Fiscal Decentralization: A Political Theory with Latin American Cases

Theories of fiscal federalism explain the efficiency and other economic gains from decentralization but do not explain its extent and nature in practice. The authors develop a political theory of decentralization that focuses on the lines of political accountability between politicians at different levels of government. The more accountable central-level politicians—presidents and legislators—are to subnational politicians, the greater the extent of decentralization and the more it will conform to the preferences of subnational politicians, for example, with respect to the degree of the center's discretion. The model is tested on five Latin American countries that, although formally decentralized, in fact exhibit wide differences in the distribution of spending and revenue responsibilities. The theory also helps explain a number of problems governments have encountered in decentralizing, including subnational debt crises and a mismatch between responsibilities and resources.