The decentralization process over the past four decades in Latin America and the Caribbean has strengthened the role of local and regional governments, yet systematic knowledge of their functions, resources, and service delivery remains limited. CAF – Development Bank of Latin America and the Caribbean’s 2025 Report on Economic Development: Nearby solutions: The role of regional and local governments in Latin America and the Caribbean provides a comprehensive overview of this landscape, documenting the responsibilities, practices, and capacities of subnational governments.
While these governments now play a central role in areas such as education, health, and infrastructure, gaps in information and capacity highlight ongoing challenges in governance, coordination, and equitable service delivery across the region.
In eight detailed chapters, CAF’s report provides in-depth analysis of the main aspects of regional and local governments in Latin America and the Caribbean, including (i) territorial organization and decentralization history; (ii) expenditure, fiscal rules, and procurement; (iii) investment and borrowing frameworks; (iv) revenue composition and transfer systems; (v) service delivery (transport, water, sanitation); (vi) metropolitan governance and coordination; (vii) bureaucratic capacity and public employment; and (viii) digitalization and shared infrastructure.
The summary below touches briefly on each of the topics covered in the report, which are explored in great detail and supported with extensive quantitative analysis.
Proximity and the promise of decentralization in Latin America: the territorial organization of countries and the challenges faced by local and regional governments
The rationale for decentralization has long rested on proximity: it is better to solve problems nearby the citizens than far away. By bringing decision-making closer to citizens, subnational governments are expected to better identify local needs, tailor public services, and strengthen accountability through closer citizen oversight. The proliferation of autonomous jurisdictions has also created space for institutional diversity, allowing governments to experiment, learn from one another, and converge toward more effective practices over time.
In practice, however, decentralization has produced a highly differentiated territorial landscape. Institutional arrangements vary widely across the region and are closely linked to country size and geography. Thirteen countries, all of South America operate with two levels of subnational government. Sixteen countries have a single subnational tier, while four Caribbean countries do not have formal subnational governments at all. These differences shape not only how responsibilities are assigned, but also how effectively they can be carried out.
Despite their growing importance, local and regional governments remain poorly documented. To address this, RED introduces a public database covering 47 variables across CELAC countries, derived largely from national census data, including demographic characteristics, territorial size, and selected well-being indicators aligned with the SDGs.
The data reveal both scale and imbalance. Over the past four decades, particularly during the 1980s and 1990s, the number of local governments expanded rapidly, while the number of regional governments remained relatively stable. Yet this growth has not translated into an even distribution of population or capacity. Approximately one-fifth of local governments serve nearly two-thirds of the region’s population, reflecting high levels of urbanization and the concentration of economic activity in a limited number of metropolitan areas. Urban management has therefore become a central challenge for subnational governments, while smaller and more remote jurisdictions continue to face persistent development gaps.
Roles of local and regional governments: expanding responsibilities, uneven autonomy
Decentralization has increased both political autonomy and functional responsibilities of subnational governments, but unevenly across LAC. Regional governments gained political autonomy in the 1980s with democratically elected authorities and expanded responsibilities further in the 1990s. Still, their autonomy remains lower than OECD counterparts, particularly in tax collection and borrowing.
Country differences are pronounced. In Argentina, Brazil, and Mexico, regional governments hold substantive authority over education, health, and security. In many other LAC countries, regions have far more limited mandates. Local governments generally manage infrastructure, public spaces, transport, and solid waste; in Brazil, Chile, Colombia, and Peru, responsibilities extend to primary education and health. In the Caribbean, Central America, Paraguay, and Uruguay, local roles remain largely confined to core municipal services.
These variations matter because outcomes depend on governance capacity. Where subnational governments have strong institutional, technical, and administrative capacity, decentralization improves policy outcomes; where capacity is weak, it risks deteriorating service delivery and widening territorial inequalities. The RED highlights asymmetric decentralization granting greater responsibilities to higher-capacity jurisdictions as a promising but underused tool. Colombia is a rare example where this approach has been successfully applied.
What subnational governments spend on and how they spend it: spending responsibilities and fiscal discipline
Fiscal decentralization has advanced, though subnational shares remain below OECD levels. Federal systems like Brazil and Argentina spend more; centralized states like Chile and Ecuador less. Subnational spending per capita varies widely, generally declining as population size increases, reflecting economies of scale. These patterns interact with fiscal rules designed to balance autonomy with sustainability. Some countries impose spending floors in health and education sectors to protect service coverage, but their effectiveness depends on governance quality and flexibility in how resources are used.
Public procurement represents a large share of subnational spending and is prone to inefficiency and corruption. Competitive mechanisms like framework agreements and auctions can limit discretion and cost overruns, though they may reduce administrative flexibility. Random, independent central government audits effectively curb corruption, while well-designed internal controls prevent it when professional and independent. Results-based financing also shows promise, aligning resources with outcomes when subnational governments maintain autonomy and receive technical support.
How subnational governments invest and finance their investments: investment, borrowing, and coordination challenges
Public investment at the subnational level displays sharp disparities both across and within countries. Federal systems tend to decentralize investment more than unitary systems, but territorial inequalities remain pronounced. Larger municipalities benefit from economies of scale, while smaller jurisdictions often exhibit higher per capita investment as they seek to address basic infrastructure gaps.
Subnational investment is financed through a mix of transfers, own-source revenues, and borrowing. Borrowing can support long-term infrastructure development by spreading costs across generations, but without robust institutional frameworks it can also lead to fiscal distress. Countries manage these risks through a range of safeguards, including debt and expenditure limits, externally verified financial projections that trigger early corrective action, and, in some cases, central government intervention mechanisms in the event of subnational insolvency. Designing capital transfer systems that balance predictability, flexibility, and alignment with national priorities remains a core intergovernmental challenge.
Subnational government revenues: the role of taxes and transfers
Revenue structures strongly shape subnational incentives and capacities. On average, transfers account for 58% of subnational government revenues in Latin America and the Caribbean, while own-source revenues represent about 42%, with wide variation across and within countries. Disparities in own-source revenue capacity are particularly pronounced at the local level and exceed those observed in OECD countries, reflecting uneven economic development and fiscal effort.
The report finds a positive relationship between financing through own-source revenues and the quality of public spending. When citizens contribute directly through taxes, they tend to demand greater accountability and more effective service delivery. Transfers remain critical to reducing territorial disparities, but inequality in total subnational revenues is still higher than in more developed economies.
Natural resource revenues add another layer of complexity. Rules governing the distribution of royalties, particularly from critical minerals and hydrocarbons such as copper, lithium, and natural gas, shape incentives for extraction and investment linked to the energy transition, especially in the territories where these resources are located.
Management of fee-based services and interjurisdictional cooperation: service delivery, coordination, and metropolitan governance
Local and regional governments play diverse roles in the provision of fee-based services, including urban transport, water, and sanitation. In transport, subnational governments are heavily involved in regulation and planning; in water and sanitation, they often engage in direct provision. Larger cities have made notable progress in formalizing public transport systems, driven in part by stronger institutional capacity. Elsewhere, fragmentation across multiple providers undermines efficiency and financial sustainability.
Unclear assignment of responsibilities between levels of government further weakens service delivery. Metropolitan authorities remain underdeveloped across much of the region, and strengthening these and other coordination mechanisms is essential to address administrative fragmentation and cross-jurisdictional externalities.
Who are the public officials of subnational governments?
Ultimately, subnational capacity depends on people. Building professional, merit-based bureaucracies at the territorial level is particularly challenging. Data on subnational public employment are scarce; only Bolivia, Brazil, Mexico, and Uruguay maintain national surveys that identify the level of government in which public officials work. Where data exist, they reveal structural weaknesses, including higher shares of temporary contracts, shorter tenures, and fewer professional and technical positions than in national administrations.
At the same time, subnational public sector wages in these countries are competitive, offering an average premium of around 17% relative to formal private-sector employment – comparable to national public sector wage premiums. Legal frameworks across the region emphasize merit, but de facto practices often diverge. Competitive local electoral systems appear to strengthen incentives for professionalization by limiting political misuse of public employment.
Digitalization and management capacities
Digitalization cuts across many of these challenges. Digital tools can improve internal administrative processes, citizen-facing services, and urban management. Yet access to digital services remains limited, and the costs of developing and maintaining systems can be prohibitive for smaller jurisdictions. National governments therefore play a critical role in providing shared digital infrastructure and ensuring interoperability, while persistent gaps in connectivity and digital skills risk deepening territorial inequalities if left unaddressed.
Conclusion: decentralization as an ongoing governance challenge
Taken together, the evidence shows that decentralization has made local and regional governments indispensable actors in development across Latin America and the Caribbean. Yet expanded responsibilities have not always been matched by resources, capacity, or institutional clarity. By systematically documenting this complex and uneven landscape, the CAF’s 2025 Economy and Development Report (RED) provides a critical foundation for understanding how subnational governance functions today and where targeted capacity development can strengthen its contribution to more inclusive and effective public action.
Read the full report:
CAF – Development Bank of Latin America and the Caribbean. (2025). Report on Economic Development: Nearby solutions: The role of regional and local governments in Latin America and the Caribbean. Caracas: CAF.
To access the full Executive Summary, click here.
