Local Governments in Chile Leonardo Letelier S.

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Local Governments in ChileLeonardo Letelier S.

• Instituto de Asuntos Públicos
• Universidad de Chile

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Measurements of FD

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

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Expenditure (Revenue) measurements of FD

• Source IMF (GFS).
• It only includes China as a Federal Country.
• It includes India and China as federal countries.

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How much more decentralized should be ?

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

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Governments decentralized funds in Chile
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Decentralized Public Funds(Mill. of 2002 US
dollars)
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Decentralized Public Investment Funds Primary
Distributive Criteria
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Regionally Decided Public Investment
Funds(Mill. US 2002)
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Sub national governments autonomy on the
allocation of investment grants.

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

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Common Municipal Fund(Mill. of US 2002)
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Problems of the CMF

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

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Delegated Functions(Mill. 2002 US dollars)
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Social Programs allocated by the CAS-II Card
(Mill. of US 2002)
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Proposals

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

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

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

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