearly understood rules are (five per year) that they were required to hold required to establish how community groups' according to the municipal law.20 priorities will be translated into government's The survey's findings are consistent with resource decisions.The entire process needs to impressions of other types of large meetings held move forward swiftly. Civic participation of this to gather citizen "demand" for neighborhood kind is self-reinforcing, because citizens quickly public works projects. Meetings of this type often see the products of their effort. Otherwise, have been held in conjunction with the opera- citizen engagement can itself become a bureau- tions of Social Investment Funds.They almost cratic process. inevitably produce a one-way flow of informa- One of the most comprehensive efforts at tion. Citizens are able to voice their views on organizing civic participation is in Le6n, Mexico, project needs, but they do not have adequate under the Sistema de Organizaci6n Ciudadana. access to cost or budget information to truly The city set up 19 different citizen councils, participate in priority setting. It is rarely clear ranging from the Council on Culture to the how public officials translate the voice of the Council on Neighborhoods and Settlements. The community expressed in this manner into a hst city formally recognized 200 different settlement of projects to be financed. comrnittees, each of which elected 12 officers 1 L R 1 \~ I X(, T * F 1 7 BOX 3 Participaory Budgeiting in BraZil he let,wing Par- issue ofhow much in each . to present the capital ri do &TMaI- auth rteie in t prese thciys . budget resuls, this time to ores the municipal executive budget, a council of Tresenta- came to power in a num- relative to tte s.w-p*tiici-.. curvet an d .apiali ives elected fiom each ber of Btzian municipal- patorexpoises, porUay oborhoDd region. ities in the id-9s. t Ca Ou Ant role for large boards The The c i o i tO sponsord a poliat ig- c m otgaitons meeting ficuses on how monair the cityh efforts form that expaded the in approvingm to invest the anount bud- to dim ment the budget powver of nei- loeeoW budgm.initially iled, geted for capital expenses. dcision associatiuons. p to en in the largest- The onizer explainid- use them as e b for. contoled cits such as what is realstcaly gting in Itabun resulted "popular council"with - Sio Paulo and Porto achievable wih the in a lge shift of invest- budgetay a-tb ri A.er- resures available and ment resources toward Tnis gool for Over time, howrver, indicate thtthe prefer- water and sanitaton, the increased publw participa- the popular-councis in ences of each aeighbor- top priorities expressed by tion in Gcam some cities acquired a hood wil be wghted ctzens. Smilar methods into conflct. with the for- large pactaic role in with those of other of community consulta- Mnai powes of traditional budgt prepation, In the neighbooo to reich a tion over capital priorities muncil institutions, giv- city of Ibu i (pop. ranking of priorities. have been adopted in ing rise to conserabk 280,000) neigborhoods Based on these sessions, Porto Alegre. tension. Between 1988 were grouped into seven the technical sffdevises and 1992,12 ofthe 36 PT regions. The mayor and an investment program Sources:Assis (1993); mfayors split with thei his staff hold one or more The mayor and staff then Campe (1995); Nickson own party, pary oer the public meei per year hold a citywide meeting (1995. filling sectoral positionis as designlated bv the A nmore direct process of-Citizen participa- municipalitv's Directorate ot Citizeni Organiza- tion and one that moves swiftlv-60 davs froml tion and Education. Between 1992 and 1994 city start to finish-is illustrated in Box 4.The capital officials and these settlemlenit committees held budgeting and planningt, process in La Florida, 1,093 meeting,s and nmany more training Chile, assigns citizen groups direct responsibilitv sessions.21 for choosing neighborhood-scale public wvorks The results of this process are instructive. projects as well as larger, sectionial projects. The munuicipalitv founid that the svstemii of civic A ditfferent kinid of partnership between participation was too highly structured for citi- municipal governiments and commilunitv organi- zens' taste. As one author observed, the interests zations is represenited by Bolivia's lopular Partic- that citizens of modest mleanis had in participa- ipation Lawv (Box 5). Here, the principal linkage tion extenided almost exclusively to obtaininlg is onle otfmunicipal accotntablitty to the coiuitn- public works.The very comprehensiveness and nitv. The laxv, wvhich took etfect in 1 994, has formiiality of the structure aiyv have discouraged translated the general concept of accountability. more spontanieous participation. In the words of wvhich almlost alwavs receives lip service in the mnunicipality's director of citizen integ,ration decenitralization initiatives, into a well defined. anid education. "People are interested in results. formal structure. As with the capital budgetin- not roles.""'2 process in La Florida. a large part ot the law's 18 1) L C E N I AL I Z A I I (N I N L A I IN A \ L RI( A BOX 4 La Florida, Chile:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I i !R ;lehsseine,pa,ty.covenesal-g ther neig or , and:ome 335, : S ;S: 002.- S 0 9 - V 0 lega: lly a o . -0St 0; i:4--.4 g -t E 0 i; 20 .S::: .S-00$ f allE the legally sector. priate sector tinder con- reonie corn rgsted comnwi;fsy The connust -''tract with the munic0-:00ipaf ;00f lit ry long prceded theThemncploen hchrpeetaie fal eurdt r cgn tizan restoration00 of muiipal men-0 t esabise an ; ovrl the0; cmuity groups; accep th globa budget stow0iii->5˘0000000000;00tt;0ti60-bi 60f 4*;0 fi rX C;0 demoracy.:;;:0;tg 0 0t00 invsten ceiling.00; Beie a;cfBj; : ttend ,; tocometo a con- cetiling.Th sysem i s;0;0: tLa; Floia .aj inthiet0 this00 gi0^lobitudtcon-00 ;00 tsensuson the proect tha deige fro theoutset Grater Satig metrpo-straint, comuit group wil goita Flrd' t oc omnt org-: itan region, hasdevelopedl} iare:give'n' a ctao oqf per- :00jXcapialbudget, subXjec gto- niagtions to make realsti aformalmechanism for unitcsts capital teheglobl budtcon- i mnt;dem s bCi inorpraing tesegrous 0;0work-eg.,thecost per t$0 strainl t. Wa consenss ca-t :fiting their proect ;lists into the mniipliy.cap0t;0-.square m,ete of 4roa,d, no0000;; f0000tf be 0reaced ithe mayo wi"jthj;g0int th budget con- i There are mre than 1000 ;traff.ic signakThey ;ar thn apropet thtproo,tes -the. true unit Cost of d f- communiyognztions aske di toc0onsut -with iti- :0; 0 comprmse. Some of the. i-j;i-tferent ftypes of projects, in La 0Floria lone,000;000 te0ns,0negtate with other 000002proeson the finl istar and by0n fain g up th At the strt othe organizations, and pose1% b by t municilty, - dtrde-oi between cor- budget cylek, the munici-: acapital project listfor dsome Iby community ora :peting neighborhoods. effectiveness is due to the clarity with \vhich it sions. A referendum alloxvs individuals to vote on assigns roles to different parties and to the fact single-issule questions of public concernl. In that these roles are formally recognized, in this Switzerland and some parts of the United States, case in national legislation. referendums are used to decide everythinlg from property tax rates for local school finanlcing to Referendums bond issuance to pay for economic developnt projects or policy matters suchl as the continlua- Some munlicipal investmlenlts cannot be del- tion of local rent control. egated to the community level. Major invest- Within Latin America, only Chile recog- ments in trunk infrastructure, like mainl water nizes referendums as legally bindinlg methods of distribution lines or principal roads, for example. reaching decisions about public expenditures. At are likely to affect the entire municipality Citi- least 5() percent of eligible voters must partici- zens may have to express their demand for these pate in a referendum for it to have legal validity investmlents through other means than consulta- Elsewhere, for the most part. mlayors have used tion with community organizationls. referendumas as advisory tools to gathler public A few mayors have held referendums to OpiniOl and to focus public attentiona on major obtain citizen guidance on such investment deci- policy choices.tThe mayor ofTijuana, Mexico. I I A i, \ I \ (, T ti i, ), t (. i ' \, p i i, i \ I I colstructed a riefereniiduLim around a proposed nitm referendmu as la imtrlllCltN folr pubHlic program of road conistr-uctioni, road rteplaccmniilt, ClhoiCc. prompositions cain be placed oni the billot anld drainage. The ballot qliestioii piroposcd a l .IV group that obtains a stufficeieit nubililer ot specific wvay to pay for the investment package. igrllattilres. ()fteii, tlcse groupS arec opposecd to Individual tax shares were established, in1 part current iunicipal poliy:. liI Latin Amirie-ca howv- according: to the aml1oun-t of dir-ect benctit each evr riiaVors are thle oni onlles So ftr to have illi- individual receivel foi-oim thc projects. The comi- tiated reterendumis-to ileiglItel ulic aarel- billed investment and cost-sharing plani waLis \iub- ntess ofisstues and obtatlin a clear mandate for- mitted to the electorate. ThCo)Uh the vote w,-,as aIctioll that the mavor- favor. Nonethelev)s, the nlot legally binding, the city ulsed pLulibc approval submission to the electorate of Clear illvestillmlet (04 percenit voted "'yes'') as a demonstration of proposals, accompanied by clear pi-ic tags, is pyart popular- support in its effort to obtaini authoriza- of a style ofLr(\Vel_l.llce t]l,lt 11 I1OC tlJls- tioln of b onjd issuance fi-omil the state, parelit and accountable. The niavor of LaN, CondeN1. Chile. used a similar citywide r-eferen-iiduLmi to gali ptublic ]) CI I ZENS T RUS I appiroval of a user-fee system to pay for i-nvest- M U N I C I PA L G OV E I N %I E N 1 S inienit in neN highways and imterchangeN 3-. Because To SE 1) R I 1() I T I E S , the party ill powver locally was pairt of the national oppositioni, the mnavor used the refercn- In the iend, the best indicatlio of whether dutim to show national authloi-ities there wa,s puib- decentralization haNJ moved government -closer lic support tor the investment strate-v. to the people" is thC trust citiZCens pICCe ili Ill countries that have a long(r tradition of mllunicipal authol-ities. BOX 5 Bolivia: Community Oversight of Municipalities olivia's Popular these functions have oversee municipal budget branch and, through it, Participation Law become local government expenditures, supervise with the Senate. If the creates new com- responsibilities. construction progress on complaints are found valid munity organizations- The law endows works, and to monitor and not remedied, a orgaitizaciontes territoriales de municipalities with new the quality of service municipality may lose its base-that are expressly tax-sharing revenues for delivery by municipal ser- tax-sharing revenues. assigned the role of meeting the investment vice entities. As of mid-1995, proposing, controlling, and priorities designated by If investment roughly 5 percent of the supervising local invest- community organizations, resources are not spent as complaints filed by vigi- ment projects and the and stipulates that 90 per- programmed by the com- lance committees had provision of public ser- cent of these resources munity, or works are not been found valid. In two vices according to the must be used directly for completed or financed cases, towns' revenue-shar- needs of the community community investments. within budget, the law ing entitlements were cut. in the areas of education, The community empowers the community health, basic sanitation, organizations also serve as organizations to lodge Source: Inter-American Con- local roads, and urban and oversight committees- complaints with a special feresnce of Mayors (1995). rural development. All of comites de vigilaincia-to office in the executive 20 DECENTRALIZATION IN LATIN AMERICA Table 5 Whom DoYou Trust More? (Opinion survey of total of 1,900 respondents in Colombia) Manizales Valledupar Ipiales Zipaquira Municipality 92% 94% 73% 57% National Government 8% 6% 27% 43% Source: Fiszbein (1995). Not surprisingly, there is no uniform answer in citizens' views, with local service quality. to the question of whether citizens trust munici- * Voting is the most basic act of citi- pal governments to make spending choices on zen participation. The separation of local from their behalf. There are, however, fragmentary national elections, the increase in the length of signs that are encouraging. Citizen surveys in mayoral terms, and the adoption of direct elec- four Colombian cities, conducted after decentral- tion of mayors are all reforms that have made ization, found that an overwhelming majority of mayors more accountable to the electorate. Simi- respondents trusted local government to a lar reforms to increase the accountability to greater degree than national government (see municipal councils are needed. Without them, Table 5). councils are likely to remain relatively weak By contrast, the 1,034 respondents to a sim- institutions, poorly equipped to exercise over- ilar survey in El Salvador in 1994 did not feel sight over strong mayors. especially "close" to their municipal govern- * Direct citizen participation requires ments In terms of citizen trust, municipal gov- that citizens have clear information regard- ernments ranked ahead of the national govern- ing the municipal budget and service ment but below religious institutions and costs, and that they participate in actual community organizations (though far ahead of budget choices. In the absence of a cost con- labor unions and political parties). Three-fourths straint, citizen preferences about service supply of the respondents reported that they saw little or investment priorities are scarcely worth gath- or no opportumty to participate in local govern- ering. Sharing budget and cost data implies a ment. Fully 85 percent knew of few if any willingness on the part of public authorities to attempts by the municipal council to obtain surrender exclusive control of key information. community input. It therefore has symbolic importance for citizen These differences in citizen confidence in participation in decision-making, as well as prac- municipal government correspond with differ- tical utility for improving the quality of choices. ences between El Salvador and Colombia in the In the most effective models of citizen participa- extent to which municipal institutions have been tion, citizen groups actually make choices about opened to citizen participation, and they suggest how limited budget resources will be allocated. that local citizens are discerning customers when * There are benefits to formal struc- it comes to evaluating different "models" of tures that clearly spell out the roles citizens decentralization. and community organizations should play in collaborating with municipal govern- EMERGING LESSONS FOR ment. Transparency and predictability are BETTER IMPLEMENTATION nowhere more important than in defining the processes that will be followed in community Citizen participation sometimes can appear participation. A clear, stable set of rules allows to be a soft goal, not as specific or measurable as participants to learn from experience, and to better service coverage or better budget manage- apply that experience in the future.Without well ment. However, it pays off in greater trust in local defined rules, there always is the possibilty that government and appears to be closely correlated, government institutions will "consult" with the LEARNING THROUGH EXPERIENCE * 21 public only so long as they obtain the answers * Mayors looking for innovative ideas they want. on how to generate citizen participation * Citizens expect concrete results from do not have to look outside Latin America participation, especially a greater say in for relevant experience. A wide variety of neighborhood capital projects. They have techniques for capturing public service demands limited tolerance for longer-term planning or have already been tried in the region, and the "policy" discussions. Initial participation strate- region is compiling a vast empirical record on gies have been most successful when they focus how to incorporate citizen participation and citi- on selecting, building, and financing local public zen choice into decentralization. It will be valu- works. The experience gained in this kind of able to monitor closely how citizens feel these collective decisioin-mnaking may provide the different approaches have succeeded and whether groundwork for broader community involve- it is possible to transplant promising innovations ment in service delivery at a subsequent stage. from one part of the region to another. IMPROVING MUNICIPAL SERVICE DELIVERY A TRANSFER OF SERVICE RESPONSIBILITIES to local authorities will make citizens better off only if local governments are capable-or swiftly become capa- ble-of delivering services effectively. Fear that municipalities will not be able to perform the functions assigned to them has become the principal roadblock to moving ahead with decen- tralization plans. Municipalities do not have to achieve transfer of service responsibilities.The contrast unreasonably high performance standards to jus- between Colombia's first efforts at decentraliza- tify decentralization. Frustration with national tion and its subsequent strategy is instructive. service providers has made citizens willing to try Colombia initially attempted to transfer entire new arrangements. Early indications of munici- blocks of functions to large numbers of munici- pal performance are encouraging. A survey of palities. For example, between late 1987 and Jan- four cities in Colombia, for example, found that uary 1, 1989, almost 1,000 water and sewerage most citizens believed public services had systems were turned over to local governments. improved as a result of decentralization, though Department-level institutions were supposed to there clearly were differences in the degree of assist in the transition by providing technical enthusiasm (Table 6). Objective measures of ser- assistance, but they were not equipped to do so. vice quality (like the degree of household cover- In subsequent decentralization planning age, frequency of service interruption, etc.) con- Colombia has moved more slowly.23 Municipali- firmed that on balance decentralization had ties and departments must demonstrate that they improved water supply, sewerage, road mainte- are ready to administer new functions before a nance, and education in these municipalities and transfer takes place. In the health sector, a five- in others that were studied. year timetable was adopted for devolution, with Central authorities can improve the chances responsibilities transferred first to the largest of successful decentralization by phasing in the municipalities with the best-developed local 22 LEARNING THROUGH ExPERIENC E * 23 Table 6 In Your Opinion, Has Service Performance Changed Since the Popular Election of Mayors? (Colombia) Manizales Valledupar Ipiales Zipaquira Improved 73% 78% 53% 31% Stayed the same 25% 20% 36% 49% Worsened 2% 2% 11% 20% Source: Fjszbein (1995). health systems. Only after these transfers were improving service quality, they will find ways on digested did devolution move on to smaller their own to upgrade their staffs or take other localities. This gradual approach has reduced the steps necessary for service improvement. risk of spectacular failures that would turn the The two strategies sometimes are presented population against decentralization in general. It as alternatives, but they in fact closely comple- also provides an opportunity to adjust later ment each other. Skill-training often is wasted rounds of devolution in light of initial unless reinforced by a system that makes munici- experience. palities want to use the newly acquired skills in One consequence of this step-by-step service delivery. On the other hand, municipali- decentralization, however, is that functional ties that lack the technical ability to deliver ser- responsibilities do not get devolved to the local vices can squander resources and exhaust citizen level as fast as revenues must be transferred under good will, no matter how attentively they listen the schedule established in the constitution. A to citizen service demands. cautious attitude toward municipal service capac- ity can exacerbate the central government's fiscal Professionalization of Municipal Staffs imbalance, by leading it to retain service respon- sibilities even in the face of mandated revenue Traditionally, municipal work forces in Latin transfers. America have been "bottom-weighted" with large numbers of unskilled workers. STRENGTHENING MUNICIPAL One of the most encouraging results of SERVICE CAPACITY decentralization has been a transformation in many countries of the character of the municipal Two broad strategies have dominated efforts work force. The size of technical and professional to upgrade municipal capacity for service deliv- staffs has grown rapidly. The number of unskilled ery. One strategy seeks to strengthen the skills of workers has shrunk. Unskilled workers have been municipal workers, to improve municipal man- cut partly because municipalities have found it agement methods, and to reduce the turnover of more efficient to contract out work like con- trained employees.This strategy tries to address struction or street cleaning than to maintain a the capacity gap directly. It is typically imple- permanent work force for this purpose.The mented through technical assistance and training changing skill mix also reflects municipalities' programs for local governments. acceptance of cost-effective service delivery as The second strategy seeks to build into the their primary mission.This contrasts with the municipal service delivery system more opportu- past, when local governments often saw them- nities for citizen feedback and control, as well as selves as employers of last resort and appealed for financial incentives for good service perfor- political support as much through job provision mance.This approach tries to create a framework as through service delivery.This tradition contin- of service accountability-arguing that once ues in some parts of the region, but is gradually municipalities feel financial and voter pressure for being displaced by a model that emphasizes 24 DECENTRALIZATION IN LATIN AMERICA competence in service delivery at reasonable bringing health workers "closer to the peo- cost. Local governments are becoming more ple" and encouraging them to take more responsive to citizens as "consumers" who want responsibility for the results of their work. In cost-effective services. this case, it was a state government agency Table 7 demonstrates the profound changes that assumed the initiative-sometimes in the made in the composition of the municipal work face of municipal government opposition- force in Chile and Colombia during the period again illustrating that it is the style of service of service decentralization. Municipal govern- delivery, more than the formal status of the ments are reshaping themselves to operate with service delivery organization, that distinguish- leaner, more flexible, and more skilled labor es effective decentralization. forces. The number of municipal workers per 1,000 residents in these countries contrasts Stability in the Public Work Force sharply with the ratios found in Brazil or Argentina, where local service delivery rational- Organizations striving to upgrade municipal ization has been less well defined. service performance regularly struggle with a trade-off between giving public workers greater Table 7 job stability and making them more responsive Changes in Structure of Municipal Work Forcesa t e Ratio of Total ~~to elected leadership. Historically, it has been Ratio of Total Workers to Total Municipal common for newly elected municipal adniinis- Professional Work Force trations to dismiss large numbers of workers and Technical per 1,000 Staff Resioents from the municipal payroll, especially when a 1975 1988 1975 1988 change of party is involved. A new administra- Chile 12.7 3.0 2.0 1.7 tion has its own set of party loyalists to reward 1988 1994 1988 1994 when it comes to power. Colombia 39.2 12.9 N.A 2.8 High turnover rates often have been identi- 1988 1994 fied as a critical point of weakness in municipal Brazil N.A. 8.2 12.9 governance. Municipal training may seem point- Argentina N.A. 7.7 N. A. less in this environment. One follow-up study of 300 municipal workers who had received spe- aExcludes school and health workers transferred from central cialized training in tax and financial administra- authorities as part of decentralization. tion found that only 67, slightly more than 20 Sources: Campbell et al. (1991); Fiszbein (1995). Country percent, still worked for the municipality three statistics. and four years later.24 Some of those who left were dismissed when a new mayor was elected. Others chose to use their newly acquired skills Upgrading Output Expectations of Local in higher paying jobs in the private sector. Public Employees Turnover can be tackled in a variety of ways. One option, broadly debated throughout the Technical skills are not the only require- region, is to create a civil service system that cov- ment of a cost-effective municipal work force. ers subnational workers. A civil service system Of at least equal importance is a management establishes career tracks of professional advance- style that imbues workers at all skill levels ment and prohibits dismissal from office for politi- with a sense of mission and the desire to pro- cal reasons except for top management positions. duce results. This commitment can be encour- Both Brazil and Colombia have extended civil aged by stressing outputs in service delivery service coverage to municipal employees. and by devices as simple as regular recogni- During periods of political reform, however, tion of employees or service units that pro- an entrenched public labor force protected by law duce the best results. Box 6 illustrates a way of from removal can be at least as great a threat to L E A R N I N T IfI () L (, 1 \ '11\ I2 I I I BOX 6 Worker Implementation of the Ceara (Brazil) Preventve Health Program eara is one, of the as local health agents, paid of health agent became most effctive in helping poorest states of at minimum wages. prestigious in rural towns, poor mothers improve Brazil, situated in Health agents visited 70 despite the low pay relative child care. All workers lived the arid Northeast. In the percent of the homes in to other public-sector jobs. in the commuities where late 1980s and early 1990s the state, transforming Workers did not they worked. Ceara implemented a pro- infant care practices. receive job tenure, as is The expectation of gram of child imnuuniza- The state nagers customary for public high-quality work and tion, prenatal care, and of the program recruited employees in Brazil. worker commitment set infant care that succeeded health agents in each Instead, they were hired as the program apart from in reducing infant death town. Though there were "temporary" workers, traditional public employ- rates from 102 per no formal schooling whose continued employ- ment. So did the continu- 1,000-one of the highest requirements, they empha- ment would depend upon ing reinforcement provid- rates in Latin America-to sized that the job was performance.Workers were ed by program managers 65 per 1,000. The program highly competitive and given the flexibility to in the form of frequent won the 1993 UNICEF that agents would be work outside of rigid rules, awards for individuals and Maurice Pate prize for selected for the job based being free to identify and program teams that child support programs in on their leadership poten- tackle other public health achieved reductions in worldwide competition. tial and their conmitment issues in their communities infant mortality. These results were to the program's success. like environmental hazards, achieved by 7,400 The entire hiring process or to identify on their own Soure: Tendler and unskilled workers serving merit-based, and position the methods that would be Freedhem (1994). etfective service deliverv as a wvork force plagued reform proposals had been reached bv the timie of bv high turnover. Brazil has periodically tried to this wvriting. Althoug, civil service ringidities mnay improve the cost-effectiveness of governmllenit, and be mlost extremiie in Brazil. mun_uicipalities else- to reduce the fiscal deficit, by reducing the size ot where in the region have founid that national state and local wvork forces and introducing(r per- rules governing selectioni and managelment ot formanice standards for emplovees. However, these school personniiel, for examiiple, cdan severely initiatives have been hampered by the constitu- restrict local ability to reformii service delivery. A tional prohibition against sacking civil servanits at decenitralizationi plan that devolves budgetary and any level. The constitutional protections have formiial service responsibility to the local level but made it virtually impossible to cut labor costs, retainis control of personnlel decisioIIs at the cenl- even as payrolls escalate to the point of sqLueezinig ter is allmost certaini to produce frustration. No out investmiienit and other expeniditures. level of governmnent theni has the tlexibilitv to The complexity of Brazil's civil service rules, respond to customer- demands. as xvell as the political selnsitivity of modifyingr theml, are revealed by the tentative agreement AcCOUNTABILITY ANI) SERVICE reached in the fall of 1995 by the congressionial D E L IV E RY committee charged wvith considering- civil service reform (Box 7). But the issue has defied resolu- The teclhlical capacity of mlunicipalities to tion, and no final agreemlenit on civil service provide services has to be supplemented by a 26 1) E C L N I A L I Z A II ) I N . AIX \A 1 1 I A BOX 7 Proose CivilSevc SrvCoAA PiP6s d fE- E tXt9 , ,,-. i,.'f'*k..i-. -..,: ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... .. 004 1l i9' dai vs"e fortumen ans afer goernmentlaborwae exceess pe rsonnel 30 years of service for ed 60 p˘rcent of revenues, who has beenra wo oritho(0 M t te asur sostem of accountabieity. This accountabilitn nay The Audit Conliissaon of Great Britain be primarily to custolers through the Starket- exeoiv plifies how regularlv published infora lation. place. Or it way be equalld to higher levels of caes be used to promote efficienCy.25 The Audit governooent who are charged with ofitltoring o old ission publishes unit cost cowle parmsons, as and overseeiug a unicipal service perforn ce. theil as service qualuto ibndicators, for the entire In either case, effective accountabilhte oust begin ratigo of local public services-wro refuse col- with an orientation toward results and wnith svs- lection anid vehicle mainteniance to school test tems for keasuring a od d gsseminatilg comiipar- resulytts and government overhead rates. The data iso es of both service qualo tc and service costs. provide a context for j4udging the quality and costs of services in anv one j furisdictioin. Output MHeasurement, Comparison, and Within Latin Aleerica, Chile plofieered this Accountability kiwsd of public service disclosure. It r ngularlv publishes the results of standardized school tests, The routine gatheridtg aced punblicatiohp of for both public aid private schools. It also pub- iyeforsatiofs ovi service qua(ity hates n d tie ss conioparative unit costs for sgtch items as one of the strongest devices for upgrading wlb unicipal trash collectioi for public as well as wiutlflpal perfornfoance. private providers. LEARNING THROUGH EXPERIENCE * 27 Both Chile and Great Britain use measures profound source of change in countries that have of local service performance as an aid to poten- substantially upgraded local service delivery. This tial competition. Most Chilean municipalities orientation starts with the pricing of public ser- contract with the private sector for routine ser- vices at levels that reflect actual costs, and vices like trash collection or street maintenance. extends through encouragement of competition Comparative cost data provide information to in the public sector. The structure of intergov- potential competitors as to where there may be ernmental aid should also be designed to enforce opportunities for market expansion because cur- incentives for cost restraint and enhancement of rent provider costs are high.The data also assist service quality. consumers in making market choices. Under the Box 8 illustrates how selected countries Chilean voucher system, for example, households have moved toward incorporating market princi- may choose to send -heir children to public or ples into municipal service delivery. Each of the private schools using a government voucher. The initiatives seeks to strengthen the linkage regularly published information on school costs, between what consumers pay for public services school test results, and school teacher characteris- and what they receive, while wvidening the range tics are intended to help families make an of service choice for citizens. informed choice about schooling alternatives. Competition among schools is expected to Efficient Intergovernmental Grant improve educational quality and to restrain costs. Structures Colombia has recently adopted a system that builds information on service quality into Many of the most important municipal seT- vertical accountability. Under the new national vice functions are financed in large part through development plan, each public institution must intergovernmental transfers. The design of grant publicly define its mission, adopt output (or structures, therefore, takes on special importance. "results") goals that reflect its mission, and regu- These may promote or hinder efficiency in ser- larly measure progress toward the goals. Every vice delivery. Grants that reimburse local author- institution is supposed to evaluate annually and ities for actual service costs, whatever their level, publicly its output performance. Institutions are for example, tend to drive up service costs, since subject, as well, to external "results" evaluation by local authorities bear none of the burden of their a government auditor. own expenditure decisions. A consensus is emerging in the region Incorporating Market Principles into regarding the broad structure of grant-in-aid Municipal Service Delivery systems: * Specific functions of national impor- In the private sector, the best assurance of tance that are transferred from the central consumer satisfaction and cost efficiency comes level to local authorities should be accom- from a competitive market. Customers who are panied by revenue transfers that must be dissatisfied with the quality or expense of the spent on the function. The allocation formu- services supplied by a given provider can turn to las should be simple and transparent, and based a competitor. Market pressures force providers to on standardized rather than actual costs. For be responsive to customer priorities in order to example, school funding can be distributed on stay in business. the basis of a uniform per-student payment, Many of the sarme market principles carry adjusted for special needs. over to municipal service delivery-either in the * Capital projects and other activities form of literal competitive markets or the con- that have significance beyond local borders struction of service delivery systems that incor- are most appropriately financed by match- porate similar incentives. In fact, a market orien- ing grants, in which the central or state tation in service provision is probably the most government absorbs part of the projects' 2 8 1) F (: E .N I IR A I I Z A I I (I N I N L % I I N A vt E it1 BOX 8 Incorporating Market Principles into x~~~~~~~e s :. ;f :. . Municipal Service LDelivery n a private market, pubhc subsidy of water kind often is found in the current performance customers must pay companies, the measure is munic l pon psvgrams. period place maret pres- the full cost of service expected to restrain the For aple, in bi;os o f sure on the supplier. Some provision. Otherwise, sup- deemand for new invest- Hoiduras, small conmuni- municipalities have sharp- pliers will go out of busi- ment in the water sector. ties in the statei of Parasi, enedlocal competition by ness. In contrast, public Experience in other coun- Brazil and other loc dividing larger, cities into suppliers of local services tries has shown that communicies ar n the seprt zonmes and awaed- traditionally have recovered demand for water con- choice ofhaving: inside ing sePart contracts for only a small percentage of suiption falls significantly watep or odo trish -colleon in each. costs. Their losses have when prices are raised, water connectios, at a iear Th i is-tre mntains been covered by subsidies partly because consumers ly idtifie overt cen from the general resources find it in their interest to per househ that coe es tii he clear bench- of municipal budgets. For repair leaks or turn off taps the cost ofeach kind o f - rkco of ser- example, it has been esti- that otherwise are allowed investment. Comm vice costs. At the same mated that water charges to run freely. Lower con- members then vote on the timiee e eac sr is able recover only 20-30 percent sumer demand, in turn, ind of servie they want to to benefit f the : of water supply costs inm reduces the need for new pay far Al me a economies of setvicinRg al Mexico26 and a compara- investment in water supy o t acp the coin- ithin itsZfa- ble percentage in Brazil. facilities. Of course, mariket muny es b con- chise zo It Also, ensures Establishment of pricing of water service tributing equa to; te cost tah will be more service fees that recover makes sense only when of the prefered solution~ than one cOppany able to the full costs of service municipalities have the In somie service bid when bid&soPen up. provision represents one capacity to measure functions, the principles Chile has gone f'ur- important step toward a household consumption of a private market can thest toward incorporatig market model of service and consumers have the be adopted directly. market competition into delivery. For example, ability to change their Municipalities, fr exam- the provision of basic Colombia has embarked consumption levels in ple, can conduct competi-_ human serviCesIt lprovides on a seven-year program response to price adjust- tive bidding among Private households with school that raises water fees, annu- ments. It also requires tar- suppliers fo the rt to vou ches wthatwill pay the ally to the point that, by geted subsidization plan to provide trash collection or cost of thei hildreins the year 2002, there must protect low income fami- street cleaning services. schoolng at either munic- be 100 percent cost recov- lies' ability to obtain*water. Although only one fran- ipal or private schools. ery by all water providers, Pricing principles chiser may be awarded, New organizations are firee including the costs of cap- also can be built into competition for the fran- to enter the school market ital investment.27 Besides household investment chise rights and the by sg up competing elinminating the need for decisions. Pricing of this prospect of rebidding after schools. cost to reflect the rest of the nation's stake by -case pleading for funds from the state as a in the local investment. basis for mlunicipal financinig. * Transfers of all kinds should follow * Grants should not be used to corn- clear, stable rules. There should be no case- pensate local authorities for budget L L AR N I N (; T H R1 ( L' L H E \ i1 \ i i< i i . t * 29 deficits, overruns in project costs, or other EMERGING LESSONS FOR BETTER consequences of poor management. When IMPLEMENTATION local finances have deteriorated to the extenit that a higher level rescue package is needed, Central-government minlistries often resist de- intervention should be contingent on local gov- cetntralizatioil because they are skeptical about the ernielnt's adoption of drastic budget-balanicin,g ability of local governmllenits to deliver services. measures and managemenit reforms. Argentina, Eveni when responsibilities have been formally de- for example, has adopted a systemii of finiancial volved, central authorities miav try to retain de facto bailout for provinces, or by provinces for ImluIic- conitrol out of concerni for the lack of professionalism ipalities, that extends enmergenecy loans that can of local authorities.There is no denyvinig that many be converted into grants if the recipients make local governments are poorly equipped to take on agreed-upon progress toward cutting costs, pri- newv ftunctionis or even to performii adequately the vatizing service delivery, and closing local oper- funictions already assigned to them. 1ut there are atinTg deficits.28 other factors encouraging decenitralizatioin. BOX 9 School and Health Care Grants in Chile; Matching Grants in Mexico hile has the audtorities. Per-pupil pay- exico has per- government into coRabo- longest experi- ments are fixed so that haps the ratmve capital planning and ence in the there are no incentives (and region's most has helped the national region in redesigning no rewards) fir high costs. extensive eperience in government implement its grants specifically to make Grant payments are pegged matching grants. Since it invesment priorities.' service decentralization to pupil days in schooL This was launched in 1989, its Some observers, however, more Ffficient. has proved an effective spur National Solidarity Pro- have a*ued that variable When Chile to higher attendance rates. gan (PRONASOL or mtig grants of this devolved schooling and In primary health Solidaridad)has distributed kind steer resources too health care responsibilities to care, government grants more than US$8 billion in strongly in the direction the local level, it initially now cover about 75 per- federal funds for infiastruc- desired by central authori- reimbursed locaities for 100 cent of actual costs. The ture projects, much of it ties and open the way for percent of service costs initial practice of financing blended on a matching political discrimination. adjusted for inflation. How- essentially ail local costs basis with state and local Block grants may be more ever, costs for both functions precipitated a rapid expan- funds. The matching rates appropriate vehicles for soon escalated.The grant sion of local health ser- required of state and local financing capital expendi- structure was redesigned to vices.The government governments vary, depend- tures for functions that help restrain costs. subsequently lowered its ing upon both local weath now are entirely the Under the current share of cost coverage and and the character of invest- responsibility of subna- grant system, municipal placed a ceilng on reirn- nent. Cost-recoverable tional authorities. For schools are able to find bursement levels. Local projects require higher state functions that have sub- somewhat less than 90 per- cost-sharing provides and local matching rates. stantial externalities, a sta- cent of their costs through municipalities with a fiscal The matching grant ble and transparent system the per-pupil payments incentive to keep health system has succeeded in of matching grants is they receive from central care costs under control. bringing different levels of appropriate. 30 DECENTRALIZATION IN LATIN AMERICA * Citizen demand for decentralization * Changes in management style can is high, driven by frustration with the qual- also improve worker productivity. As service ity of service delivery from the center. functions are devolved to the local level, manage- From the small pieces of evidence that we pos- ment can be reorganized to be more effective. sess, citizens seem to feel that decentralization Institutions that establish objectives based on has improved service quality. They support press- results, but give workers greater freedom to ing ahead with further devolution. From the per- decide how to achieve the results and recognize spective of residents outside the capital, there is those who succeed, build most effectively on the so much need for improvement in service provi- potential of decentralized management. sion that fear of municipal incompetence is not * Improving work-force responsiveness sufficient reason to maintain the status quo. and service efficiency will require greater * At least in intermediate-sized cities, managerial control over the municipal the present skills of the municipal work labor force. At this point, indifferent workers or force are not a good indicator of the skills workers who do not appear at all for work are potentially available to the community. more of a threat to service quality than political- One of the most pronounced effects of decen- ly inspired turnover. Civil service coverage may tralization has been to draw a new generation of be able to help establish municipal career paths mayors into local politics.These mayors typically and provide incentives for employees to upgrade come from the private sector and are better edu- their skills, but rules that prohibit employee dis- cated. They are more "modern" in their approach missals based on performance or impede labor to government and service supply, and they flexibility in responding to changing local needs know how to hire managers of similar back- are obstacles to service improvement. Systems ground. In effect, genuine decentralization, that devolve budgetary responsibilities to the which enlarges the scope for local initiative and local level but retain personnel control at the problem solving, permits local government to tap center-or prohibit worker dismissals by law- a new supply of leaders. are inconsistent with decentralization. * Cost-effective service delivery * The intergovernmental grant struc- requires an overhaul of the municipal work ture is critical to local service efficiency. In force-a pruning of unskilled workers and the past, central-level grants have often recruiting of skilled labor. The transforma- been poorly designed. They have rewarded tion of the municipal work force in countries high cost structures and maintained central-level like Chile and Colombia has been a remarkable control over spending even for functions that accomplishment. Other countries will have to have been formally decentralized. A new genera- make equal efforts to upgrade the skill levels of tion of grants is now being introduced that pro- municipal workers if citizens are to receive the vides greater incentives for cost control and ser- public services they want at reasonable cost. vice efficiency. CONCLUDING THOUGHTS LATIN AMERICA HAS EXPERIENCED numerous waves of decentralization since the countries of the region first gained their independence. Each has finally ended with a recentralizing of au-thority at the national level. Many authors have noted that this cycle of decentralization and recentralization has had less to do with disagreement over the most effec- tive structure of government than with quarrels between different political elites who, when possessing national power, favor centralization and, when out of power, prefer decentralization. Whether the current decentralization initia- able, where the central government concentrates tives will prove more durable remains to be on solidifying the economic and fiscal frame- determined. These initiatives do, however, possess work of the country, and subnational govern- distinguishing characteristics that set them apart ments assume more responsibility for service from past efforts at transferring power from the delivery or for oversight of service delivery by national to the local level. First, they place much the private sector.The intergovernmental financ- greater emphasis on practical service delivery. ing rules are crucial to this division of labor. Public dissatisfaction with the level and quality They must simultaneously provide local govern- of public services has been the driving force ments with stability and predictability of financ- behind the recent changes. Citizen satisfaction ing, while providing the central government the with services also provides a yardstick by which flexibility and resources needed for macroeco- the accomplishments of decentralization and nomic management. other government reforms can be measured. Third, the current wave of decentralization Second, decentralization of service delivery has produced a remarkable variety of local is occurring at a time when the state is taking its experiments in citizen participation in gover- responsibilities for macro-economic management nance.This experience is building a grass-roots and fiscal restructuring far more seriously. This constituency for local civic engagement, as well suggests a division of labor that may be sustain- as a thick web of democratic institutions. Citi- 31 32 DECENTRALIZATION IN LATIN AMERICA zens' expectations that they have a right to par- not be viewed as a goal in itself. It is an instru- ticipate in municipal government may prove to ment for achieving more effective service- be the best bulwark of decentralization. delivery systems, for opening the institutions of Robert Putnam, in his remarkable study of governance to wider civic participation, and for a quarter century of decentralization in Italy,30 increasing public trust in government. There are noted that there is an extremely high correlation other instruments, as well, for achieving these between the effectiveness of institutions in service goals. Decentralization, in fact, is one of many delivery, citizen trust in these institutions, and reforms taking place in the way the public sector citizen participation. Where local institutions are is managed in the region. Specific decentraliza- effective at service delivery (as measured by such tion proposals should be judged according to simple indices as the ability to deliver services on how well they serve these deeper purposes of time or respond to citizen inquiries), people had effective service performance and democratic far greater faith in the decentralization process. participation in governance. The spirit animating Effective institutions, in turn, were more open to decentralization should not fall victim to rigid citizen involvement. demands that more funding and powers be trans- In the end, decentralization probably should ferred to lower levels of government. SELECTED BIBLIOGRAPHY Afonso, R., Jose Roberto and Renato Augusto Villella. Evolution of the Social Stabilization and Municipal Develop- 1990. Financas Publicas Mllunicipais no Brasil: Caracteristicas ment Strengthening Project, El Salvador. Washington, D.C. e Evolufao nos Anos Oitenta. Rio de Janeiro: Centro de Davey, Kenneth. 1995. 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Instituto de Investiga- 1'Vater Supply and Sanitation Sector Project. Report No. ciones Sociales. Mexico City. 12340-ME.Washington, DC. . 1995b. "La Tarea de Gobernar: las Cidudades Yafiez,Jos. 1993. "Principios a Considerar en la Descen- y la Gobernabilidad," in Ziccardi (ed.), La Tarea de Gob- tralizaci6n de las Finanzas Puiblicas," in Ignacio Irarrizal ernar: Gobiernos Locales y Demandas Ciudadanas. Instituto (ed.), Desaflos de la Descentralizaci6n: Propuestas para Con- de Investigaciones Sociales. Mexico City. NOTES 1 Shah, 1991. 6 Nickson, 1995. 2 World Bank, 1989. l 7Ziccardi, 1995b. 3Tanzi, 1995; Ahmed et al., 1995. 1 Federaci6n Colombiana de Municipios, 1994. 4 For example, see World Bank, 1990; Winkler, 1994. 19 Checchi and Company, 1994. 5 Superintendencia Bancaria (Colombia), 1995. 2() The historical role of cabildos abiertos as democratic insti- 6 Economist, 1996. The State of Sao Paulo now owes tutions also seems to have been exaggerated. In the early lenders $58 billion.The annual increase in state debt in colonial years, cabildos abiertos were convened sporadically 1995 exceeded the state's total annual tax revenues, even by mayors, largely in response to emergencies or royal cel- though Sao Paulo had no new borrowing. Real interest ebrations. They were not open to all inhabitants but to rates in excess of 20 percent, coupled with the state's fail- invited notables. Cabildos abiertos were briefly reactivated ure to make interest or principal payments, accounted for during the independence movement, but rapidly disap- the growth in indebtedness. peared afterward. See Nickson, 1995. ' For example, see Villela, 1993; Shah, 1991: Schroeder, 21 Mendoza, 1995. 1990; Sinchez and Gutierrez, 1994. 22 Ibid. 8World Bank, 1992a. 23 Quehl and Call, 1994. 9 Valencia Garcia, 1995. 24 Peterson, 1990. 0 Fiszbein, 1995. 25 Davey, 1995. '" World Bank, 1992a. 26 World Bank, 1994. 12 Merino, 1992. 27 ReXgitnen de los Servictos PNblicos, 1994. 13 Tanzi, 1995; Prud'homme, 1995. 28 Bertranou, 1992;Vega, 1995. 14 Grodzins, 1966. 29 Campbell, 1994b. 1 Fox,1994. 30 Putnam, 1993. 37 38 DECENTRALIZATION IN LATIN A MERICA WORLD BANK LATIN AMERICAN AND CARIBBEAN STUDIES VIEWPOINTS SERIES Latin America after Mexico: Quickening the Pace by Shahid Javed Burki and Sebastian Edwards Poverty, Inequality, and Human Capital Development in Latin America, 1950-2025 by Juan Luis Londoio ayailable in English and 5panish Dismantling the Populist State: the Unfinished Revolution in Latin America and the Caribbean by Shahid Javed Burki and Sebastian Edwards Decentralization in Latin America: Learninig through Experience by George E. Peter son Urban Poverty and Violence inJamaica by Caroline Moser and Jeremy Holland PROCEEDINGS SERIES Currency Boards and External Shocks: How Much Pain, How Much Gain? Edited by Guillermo E. Perry Annual World Bank Conference on Development in Latin America and the Caribbean: 1995 Edited by Shahid Javed Burki, Sebastian Edwards, and Sri-Ram Aiyer THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433 USA Telephone: 202-477-1234 Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK Cable Address: INTBAFRAD WASHINGTONDC World Wide Web: http://www.worldbank.org/ E-mail: books@worldbank.org I* III II i1rir1 3 8 6 9 780821 338650 ISBN 0-8213-3865-X