Over the past four decades, Latin America and the Caribbean have undergone substantial changes in the organization and financing of their public sectors. Beginning in the 1980s, political democratization and institutional reforms contributed to a significant expansion of subnational government responsibilities. Yet while fiscal decentralization advanced rapidly during the following decades, progress has largely stabilized since 2010, leaving important challenges in the design and functioning of intergovernmental fiscal systems.
A new report jointly published by the Inter-American Development Bank (IDB) and the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), Panorama de las relaciones fiscales entre niveles de gobierno en países de América Latina y el Caribe (2026), provides a comprehensive assessment of these developments. With the original edition released in 2022, the second edition of this publication brings together internationally comparable fiscal statistics and detailed institutional profiles for 26 countries, examining subnational expenditure, own-source revenues, intergovernmental transfers, public debt, and the institutions responsible for coordinating fiscal relations across levels of government.
The report documents substantial differences in the extent and structure of decentralization across the region, while identifying several persistent challenges: high dependence on intergovernmental transfers, limited subnational revenue autonomy, significant territorial fiscal disparities, and weaknesses in the design of fiscal transfer systems.
Fiscal decentralization has largely stabilized
One of the report’s central findings is that the expansion of fiscal decentralization in Latin America and the Caribbean has slowed considerably. Between 1985 and 2010, the share of public expenditure executed by subnational governments nearly doubled, increasing from approximately 13% to 25% of aggregate government expenditure. Since then, the subnational expenditure share has remained relatively stable, reaching approximately 25.6% in 2024, compared with an OECD average of around 32%.
These regional averages, however, conceal enormous differences between countries. In Argentina, subnational governments accounted for 54.5% of aggregate government expenditure in 2024, followed by Brazil (41.7%), Colombia (40.9%), Mexico (39.6%), and Peru (37.8%). At the other end of the spectrum, subnational expenditure accounted for less than 5% of aggregate public spending in several Central American and Caribbean countries.
The report distinguishes four broad groups of countries: the large federal systems of Argentina, Brazil, and Mexico; relatively decentralized unitary countries such as Bolivia, Colombia, Ecuador, and Peru; less decentralized unitary countries, including Chile, Paraguay, Uruguay, and several Central American countries; and Caribbean countries where decentralization remains comparatively limited.
Recent reforms have generally focused less on major new transfers of responsibilities and more on adjustments to existing intergovernmental arrangements. Examples include the introduction of elected regional governments in Chile, changes to revenue-sharing arrangements in Colombia and Peru, reforms to discretionary transfers in Argentina and Mexico, and tax and fiscal management reforms in Brazil.
High dependence on intergovernmental transfers remains a central challenge
Despite the expansion of subnational expenditure responsibilities, the report finds that subnational governments in Latin America and the Caribbean remain exceptionally dependent on transfers from higher levels of government. On average, intergovernmental transfers account for 56.4% of subnational government financing—the highest level of transfer dependence among the world regions compared in the report. In 10 of the 16 Latin American and Caribbean countries for which comparable information is presented, transfers finance more than half of subnational spending. By comparison, only four of 38 OECD countries exceed this threshold.
The authors identify this dependence as a longstanding challenge for fiscal decentralization. When subnational governments finance a large share of their expenditure through transfers rather than own-source revenues, the connection between spending decisions and local revenue mobilization is weakened. The report argues that this can reduce incentives for efficient fiscal management, revenue collection, accountability, and fiscal responsibility.
The challenge is not simply one of increasing subnational resources. The authors emphasize the importance of aligning expenditure responsibilities with the financing arrangements needed to fulfill them. In this context, the report cautions against equating decentralization with increased transfers alone. As the authors observe, expanding revenue-sharing arrangements without corresponding expenditure responsibilities can increase fiscal dependence and create additional rigidities in public finances.
Territorial disparities highlight the need for stronger fiscal equalization
Another major finding concerns the exceptionally large economic and fiscal disparities between territories within Latin American and Caribbean countries. According to the report, the ratio of per capita income between the richest and poorest regions exceeds six to one, approximately twice the corresponding ratio among OECD countries. Differences in subnational tax collection capacity are similarly pronounced.
These disparities pose a fundamental challenge for intergovernmental fiscal systems. Jurisdictions with stronger economic bases can mobilize substantially greater own-source revenues than poorer jurisdictions, even when they face comparable expenditure responsibilities. Although existing intergovernmental transfer systems generally reduce some of these disparities, the report finds that their redistributive impact remains limited.
Revenue-sharing arrangements frequently distribute resources without adequately accounting for differences in fiscal capacity or expenditure needs. Other transfers, particularly those associated with natural-resource extraction and capital investment, may actually increase territorial fiscal disparities. The authors contrast these arrangements with fiscal equalization systems in many OECD countries, where transfers are more explicitly designed to address differences between expenditure needs and revenue-raising capacity. They consequently emphasize the importance of strengthening the technical capacity to estimate fiscal disparities and improving the redistributive design of intergovernmental transfers. The report also recognizes the political difficulties of reform, given that changes to transfer formulas inevitably create winners and losers across jurisdictions.
Natural-resource revenues create additional fiscal challenges
Natural-resource revenues represent an important source of subnational financing in several countries, particularly in the Andean region. However, the report identifies significant challenges associated with their volatility, geographical concentration, and use. In Bolivia, for instance, transfers linked to natural resources accounted for approximately 20% of total subnational revenues in 2024, and close to 60% of departmental revenues. In Peru, transfers associated with the canon and royalties represented approximately 23% of total subnational revenues, with considerably higher shares in some municipalities. These revenues are often allocated predominantly to the jurisdictions where natural resources are extracted and are frequently earmarked for capital investment.
Several problems are commonly associated with these arrangements. Commodity-price fluctuations can produce substantial instability in subnational budgets, while the concentration of revenues in resource-producing jurisdictions may widen territorial fiscal disparities. In addition, some recipient governments face difficulties executing investment budgets effectively. The report highlights the importance of improving the management of these revenues, including through more predictable financing arrangements, stronger investment management capacity, and better consideration of territorial equity.
Recent reforms reveal different directions of change
Although the overall level of fiscal decentralization has remained relatively stable, the report documents significant institutional and fiscal reforms in individual countries.
In particular, Chile has advanced the political decentralization of its regional governments through the introduction of directly elected regional authorities and the gradual transfer of responsibilities. At the same time, some services previously managed in part by municipalities, including education, have been centralized. In Peru, the government has expanded transfers to regional and municipal governments through reforms to the Regional Compensation Fund (FONCOR) and Municipal Compensation Fund (FONCOMUN). Colombia has approved changes to its principal revenue-sharing system, the Sistema General de Participaciones, although the increase in subnational financing is linked to the transfer of additional expenditure responsibilities. Mexico and Argentina have reduced discretionary transfers, while Brazil has undertaken significant tax reform and introduced measures to strengthen subnational fiscal sustainability.
Elsewhere, El Salvador has reduced the number of municipalities from 262 to 44, alongside changes to municipal financing and the creation of a national agency responsible for municipal public works. Taken together, these examples illustrate the diversity of ongoing reforms. Some countries are strengthening subnational institutions and financing, while others are consolidating territorial structures or centralizing particular functions.
Subnational fiscal sustainability has improved
The report also documents progress in the management of subnational public debt. Average subnational debt declined slightly from 2.9% of GDP during 2015–2019 to 2.7% during 2021–2024. Although country experiences differ, the authors point to improvements in fiscal responsibility frameworks, budget transparency, and monitoring arrangements.
Countries such as Argentina, Brazil, Colombia, and Mexico have introduced fiscal rules and institutional mechanisms intended to limit excessive borrowing and reduce risks to national fiscal stability. Colombia’s fiscal monitoring system, including its early-warning mechanisms, is highlighted as an example of institutional arrangements that can identify emerging fiscal risks and support corrective action. While fiscal sustainability remains an important concern, the experience of recent decades suggests that stronger fiscal rules and monitoring institutions can contribute to more responsible subnational financial management.
Looking ahead: Strengthening intergovernmental fiscal systems
The 2026 IDB–ECLAC report offers a detailed picture of a region where fiscal decentralization has become an established feature of public sector organization, but where important weaknesses in intergovernmental fiscal relations persist.
The analysis highlights several priorities for improving these systems: strengthening subnational own-source revenue mobilization, aligning financing arrangements more closely with expenditure responsibilities, improving the equalizing impact of transfers, managing the volatility of natural-resource revenues, and reinforcing fiscal sustainability and institutional coordination.
The report also underscores the importance of recognizing differences across countries and jurisdictions. With approximately 17,300 subnational governments across the 26 countries studied, the region encompasses a wide variety of institutional structures, population sizes, fiscal capacities, and service-delivery responsibilities. Yet, rather than pointing toward a single model of decentralization, the findings emphasize the need for reforms that respond to the specific institutional and fiscal circumstances of each country.
For policymakers, researchers, and practitioners working on decentralization and multilevel governance, the report provides a valuable comparative resource for understanding how intergovernmental fiscal arrangements have evolved, where important challenges remain, and which reform approaches are emerging across Latin America and the Caribbean.
Access the full report (in Spanish): Inter-American Development Bank (IDB) and Economic Commission for Latin America and the Caribbean (ECLAC). (2026). Panorama de las relaciones fiscales entre niveles de gobierno en países de América Latina y el Caribe. LC/TS.2026/101. See especially Chapter 1, Tendencias regionales, pp. 11–59.
