Chapter

17 Bolivia

Editor(s):
Teresa Ter-Minassian
Published Date:
September 1997
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Author(s)
G.A. Mackenzie and JosÉ-LuÍs Ruiz

As previous chapters have related, the major objective of recent reforms of intergovernmental financial relations in countries around the world has been the decentralization of government operations from the central to the regional and local levels. This is especially true of Latin American reforms. The experience of Mexico and Brazil, where reforms have affected mainly regional-center arrangements, and that of Colombia, where reforms have affected arrangements of the center with both regional and local governments, have elicited much interest. The decentralization movement is not confined, however, to the larger countries of the region. Bolivia’s recent reform has resulted in a quite substantial increase in the financial autonomy and responsibilities of local governments. The lessons that can be drawn from it could apply to the many countries where the second tier of government is comparatively unimportant—and, in particular, those countries where government is relatively centralized. This was Bolivia’s starting point.

Center-Local Government Financial Arrangements Prior to the Reforms

General government in Bolivia consists of the national government, nine departments, and approximately 310 cities and towns. In recent years, total general government expenditures have amounted to about 25 percent of GDP (Table 1). Prior to the reforms that began in 1994, however, there was effectively no middle layer between the national government and the municipalities, since the nine departments were essentially administrative entities. Each department did have a Regional Development Corporation (RDC), which played an important role in the provision of infrastructural investment. In respect of its organization and financial structure, however, the RDC was essentially like an investment fund, or a decentralized agency of the central government, without financial autonomy.

Table 1.Bolivia: Financial Operations of the General Government(In percent of GDP)
19921993199419951996
Revenue and grants21.621.423.523.523.6
Current revenue17.317.718.318.518.7
Tax revenue16.516.917.217.317.4
Domestic taxes15.215.515.715.916.1
Custom duties1.31.31.41.41.2
Nontax revenue0.80.91.21.21.3
Current transfers from1.71.92.23.01.8
Public enterprises0.40.50.71.40.3
Private sector11.31.51.51.51.5
Capital revenue0.20.30.60.61.0
Foreign grants2.41.52.41.52.1
Expenditure24.526.526.825.725.9
Current expenditure18.420.019.819.219.1
Wages and salaries8.59.09.29.08.9
Goods and services2.62.42.02.32.3
Interest2.62.62.52.92.7
Transfers to2.63.04.33.33.7
Public enterprises0.40.71.20.40.3
Private sector2.12.53.12.93.4
Other2.23.01.81.71.6
Capital expenditure6.16.56.96.56.8
Fixed capital formation5.95.96.36.16.4
Transfers to public enterprises0.40.10.1
Other0.10.30.50.40.4
Overall balance−2.8−5.1−3.2−2.1−2.3
Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and IMF staff estimates.

Comprises social security contribution paid by the private sector and public enterprises.

Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and IMF staff estimates.

Comprises social security contribution paid by the private sector and public enterprises.

The centralized character of the Bolivian state prior to the recent reforms is reflected in the national government’s near monopoly of expenditure assignments. The nine RDCs were not responsible for the administration of current expenditure programs. Most current expenditure, including social expenditure, was the responsibility of the national government.1 Municipal governments, with the exception of the Largest cities—La Paz, Santa Cruz, Cochabamba, and El Alto—had little revenue of their own, and of 310 cities and towns only about 30—the larger ones—benefited from the revenue-sharing scheme then in effect.2 As the foregoing suggests, there is a huge variation in the size of Bolivian municipalities, despite their common legal status: the four largest cities have between them roughly 2¼ million of the country’s 7 ½ million inhabitants, but a large number of towns have less than 1,000 inhabitants.

The limited role in the provision of public services played by the municipalities is borne out by the fact that in 1993 noninterest expenditures (primary expenditure) of the municipalities amounted to only 8 percent of general government primary expenditure or 2 percent of GDP (Table 2). Even this modest expenditure level was financed largely by statutory or discretionary transfers from the center. Own revenues of the municipalities (excluding discretionary transfers and revenues received under the then existing revenue-sharing arrangement) amounted to about 20 percent of their total revenues, or just 0.3 percent of GDP. Their comparatively small size and limited access to either domestic or external credit meant that the finances of the municipalities as a group were more or less balanced from one year to the next.

Table 2.Bolivia: Financial Operations of the Municipalities(In percent of GDP)
19921993199419951996
Revenue and grants1.51.72.63.43.6
Current revenue1.41.52.43.23.2
Revenue sharing1.11.22.02.82.9
Other0.30.30.30.40.4
Other revenue and grants0.10.2
Capital transfers from rest of public sector0.10.20.10.3
Expenditure1.51.92.43.53.8
Current expenditure1.11.21.21.41.6
Wages and salaries0.60.60.60.70.8
Goods and services0.20.30.20.30.4
Interest0.1
Other0.20.30.20.30.2
Current transfers to rest of public sector0.10.10.10.10.1
Capital expenditure0.40.61.22.02.2
Fixed capital formation0.40.61.21.92.0
Capital transfers to rest of public sector0.10.2
Overall balance0.1−0.20.2−0.2
Memorandum items:
Noninterest expenditure as percent of GDP1.51.82.43.43.7
Noninterest expenditure as percent of general government noninterest expenditure6.67.79.914.916.1
Capital expenditure as percent of noninterest expenditure26.733.350.058.859.5
Current revenue as percent of general government current revenue8.18.513.117.317.1
Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and IMF staff estimates.
Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and IMF staff estimates.

The Impact of Reform

The Popular Participation Law, which was promulgated in 1994, and the Decentralization Law, which became effective at the beginning of 1996, reflect not only a desire for financial decentralization but, as the name of the first piece of legislation suggests, a grassroots sentiment for more local participation in the political process. Although the discussion of this chapter is limited to their economic and financial content, these aspects of the reforms are better appreciated when the political sentiments motivating the reform are kept in mind.

Briefly put, the reforms have resulted in a substantial devolution of expenditure responsibilities to the municipalities. All municipalities, even the smallest, benefit from the new revenue-sharing scheme, which is the source of the revenue that finances the increase in local government expenditure.3 The RDCs have been eliminated, and their expenditure program responsibilities, plus some additional ones, have been assigned either to the departmental government (prefectura) or to the municipalities of the department, to be financed by tax earmarking and revenue sharing. These observations are elaborated in what follows.

Municipalities

Expenditure Assignments

Municipalities are now responsible for the provision of education through the secondary level and virtually for all health services. They have also been assigned responsibility for sports facilities (with certain exceptions), micro-irrigation, local roads, and most cultural facilities. This substantial devolution of expenditure responsibilities has entailed a very marked increase in the share of general government primary expenditure executed by the municipalities, from the 8 percent share in 1993 already noted to 16 percent in 1996. Although the reforms have certainly boosted municipalities’ current expenditure, their capital expenditure has increased remarkably, and its share in primary expenditure has increased from 33 percent in 1993 to 59 percent in 1996 (see Table 2). This is mainly a reflection of the transfer of local investment projects from the old RDCs to local governments.

Despite the municipalities’ enhanced role in the provision of education and health programs, among other public services, they continue to share some responsibility in these areas with the national government. This is particularly true of the health sector, where the national government (through the prefecturas) is responsible not only for paying the salaries of medical and technical personnel but also for managing them (Popular Participation Law, Article 3). In general, there is considerable potential for an overlap in expenditure responsibilities, as well as potential for a conflict between levels of government managing different facets of the same service.

The legislation embodies a concern that some municipalities are simply too small to be able to carry out their expenditure assignments effectively. For this reason, it stipulates that such municipalities should be provided technical assistance. The law also requires that towns whose populations fall short of 5,000 form an association (mancomunidad) whose total population will at least reach that figure.

Revenue Arrangements

The revenue-sharing (coparticipation) agreement provides that 20 percent of the revenue generated by the taxes assigned to the national government should be transferred to the municipalities, and that this amount should be distributed according to the share of each in total population, as established by the 1992 census.4 Thus, if town A has seven times the population of town B, its share of coparticipated revenues is seven times as great. The municipalities are also assigned certain tax bases; namely, property taxes and business licenses (patentes). The reform has entailed an increase in the ratio of local government current revenue to GDP from less than 2 percent in 1993 to more than 3 percent in 1996, and an increase in its share of general government current revenue over the same period from 8 percent to 17 percent (Table 2).

There is no obvious reason for believing that the resources that have been assigned to the average-sized municipality are not enough to finance the additional expenditure programs for which it is now responsible. That said, to the extent that the supply of public goods and services is subject to economies of scale, the proportional formula favors the larger cities, at least relative to a formula with a lump-sum element, or one where revenue increases with city size, but by less than proportionately.5 In addition to taking no account of economies of scale, the revenue-sharing formula makes no allowance for the fact that municipalities will differ in their capacity to raise revenue. Again, the larger cities and towns would probably benefit from economies of scale with respect to the tax collection function, and incomes in the larger cities would in any case tend to be higher than those in the smaller towns.

The laws impose restrictions on the use of the shared revenues. In particular, 85 percent of the coparticipated revenues are to be devoted to investment expenditure. For the purpose of the law, investment is defined very broadly: it includes effectively all the expenditures associated with the new expenditure assignments of the municipalities, except for wages and salaries and other personnel expenditure. (Popular Participation Law, Article 23V). Debt service can be included under the investment expenditure umbrella, up to a limit of 90 percent of coparticipated revenues, but only if the debt being serviced is deemed to have been financing investment projects. Expenditures incurred for training may also be included (Special Decree 23813, Article 16). It is not clear whether these limitations are binding, since municipalities are effectively given a good deal of latitude in their application.

The assignment of property taxes to the municipalities is in line with the general principle of tax assignment that stipulates that local governments should be allowed to exploit only the most immobile bases. To the extent that the incidence of the patente falls on business activity, and not on the property at which the business is located, it is less well suited than the property tax to finance local government, because its base will be more mobile. These taxes are, however, typically levied at moderate rates, and are not a significant source of revenue.

One feature of the revenue-sharing arrangement that is problematic is the fact that local governments receive 20 centavos of every additional boliviano raised by the national government. This holds even when the national government is obliged to increase taxes as part of an adjustment effort. It receives only 80 centavos for each extra boliviano it raises. When financial conditions are stable and the economy is growing more or less at its trend rate, this system of revenue sharing can function reasonably well. Assuming that tax revenues grow pari passu with GDP, the system provides the lower level governments with a source of finance that bears some relationship to their expenditure needs. It does not function well, however, in periods of fiscal crisis, when the central government is forced to tighten its belt. Paradoxically, the revenue-raising efforts of the central government in these circumstances allow the local governments to spend more, thus thwarting the adjustment effort. In the Bolivian case, the national government must overadjust—for each boliviano in extra revenue it seeks to raise to reduce the deficit, it must raise 1.25 bolivianos, assuming that the local governments will spend all the extra revenue that they get.6

This feature of the revenue-sharing arrangement is similar to that which governs the sharing of revenue between the federal government and provinces of Argentina, except that Argentina’s “coparticipation coefficient” is much higher than that of Bolivia.7 More than half of each peso raised by Buenos Aires goes to the provinces. Consequently, the Bolivian arrangement does not have the same potentially serious consequences as the Argentinean arrangement. Another difference of note between the two systems is that, in Bolivia’s case, the pool of revenues shared includes revenue from all the taxes that are assigned to the national government, whereas in Argentina’s case, the pool of shared revenues excludes the taxes on international trade. In consequence, the Argentine revenue-sharing arrangement creates an incentive for the federal government to rely more on taxes that are less efficient but not shared. The Bolivian arrangement has the merit of not creating this rather perverse incentive.

Prefecturas

Expenditure Assignments

The prefecturas, like the RDCs they replaced, are expected to play an important role in the provision of new infrastructure; specifically, in the areas of road construction, rural electrification, irrigation infrastructure, environmental preservation, tourism, social assistance programs, institution-building (for municipalities), and other projects in conjunction with municipalities. However, they have relinquished responsibility for the infrastructural investments that are now undertaken by the cities and towns.

Unlike the RDCs, the prefecturas also have responsibilities for current programs. The national government delegates to them the responsibilities for human resource management and administration in the health, education and social assistance areas, although, as noted above, the wage bill in these sectors is financed by a transfer from the national government. The prefecturas are also responsible for the provision of public services in the areas of social assistance, sports, culture, tourism, agriculture and pisciculture, and local roads unless these are the responsibility of the municipalities. It is important to stress, however, that in political and constitutional terms, the prefecturas are simply an arm of the central government. The senior official of the prefectura is appointed by the government; he is not elected by the residents of his department. On balance, the recent reforms have not had a significant impact on total expenditure by the prefecturas. It is, if anything, lower than it was prereform (Table 3).

Table 3.Bolivia: Financial Operations of the Regional Development Corporations and Prefecturas(In percent of GDP)
19921993199419951996
Revenue and grants2.32.51.91.62.4
Current revenue1.61.61.10.71.4
Revenue sharing0.80.90.40.4
Hydrocarbon taxes0.70.60.60.60.6
Other0.10.10.10.10.4
Current transfers from rest of public sector0.10.20.1
Capital revenue0.10.10.10.4
Capital transfers from resr of public sector0.30.40.50.30.2
Foreign grants0.20.30.20.30.2
Expenditure2.92.72.21.82.4
Current expenditure0.90.80.80.50.8
Wages and salaries0.30.40.40.20.4
Goods and services0.30.10.10.10.2
Interest0.10.1
Other0.20.20.20.1
Current transfers to rest of public sector0.10.10.10.1
Capital expenditure2.01.91.41.31.6
Fixed capital formation1.81.71.31.11.5
Capital transfers to rest of public sector0.20.10.10.20.2
Overall balance−0.6−0.10.3−0.2
Memorandum item:
Noninterest expenditure as percent of GDP2.92.72.11.82.3
Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and IMF staff estimates.
Sources: Ministry of Finance; Integrated System of Financial Administration and Government Control (SAFCO); Central Bank of Bolivia; and IMF staff estimates.

Revenue Arrangements

The prefecturas continue to be assigned the royalties from forestry and petroleum and minerals extraction. The major change brought about by the recent reforms has been the creation of the Departmental Equalization Fund (Fondo Compensatorio Departmental), under which those prefecturas whose per capita revenues from royalties are lower than the national average receive a compensatory transfer from the national government that effectively brings them up to the average. Those prefecturas that are relatively resource-rich receive nothing from the Fund. Another important aspect of the reform was the introduction of a special coparticipation arrangement, under which the prefecturas collectively receive 25 percent of collections of the Special Tax on Hydrocarbons (Impuesto Especial a los Hidrocarburos—IEH) (the RDCs shared in the earlier coparticipation arrangement).8 These two revenue sources, together with royalty income, make up the lion’s share of their revenue. Total revenues are now little changed from their prereform ratio with respect to GDP (see Table 3).

There is a certain inconsistency between the assignment of revenue to the prefecturas and their lack of political autonomy. In general, entities that are components of central government should be financed via budgetary transfers, since it is logical that their operations should be subject to the same degree or kind of scrutiny as any central government operation. There is no reason, in other words, why the coverage of the budget should not encompass them. However, these considerations are not reflected in the new financing arrangements for the prefecturas.

One possible rationale for the assignment of taxes and the revenue-sharing arrangements is to ensure that the national government pays due regard to regional interests. These revenue arrangements may work to reduce regional disparities, and may be appropriate if the budgetary process at the national level were not to work well for the smaller or more disadvantaged regions. However, it is possible to imagine a more centralized arrangement—with no assignment or sharing of revenues—that guaranteed, say, a minimum level of social spending per inhabitant while nonetheless ensuring that the financial operations of the prefectura were included in the national government’s budget.

Implications of the Recent Reform

There is much to praise in Bolivia’s reforms. To point out just two of their merits, they address a heartfelt need for greater participation in the governance of the country at the community levels, and they achieve a sorely needed redistribution of revenue to the poorer areas of the country.

Certain features of the reforms may, however, make the gains from decentralization of expenditure less than they otherwise would be. In particular, they appear to entail some overlap of expenditure responsibilities. The reforms may also have created some horizontal imbalance, in the sense that the increase in the expenditure responsibilities of some municipalities may have outstripped the increase in revenue they receive under the coparticipation agreement.9 Further, the reforms have greatly increased the number of jurisdictions in Bolivia with both the motive and the opportunity to borrow. Local government indebtedness, up until now negligible, may start to grow. Finally, the devolution of expenditure responsibilities to small jurisdictions that may not be ready for them may contribute to wasteful expenditure.

Overlapping expenditure responsibilities. Current expenditure assignments are either not entirely clear-cut, or entail two jurisdictions being responsible for two different economic expenditure categories in the same program. In particular:

  • The laws assign certain specific investment responsibilities to the prefecturas. However, they also assign a residual category of investment—any investment—if it is not the responsibility of the municipality. This approach does not really give clear guidance. Does it mean, for example, that the prefecturas will undertake investment in the rural areas of a municipality’s jurisdiction?

  • The assignment of health programs has the central government (through the prefecturas) being responsible for administering certain program inputs—for example, salaries of professional personnel—while the municipality is responsible for maintaining the physical plant and also for materials and supplies. This arrangement risks being inefficient.

  • There is scope for rationalization of the road construction and maintenance programs of prefecturas and municipalities, according to informed sources.

  • There is apparently some confusion on the part of officials at different levels of government about their current expenditure assignments.

Risk of horizontal inequity. Decentralization has increased both the local governments’ expenditure responsibilities and the revenue they need to carry them out. Revenue and expenditure increases may match in the aggregate, but this is not necessarily true of each and every city and town. Those in a surplus position may well spend more than they need to, while those whose revenue increase has fallen short of what is needed to finance their additional expenditure responsibilities will have an incentive to borrow. In other words, there is likely to be an asymmetry in the response of local government. The result is that both the gross and the net indebtedness of the local government sector increases.

This is simply a conjecture at this stage, and it is not possible to hazard a guess as to whether horizonal inequity is significant and whether it could have these kinds of consequences. Nonetheless, the signs of emerging horizontal imbalances bear watching.

Increase in the number of jurisdictions able to borrow. Although the total amount of revenue shared with the municipalities is allocated on the basis of a fixed amount per head, the agreement has had a dramatic effect on the revenue of the smaller towns, which previously were getting next to nothing, or nothing. As an example, one small town has seen its annual revenues increase from Bs 7,000 (less than US$1,500) to Bs 2 million. By increasing the stream of revenues to the smaller municipalities, coparticipation makes them more attractive to potential lenders. It has also resulted in a quantum jump in the number of municipalities borrowing from the National Fund for Regional Development (a central government agency), from a handful to over 50. Although these entities are too small at present for their financial operations to have macroeconomic effects, and may in any case have been unable to borrow, their size and borrowing capacity will grow over time. The potential increase in the number of debtors may have implications for the national government’s debt management systems. Since the national government’s monitoring system has been geared to the largest cities and the prefecturas, its present coverage is not broad enough to respond to an increase in borrowing by smaller municipalities.

Potential for and consequences of unwise spending decisions by local governments. Anecdotal evidence suggests, as could be expected, that there is considerable variation in the abilities of the smaller towns to carry out expenditure projects. Reported cases range from that of a small community that had been able to implement a school building project successfully to another that had wasted a large sum of money on unusable cellular phones. Perhaps needless to say, if too much money is wasted at the local level, there may be pressure for additional expenditure, which might increase the debt of either level of government.

The point of these observations is not to argue that the recent impressive reforms of local government in Bolivia should be reversed. Indeed, most of these observations could be made of any reform that devolves a substantial share of expenditure to local authorities. The point is rather that it is only sensible to be aware of the potential pitfalls and snares surrounding a reform of this type.

Directions for Further Reform

The decentralization of government services may well improve substantially the efficiency with which public services, especially health and education, are provided, since they will involve directly the people who will most benefit. The question arises as to how the beneficial impact of these reforms can be enhanced by measures that would minimize or neutralize the potentially harmful side effects of the reform. On the basis of the foregoing discussion, the major risks to the reform may be summarized as follows:

  • Overlaps. Inefficiency resulting from overlaps (or gaps) in the provision of services, and from problems stemming from the joint management of a given activity by two levels of government.

  • Problems of technical competence. Inefficiency resulting from a lack of technical competence in the design, execution of projects, and in the provision of services by the local governments.

  • Excessive incentives and opportunities for indebtedness. Excessive indebtedness at the local government level resulting from the combination of increased access to borrowed resources by the municipalities, a lack of incentives for fiscal prudence, and problems with the national government’s control systems.

Expenditure overlaps. It may be that there will be problems coordinating the operations of the prefecturas and municipalities. If so, these may well be amenable to being addressed bilaterally. The joint management of certain services by the national government and the municipalities, which could also lead to coordination problems, might also be addressed in this way. If, as experience is gained with the new arrangements, this informal approach proves unsuccessful, the problem of overlaps may ultimately have to be addressed through an amendment to the legislation that aims at a sharper delineation of the responsibilities of the various levels of government.

Lack of expertise. As noted above, the law recognizes the possibility that municipalities may require assistance, at least initially, in carrying out their new responsibilities. Given the disparities in size of Bolivian municipalities, and their lack of experience in the provision of many public services, a good deal of technical assistance will probably have to be provided by the national government. This can be seen as an initial investment that will benefit the country as a whole once the smaller cities and towns have become more adept at managing their expenditure programs. That said, it may be that some towns will be too small to provide the services expected of them. If so, some special arrangement may have to be made, where the prefectura assumes responsibility for certain services. The question then arises as to whether the legislation might distinguish explicitly between classes of municipalities according to their capacity to deliver basic public services or whether ad hoc arrangements will suffice.

Debt issues. Local government indebtedness has to date not been a problem in Bolivia. The total debt of the municipalities in 1996 was only 1.2 percent of GDP, and most of this was concentrated in the three largest cities. Under the new arrangements, however, indebtedness is quite likely to grow. Local government borrowing will need to be controlled, either directly or indirectly, by the national government since the market model is not well suited for the Bolivian setting. Market-based systems are found in comparatively few countries. The requirements for their successful operation are heavy. In particular, they require well-functioning and comparatively broad financial markets and reliable, comprehensive, and timely information on the government’s financial operations.

At present, domestic borrowing is subject to formal controls, but borrowing does take place without formal authorization. The national government monitors the financial operations of the 10 or so largest cities, but not those of the remaining 300.

Two basic components of an effective management system for local government debt are a good information system and a system of local government budget review by the relevant financial agency of the national government. Under such a system, the local governments, at least the largest of them, prepare a budget using standard procedures, which they discuss with the national government (the Ministry of Finance) before the start of the fiscal year.

In vetting municipal budgets, the Finance Ministry can rely on a rules-based system, a discretionary approach, or a combination of the two. For example, the ministry could assign maximum values to indicators of the ability of local governments to service their debt. Two such indicators could be the ratio of the stock of debt to current revenue, and the ratio of the flow of debt service to current revenue. Under a rules-based approach, all municipalities would have to submit budgets that respect the particular values chosen for these indicators (and any other thought to be necessary to control local government finances). The indicators would be revised from time to time, but not necessarily annually.

In addition to this, however, the Finance Ministry should require that the budgets submitted to it respect an annual limit on borrowing. The annual limit is necessary because the current level of indebtedness is low, so that even a moderate limit on the ratio of debt or debt service to revenue will not suffice to prevent large increases in indebtedness (and large deficits) from one year to the next. Put another way, it is not simply the level of indebtedness that matters, but its rate of change.

In Bolivia’s case, the annual limit could be negotiated on a case-by-case basis with the larger municipalities, and would be renegotiated each year. It would not be feasible to negotiate individual limits with each of the more than 300 municipalities in the country. For the smaller municipalities, an all rules-based approach would probably be necessary. For example, in addition to the requirement that the two debt-service capacity indicators be respected, a limit could be imposed on the annual increase in the nominal value of debt, for which one value would be chosen that would apply to all of the smaller towns.

For the prefecturas, it can be argued that if expenditure needs in a particular year clearly exceed revenue, the national government should finance the excess, to the extent that it is deemed desirable and affordable, by discretionary transfers. This approach is consistent with the legal and political status of the prefecturas. Alternatively, the national government could give them the same treatment it would give to the larger cities and towns.

The coparticipation formula. A final issue to address is whether the revenue-sharing formula can or should be altered to eliminate the scope it provides local governments to increase spending when taxes at the national level are being increased to reduce the deficit. One possibility might be to redefine the revenue base subject to revenue sharing so that it does not include the revenue generated by tax increases and other measures adopted to promote a reduction in the deficit. Thus, for example, if the rate of the value-added tax (VAT) is increased from 13 percent to 15 percent, the revenue-sharing formula could be modified so that it applies to only (13/15*100) or 87 percent of VAT revenue, meaning that the additional revenue deemed to be generated by the tax rate increase would accrue in its entirety to the national government. This procedure would have to be symmetric, however; a reduction in the rate of the tax from 15 percent to 13 percent would then result in the national government’s giving up the 2 percentage points of VAT revenue that was going directly to it, without being subject to revenue sharing. This procedure would only work well when the adjustment measures take the form of a rate increase, or some other form that allows a simple calculation of the amount of revenue that would not be subject to the coparticipation formula.

Another possibility might be to assume that the agreement would apply only to tax revenue up to some stipulated ceiling. For example, it could be assumed at the beginning of the year that all revenue exceeding 115 percent of the previous year’s figure would not be shared, but would go entirely to the national government. The threshold value of 115 percent would be determined on the basis of some formula or method; for example, by making a projection of the revenue increase that could be expected with real GDP growing at its trend rate, and inflation at its underlying rate. Both of these proposals would detract to some degree from the simplicity of the current arrangement, and it may be that given the relatively modest share of revenue going to the municipalities, the pro-cyclical nature of the revenue-sharing rule may not be a problem.

As a final observation, the low share in their total revenue of taxes raised by the municipalities themselves suggests that it would be highly desirable to encourage them to exploit their own tax bases more fully. The higher the value of the coparticipation coefficient, however, the less the incentive the municipalities have to finance themselves.

The larger municipalities undoubtedly undertook some expenditure on social programs, although there is no readily available information on the composition of their expenditures.

The smaller cities and towns were not denied participation in the scheme by law. However, the administrative and bureaucratic requirements for participation were apparently onerous for small towns, and the incentives to participate may not have been compelling, at least if the increase in revenue that participation entailed would have come at the cost of central government provision of certain public services.

Revenues are transferred via the banking system on an almost daily basis from the Treasury’s account to those of the municipalities. Small towns band together and open a collective account.

The taxes assigned to the national government are basically all taxes on goods and services and on domestic income and profits, plus taxes on international trade and on inheritances. Each department is divided up into provinces, and each province into a section, which for the purposes of the law is considered to be the territorial limits of the municipality that is located in it. Consequently, all inhabitants of Bolivia are effectively assigned to one municipality or another, even if they live in the country. The law also provides that 5 percent of the national government’s revenue should be transferred automatically to the public universities. Mineral, petroleum, and forestry royalties are assigned to the departments.

The proportional formula for the transfer to a given town can be expressed simply as X bolivianos times the number of the town’s inhabitants as established by the 1992 census where X = total shared revenue divided by the total population of Bolivia (also from the 1992 census).

Taking account of the 5 percent transfer to the public universities, the gross yield of new tax measures must increase to 1.43 bolivianos.

Argentina’s coparticipation coefficient is actually an average, since, unlike the Bolivian revenue-sharing mechanism, the coefficient differs by type of tax.

The revenue from the IEH is distributed as follows: 50 percent is divided among the prefecturas in proportion to their relative population sizes; and 50 percent is divided in nine equal parts, one for each department. Thus, if a given department’s share of total population is x, and total revenue from the IEH is R, that department’s share (S), in bolivianos, of total revenue from the IEH would be given by:

If national government expenditure in the areas for which municipalities now have responsibility was very low before the reform, then the lack of balance need not prevent an increase in expenditure, but pressures for increased spending may be created nonetheless.

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