Intergovernmental transfers and regional income inequalities in Uruguay

Abstract

In this paper we explore the bidirectional relationship between intergovernmental transfers and regional income inequalities in Uruguay. Based on the construction of a simultaneous equations model, that accounts for the joint determination of these two variables, and by using a panel of departments (regions) over the period 1990-2012, our empirical results show that the central government transfers to regional governments does not have a significant impact on regional income inequalities levels. In fact, these transfers are strongly determined by the historical validation of public expenditure executed by regional governments but not by regional income disparities levels. Our results are consistent with the lack of territorial cohesion criteria in the normative governing the allocation of these transfers in Uruguay. Finally, these results have clear policy implications based on the necessary revision of the normative scheme of intergovernmental regional transfers in Uruguay if the objective is to arrive to a country with a higher degree of territorial cohesion