Budgeting at federal and various "local" levels is a high-stakes game, particularly in Latin America and the rest of the developing world. Last month, the UCLA Latin American Center and the Institute convened players for a first major conference on fiscal federalism.
We want this conversation, in short, not to end but to continue for years to come.
At a Feb. 24, 2007, conference on Fiscal Federalism sponsored by the UCLA Latin American Center (LAC) and the International Institute, visitors from Argentina, Mexico, Colombia, and elsewhere compared notes on how economies get into messes and which mixes of fiscal policies tend to keep them out.
In conference sessions about taxation, fiscal decentralization, and political accountability, distinguished scholars and policy insiders showed that there's no simple formula for deploying resources so that national and various subnational governments avoid creating problems for themselves and one other. Even if you could put together a checklist of "optimal" policies, it's unlikely that stars would ever align for their implementation.
"We are working in a second-best world," said Daniel Artana, chief economist for FIEL (Latin American Economic Research Foundation), immediately referring to the absence of handy levers to shift the balance of control over taxing and spending between national governments and localities.
The conference brought together leading figures in the economics, politics, and history of fiscal federalism. In addition to Artana, they included Richard Bird (University of Toronto); former Colombian cabinet minister Mauricio Cardenas, (Executive Director, Fedesarrollo); Alberto Díaz-Cayeros (Stanford); Frederico Finan (UCLA); former Mexican Finance Minister Francisco Gil Díaz (ITAM); former Argentine cabinet minister and presidential hopeful Ricardo López Murphy (President, Fundación Cívico Republicana); Charles McLure (Hoover Institution); Jonathan Rodden (MIT); William Summerhill (UCLA); and Eric M. Zolt (UCLA). LAC Director Randal Johnson welcomed the day's speakers and the audience.
From left: LAC Director Randal Johnson; Mauricio Cardenas, Executive Director of Fedesarrollo, Bogota, Colombia; and Russell Faucett, President of Barrington Capital Advisors.
In opening remarks Professor Ron Rogowski, interim vice provost and dean of the Institute and a political scientist with his own interests in fiscal federalism, cast the conference as the first in a series of at least annual events.
"We want this conversation, in short, not to end but to continue for years to come," he told attendees.
The topic of fiscal federalism has received redoubled attention in recent years from academics, policy makers, and political leaders. Latin America has seen the negative outcomes of corruption and poor coordination in fiscal policy, such as hyperinflation, poverty, and disinvestment. Participants at the conference sought to shed light on the topic from various perspectives.
Two papers presented at the conference looked at relationships between local fiscal performance and local elections, which are in principle the chief mechanism in democracies for changing policy. UCLA economist Frederico Finan presented "Exposing Corrupt Politicians," a paper co-written with Claudio Ferraz of UC-Berkeley focusing on a new anti-corruption program in Brazil that seeks to promote political transparency and accountability. Comparing the results of local elections, the paper showed that the exposure of official corruption under the program does have a significant negative impact on the reelection of incumbent mayors. This was more pronounced in cities and town where radio stations reported on the findings, underscoring the importance of getting information to the public.
Díaz-Cayeros analyzed the relationship between democratic accountability and the provision of local public goods in Mexico. Cayeros found, in the case of Mexico, that success in local elections is based more on "clientelism" and patronage networks than on competence or the provision of healthcare, infrastructure, education, and so on.
In "Are Latin-American Countries Decentralized?" Artana probed methodological uncertainties that attend efforts to understand the level of fiscal centralization or decentralization in countries as different as Barbados and Brazil. Discussing trends towards decentralization that follow democratic transitions, he observed, "What is clear is that decentralization per se will not solve the institutional weakness of many developing countries and in some cases it might even worsen it."
Eric M. Zolt spoke on a paper co-authored with UCLA's Kenneth L. Sokoloff, the main organizer of the conference, on "Inequality and the Evolution of Institutions of Taxation: Evidence from the Economic History of the Americas." The paper, which dealt with the impact of economic inequality on the design and implementation of tax policy, was a departure from previous work that had instead considered the effect of taxes on inequality. Latin American countries have experienced some of the largest income inequalities in the world over the long term. Sokoloff and Zolt found that this history is crucial in understanding the unique tax institutions that have evolved there.
Diliana Peregrina of the LAC contributed to this article.