In the past few decades, Latin America has gone through a major decentralization process, involving reforms in the institutional, fiscal and political fronts of policymaking. As expected, the process has differed from country to country, not only in the intensity and depth of the reforms, but also in its outcomes. It is widely recognized that in countries such as Brazil, Argentina and Colombia (the first two, federal countries), decentralization has played a prominent role in public policies. On the contrary, Chile, Costa Rica and El Salvador, among others, are not as advanced in the process. The purpose of this study was twofold: first, give a general overview of Latin America's progress in implementing decentralization reforms, with an emphasis in the fiscal dimension (particularly in expenditure) and second, analyze in more detail the case of four specific countries: Colombia, Mexico, Chile and Peru.

Main Results: The study identified five main dimensions of a decentralization process: political, public expenditure, tax policy, territorial transfers system and subnational borrowing regulation. However, as mentioned before, the emphasis was placed on the fiscal front, more specifically on the share of subnational expenditure and the autonomy of local governments to decide how to spend public resources. In most countries, political decentralization is significantly advanced, particularly at the municipal level, considering the outbreak of military regimes in the region during the second half of the twentieth century. As of 2005, 88% of Latin American countries elect their municipal governors (mayors) and 36% elect their state governors (as opposed to the practice of appointing them).

Regarding decentralized expenditure, progress in recent decades has been impressive. The regional average doubled from 11% of total public expenditure in 1990 to 22% in 2004. However, these numbers hide considerable differences between countries: while in Argentina states and municipalities account for half of the total expenditure, in Guatemala the number is less than 10%. A central issue of this dimension is the degree of autonomy of the territorial entities; that is, to what extent are local governments responsible of the decisions on expenditure. Evidence shows that in most Latin American countries, important decisions on where and how to spend are still centralized at the national level.

On the other hand, subnational tax policy, or the devolution of tax power to lower levels of government, has not played a mayor role in Latin American decentralization policies. A possible explanation is that, in general, taxes are most efficiently collected at the central level, because of economies of scale, mobility of the tax bases and possible economic distortions. In order to overcome the vertical imbalance resulting from the limited local tax capacity, most countries have been forced to establish a resource transfer system from the national government to the lower levels of government. A widespread problem on this matter is that local governments have become highly dependent on transfers. On average, transfers from the national government represent 50% of the total subnational income (once more, this varies considerably across countries).

A much debated dimension of decentralization is the subnational borrowing autonomy. The experience of the 1990s taught many Latin American countries that permissive borrowing policies can cause severe fiscal distress and macroeconomic instability. For that reason, borrowing was conditioned on central government approval and limitations on the use and quantity of the funds subnational governments are allowed to borrow were set. However, only three countries (Chile, Bahamas and Suriname) have completely prohibited subnational borrowing.

Regarding the country specific studies, even though Colombia is a non-federal country, it is regarded as one of the most advanced decentralization processes of the region, comparable to the cases of Brazil and Argentina. Following a common trend, decentralization reforms in Colombia have focused on the expenditure side, more specifically on the execution of social investment (mainly, education and health). In addition, the country has progressed considerably on the political, transfers system and subnational borrowing policies dimensions of decentralization. However, the tax structure of municipalities and departments is weak, and their decision power on expenditure is highly constrained.

As a federal country, decentralization in Mexico could be deeper than what currently is. As a consequence of the 1980 Fiscal Pact, states gave up their authority to tax, in return of large transfers of resources from the federal government and giving rise to an exceptionally complicated transfer and revenue sharing systems. Hence, states have neglected their own tax revenue as an important income source, and nowadays 90% of local revenues currently come from federal transfers. On the other hand, states (not municipalities) are responsible for approximately one third of public expenditure, but with a low degree of discretionality in the management of resources. Like Colombia and Peru, Mexico recently introduced subnational borrowing regulation, but in this case, the control relies on the financial market rather than on the central government.

Finally, despite recent reforms Chile is still regarded as a highly centralized country. In part, this is due to the legacy of the military regime that ruled the country for twenty years. Decentralized expenditures account for approximately 14% of total public expenditure, and the central government determine where resources should be spent. As with Colombia and Mexico, the ability of local government to raise their revenue is narrowed, making them highly dependent on national transfers. Moreover, regional governors are still appointed by the president, and subnational borrowing is strictly prohibited. On the positive side, and due in part to the role they had under the military regime, municipalities developed important management skills in the execution of social investment resources, with high efficiency standards.