The politics of intergovernmental deficits: Theory and evidence

The purpose of this paper is twofold. First, we present a model of decentralized fiscal policy-making where a "coordination failure" problem arises. Second, we make an effort in order to empirically test this approach by developing an empirical investigation based on the recent experience of two countries: Argentina and Great Britain.

Decentralization, Fiscal Discipline in Sub-National Governments and the Bailout Problem: The Case of Argentina

This paper examines the determinants of fiscal performance of sub-national governments in Argentina. This will be done through analysis and examination of the overall regime of incentives, through an analysis of salient episodes of `bailout` and through cross-sectional empirical analysis. The bailout episodes to be analyzed will include mostly those that occurred in the relationship between the national and provincial governments. Of primary interest will be the process that caused the crises and how both the provinces and the federal government reacted, with an emphasis on the incentives and constraints each faced. The paper will also try to explain the actual form that the bailout takes. The empirical analysis will emphasize those determinants of bailout related to the institutional design of intergovernmental fiscal institutions. Thus, the study will have direct implications regarding the strengths and weaknesses of the current institutional framework in generating sound fiscal behavior by the different levels of government.

Exerting local tax effort or lobbying for central transfers?: Evidence from Argentina

In many countries fiscal decentralization characterizes the relationship among different levels of government. In those countries, local authorities have the prerogative to tax their constituencies. However, fiscal decentralization is seldom balanced in terms of tax and expenditure assignments. In order to equalize tax capacities, to internalize spillovers or to achieve national policy objectives, central governments often provide transfers to lower levels of government. These transfers may affect the incentives to manage or to improve fiscal performance. Specifically, according to Litvack, Ahmad and Bird (1998), such transfers may induce low `tax effort' in the regions. The purpose of this paper is to investigate theoretically and empirically this relationship between intergovernmental transfers and local tax effort. An initial problem to deal with is the definition of `tax effort' in itself. First, one can associate tax effort to high tax rates. Smart (1998) asserted that such association is inadequate. Second, one can measure tax effort using actual tax revenues or the difference between actual the predicted value of tax revenues. This approach has been mainly adopted by the empirical literature on the relationship between intergovernmental transfers and local tax effort [Baretti, Huber and Lichtblau (2000), Von Hagen and Hepp (2000), Jha, Mohanty, Chattergee and Chitkara (1999), Sagbas (2001)]. Although tax revenue is an accurate and observable variable, still one can hardly say that it is a good estimate of tax effort. The reason is for a given region in a given time period tax revenue is affected by many potential variables outside the control of local governments (like idiosyncratic shocks to some specific tax bases) which are seldom well controlled for in estimates of tax capacity. In practice local tax effort encompasses a broad set of actions. One of them is clearly the battle against tax evasion. In spite of its importance, this problem has been only recently addressed by the local public finance literature. Bordignon, Manasse and Tabellini (1996), presented a model where a local government exerts costless effort to catch tax evader workers and they showed how intergovernmental transfers affect tax enforcement. The drawback of this model is that, in reality, tax enforcement is not costless and the cost depends upon other variables chosen by local authorities, like the efficiency of the local tax administration. Although Prud'homme (1995) and Tanzi (1996) have informally signaled the possible inefficiencies of the local tax administrations, this feature has not been raised by the theoretical or the empirical literature. The purpose of this paper is precisely to incorporate such dimension in the assessment of the relationship between intergovernmental transfers and local tax effort. The theoretical framework assumes that in each region there is one representative habitant and a local government. The habitant posses a low or a high-valued property. The local government maximizes tax revenues. In a first period, the local government invests resources to improve the efficiency of the tax administration or to lobby the central government in order to obtain discretionary transfers. This decision is affected by the political cost of reforming the tax administration and on the ability of the local government to negotiate with the central government. Thus, in our model, intergovernmental transfers are endogenous and simultaneously determined with the reform of the local tax system. In a second period, the local government sets the property tax schedule. But, as the local government is unable to observe the value of the property, it has to rely on the habitant announcing this value. Finally, in the third period, the local government decides to enforce the tax law by randomly auditing such announcement. If the habitant is discovered having misreported, the local government sets the corresponding property tax and imposes a penalty. We assume that audit is perfect but costly; the cost depending on the efficiency of the local tax administration. We solve the model backwards. As the local government cannot commit to the auditing probability when it designs its tax policy, the equilibrium of the audit-report game is in mixed strategies, with auditing and tax evasion. Then we find the optimal tax schedule. In order to reduce the stake for tax evasion, the local government distorts downwardly the high-valued property tax. Finally, we solve for the decision of the local government regarding how much resources to invest for improving the efficiency of the tax administration. We find that this decision is negatively associated with the domestic political costs and positively with the ability to negotiate with the Federal Government. The predictions of the model are empirically tested using data for Argentina. The theory suggests a two-step approach. In a first stage we run a probit estimation where the probability of a certain province to reform its tax system (or receiving discretionary transfers) in a given year will be correlated with domestic political variables (e.g. divided government) and also with variables describing its bargaining power vis a vis the federal authorities (e.g. political representation at the National Congress, political party of the President vis a vis that of the Governor). In a second stage, we include this exogenous instrument of tax reform in a regression where the evolution of actual provincial tax receipts are regressed against this variable plus other controls like population, density, provincial income distribution and production structure. Notice that this two stage empirical approach allow us to deal with a frequent problem encountered in the empirical literature given by the endogeneity bias affecting some of the variables of interest, like federal transfers (e.g. Jha, Mohanty, Chattergee and Chitkara (1999), Sagbas (2001)).local tax effort - discretionary transfers - tax enforcement

Trade liberalization, Industry Location and Sub-national Development in Argentina

The paper analyzes the determinants of industry employment location across Argentine provinces. On one hand, we looked at those determinants suggested by the traditional trade theory emphasizing the role of factor endowments. On the other hand, we explored the role of economies of scale combined with easy access to large markets and the presence of agglomeration economies spurred by input-output linkages, factors that figure prominently in “new economic geography†literature. The empirical results suggest that both factor endowments and agglomeration economies have played a key role in shaping the distribution of employment shares across industries and provinces in Argentina. The presence of natural resources such as oil and arable land helped some jurisdictions attract industrial employment. Skill labor also played a positive role in promoting industrial employment. At the same time, though we identify that agglomeration economies had a positive and significant effect on location decisions, this is not the case for economies of scale cum domestic market access. Trade policy has also contributed to concentrated (de-concentrate) industrial activities near the Buenos Aires area for those sectors that were subject to larger (lower) rates of protection. Finally, regional policies like tax exceptions and subsidies have had a significant effect in industry employment for some of the provinces that benefited from these regimes.Lederman's Session

Public-Private Co-operation for Gas Provision in Poor Neighbourhoods of Buenos Aires: Impact on Housing Improvements and Health

This study examines the programme Redes Solidarias, a public-private initiative that connected to natural pipelined gas 4,000 households in the Great Buenos Aires Area during 2005. The main features of the institutional framework are described and the main results of an impact estimation analysis are reported. The mechanism of selection of neighbourhoods for the connection represents a ‘natural experiment’, which allows the estimation of the causal effects of the programme on several indicators, including housing improvements, health and happiness related variables. We perform this analysis using data from two surveys we collected on the neighbourhoods in 2006 and 2007. The programme was found to generate improvements on dwelling walls, and the …infrastructure provision, gas, impact evaluation

Economic integration and location of manufacturing activities: Evidence from MERCOSUR

Economic integration leads to a reallocation of resources across sectors and space. Location patterns resulting from North-North and North-South regional trade initiatives have been documented in several studies. However, empirical evidence on South-South agreements is rather limited. In this respect, MERCOSUR provides an interesting case study. This paper aims at answering the following questions: What are the main driving factors explaining location patterns in the Southern Cone? To what extent has the establishment of MERCOSUR affected location of economic activities? Using data for the period 1985-1998, we identify the determinants of manufacturing location patterns and assess their changes in the context of increased economic integration. We find that preferential trade liberalization has fostered the influence of factors underlined by the recent trade theories, such as economies of scale and inputoutput linkages, relative to comparative advantage considerations. --Economic Integration,Location of Industrial Activities,MERCOSUR

Economic Integration and Location of Manufacturing Activities: Evidence from Mercosur

Economic integration leads to a reallocation of resources across sectors and space. Location patterns resulting from North-North and North-South regional trade initiatives have been documented in several studies. However, empirical evidence on South-South agreements is rather limited. In this respect, MERCOSUR provides an interesting case study. This paper aims at answering the following questions: What are the main driving factors explaining location patterns in the Southern Cone? To what extent has the establishment of MERCOSUR affected location of economic activities? Using data for the period 1985-1998, we identify the determinants of manufacturing location patterns and assess their changes in the context of increased economic integration. We find that preferential trade liberalization has fostered the influence of factors underlined by the recent trade theories, such as economies of scale and input-output linkages, relative to comparative advantage considerations. Keywords: Economic Integration, Location of Industrial Activities, MERCOSUR JEL-Classification: F14, F15, L60

Formal and real fiscal federalism in Argentina

In this note we describe, on the one hand, the formal institutional structure of the Argentine fiscal federalism. Then, on the other hand, we show how fiscal federalism really works in Argentina. We analyze data on fiscal behavior of the federal and provincial governments during the nineties. The goal of this note is precisely to point that one of the main issues of the current situation in Argentina is precisely the difference between ‘formal’ and ‘real’ institutions. At the heart of such difference is the lack of enforcement of national laws and formal inter-provincial agreements. We illustrate this by studying how formal rules to the provincial borrowing have functioned during the last decade

Análisis de alternativas de financiamiento de la educación básica en Argentina en el marco de las instituciones fiscales federales

La cuestión federal del financiamiento educativo se manifiesta no solo por la necesidad de provocar una fuerte redistribución de recursos en pos de asegurar una convergencia en los indicadores de capital humano e ingreso entre las jurisdicciones, sino también por las externalidades interjurisdiccionales que genera este tipo de gasto. Esto refuerza la necesidad de coordinar estas decisiones a nivel agregado teniendo en cuenta estos efectos externos. Finalmente, tanto el objetivo de redistribución como el de internalizar el efecto de las externalidades son acciones que benefician al conjunto de las jurisdicciones en la medida que todas estas cumplan con los compromisos asumidos, descartándose conductas oportunistas. Para evitar este tipo de comportamiento y alinear los incentivos de los actores en pos de maximizar el bienestar agregado es necesario diseñar instituciones (mecanismos de información y control) que sirvan para evaluar la marcha de las políticas y el alcance de los objetivos propuestos. Ahora bien, ¿quién debe ser el artífice de esta coordinación? Sin duda a el gobierno nacional le cabe un compromiso importante en provocar dichas instancias de coordinación. Tanto la Constitución como otros instrumentos federales (ej. la Ley Federal de Educación) se lo demandan. Sin embargo, a lo largo del trabajo se argumentará que no necesariamente el gobierno nacional debe ser el instrumento único y fundamental de dicha coordinación. No se trata de nacionalizar nuevamente las decisiones de gasto en educación básica sino de "federalizarlas" dado la fuerte demanda por coordinación que tienen estas políticas. En Argentina ya existen instituciones como el Consejo Federal de Educación que pueden cumplir un papel importante en dicho proceso. El trabajo esta organizado en cuatro capítulos. En el capitulo I se describen los "hechos estilizados" referidos al comportamiento del gasto en educación en los últimos años. El Capitulo II trata de explicar el comportamiento del gasto en educación básica de las jurisdicciones descripto en el capitulo I con la ayuda de modelos econométricos. En el capitulo III se desarrolla un modelo teórico donde la educación y el sistema de transferencias juega un papel critico en el desarrollo y convergencia de las regiones dentro un país. Finalmente en el capitulo IV, en base a los resultados obtenidos en los capítulos previos, se evalúan los antecedentes de políticas de financiamiento a la educación básica en Argentina y se introduce una propuesta de reforma.Departamento de Economí