Strengthening subnational fiscal management in Latin America

Lessons and learning from the field (2010-2020)

Latin America and the Caribbean are among the most decentralized global regions in the world. The nature and extent of (fiscal) decentralization in the region was recently established in the Outlook of Fiscal Relations among Levels of Government in Latin America and the Caribbean — a joint publication by the Inter-American Development Bank (IDB) and Economic Commission for Latin America and the Caribbean (ECLAC). This document is now available in English.

One of the main challenges of fiscal decentralization and of subnational governments in Latin America and the Caribbean is to ensure that the latter have the institutional capacities to fulfill their responsibilities and can respond to the demands of citizens and sustainable development.

A recent study by the Inter-American Development Bank (IDB) called Strengthening Subnational Fiscal Management – Lessons and learning from the field (2010-2020)–available in Spanish–analyzes some of the most emblematic experiences of programs to strengthen subnational fiscal management carried out with IDB financing and identifies a set of recommendations that can be useful for new initiatives in the matter.

The study includes five case studies of programs in Argentina, Brazil, Mexico, and Uruguay and incorporates two international experiences. All the cases present the conditions of the context in which the programs were inserted, the challenges addressed, the strengthening strategies and diagnostic instruments used, the main results, and the lessons learned in terms of design and implementation. Eight lessons from this learning are outlined below, with a view to considering them in future interventions:

1. Subnational fiscal strengthening programs must be supported and articulated with decentralization policies

Consistency with national fiscal decentralization objectives should be a central aspect in the design of plans to strengthen subnational fiscal management, as shown by the long-term programs financed by the IDB in Argentina, Brazil, Mexico, and Uruguay.

The IDB’s strengthening interventions in these countries have been key for subnational governments to acquire the capacities to fulfill the responsibilities assigned to them in the national and sectoral policy frameworks. Specifically, the case studies show that strengthening programs must follow the historical and conjunctural evolution of the policy framework and regulations prevailing in the countries, a factor that is essential to ensure the relevance and sustainability of the results achieved and of the instruments of proposed fiscal management.

2. Intervention strategies must be consistent with policy objectives

The success of subnational fiscal strengthening programs depends on the clarity of the intervention strategy. These strategies must respond to national objectives, and, in this sense, they must provide clarity on:

  • the level (or levels) of government that will serve the program;
  • the way in which the heterogeneity of the institutional capacities of subnational governments will be addressed;
  • the use of incentives to promote the improvement of subnational management;
  • the time horizon of the program since these can be designed as isolated interventions or a sequence of several;
  • the metrics from which institutional progress is evaluated, and the definition of the goals and eligibility requirements to transition from one program to another.

Intergovernmental coordination is also fundamental so that strengthening activities are designed taking into account the different actors involved, both at the national and subnational levels.

3. The adoption of standardized fiscal management rules and instruments should be promoted

The adoption of standardized fiscal management tools (methodologies, systems, guides, indicators, standards, among others) allows reduction of the costs and implementation times of the planned improvements. This helps to avoid the proliferation of subnational management tools that do not take into account international best practices, and which could be costly to maintain and apply.

The adoption of standardized instruments also facilitates the replication of the solutions developed by other subnational governments, even if they are not direct beneficiaries of the programs. In this sense, it is important to induce the establishment of standardized management rules and procedures, in accordance with what is established by the governing bodies, as occurs with accounting harmonization, or the adoption of common rules of fiscal responsibility.

4. The use of incentive schemes must be adapted to existing capacities

Considering existing institutional capacities in subnational governments is essential for a good design of incentive systems that help improve fiscal management. For example, the use of resources for public works as incentives to improve fiscal performance must take into account the ability of subnational governments to select, prepare, and evaluate the public works projects that will benefit from this type of incentive.

5. It is important to encourage the adoption of common technological solutions

The cases studied indicate that the intensive use of information and communication technologies is a factor accelerating management improvements, especially since programs to strengthen subnational fiscal management generate a set of solutions that respond to common management problems. For this reason, it is important that these programs promote the establishment of common parameters and standards for the development of new management technologies, as well as protocols that facilitate the exchange of technological solutions.

6. The contents and training activities must consider the specific characteristics of the audience

Given that there is a great heterogeneity of institutional capacities at the subnational level, it is essential that strengthening programs correctly combine the theoretical aspects of good management with the dissemination of practical experiences. In this sense, the offer of technical assistance must be flexible and provide a broad spectrum of options that take into account the level of training and experience of subnational officials, as well as the resources (technical and financial) that are at their disposal. This implies combining massive training courses (MOOC type), with training programs for specialized technicians, and training based on specific cases of application of the proposed management tools.

7. The establishment of knowledge exchange platforms is crucial to accelerate innovation and the replicability of successful experiences

The promotion and formation of knowledge networks and the establishment of specialized associations make it possible to articulate the participation of the actors of the different levels of government, or of these among themselves, promoting technical dialogue to solve common problems, exchange experiences and adopt shared solutions. In this matter, it is important to use web platforms or the formation of networks to facilitate this type of dialogue through conferences or thematic forums.

8. It is necessary to strengthen the measurement and evaluation of the effectiveness of subnational fiscal management programs

A common factor in the studies analyzed points to the need to undertake impact evaluations in a more systematic and rigorous manner. Carrying out rigorous evaluations is still a pending task, which is why it is generally difficult to analyze the effectiveness of interventions, an aspect that is very useful for improving the design and implementation of future programs.

Given the complexity of carrying out comprehensive evaluations of this type of program, it is advisable to adopt an evaluation strategy based on specific topics (for example, studies on the impact of electronic invoicing, or cadastral valuation processes) that, as a whole, provide a comprehensive overview of the effectiveness of these programs in their different areas of intervention.

The Inter-American Development Bank invites you to download the study Strengthening Subnational Fiscal Management – Lessons and learning from the field 2010-2020 (in Spanish) for more details on the lessons learned from their projects.

This blog was written by Huáscar Eguino and Carlos Pineda Mannheim and originally posted on the website of IADB on March 7, 2023.