Fiscal Decentralization: Explaining Successful Local Economic Development in Latin America

Abstract

This study uses a statistical model to examine which institutional factors influence the number of businesses created in a local area. It uses a survey of mayors, city council members and executives from thirteen countries in Latin America to gauge whether they implement pro-business policies. The analysis considers fiscal, administrative and political autonomy as influential factors and controls for municipal environmental factors. The outcome shows that whereas political autonomy and business friendly policies at the local level are important in attracting new businesses to the municipality, administrative and fiscal autonomy are less influential. The importance of this research lies in the theoretical analysis, which evaluates whether mayors and other local authorities see themselves as agents of growth. Specifically, the following questions are addressed. Does government structure matter to support municipalities with the appropriate level of economic policies? Does fiscal, political or administrative decentralization increase the production of small and medium size enterprises (SMEs)? This paper is organized into the following sections. First, it briefly summarizes the development attempts in Latin America and describes why entrepreneurship is key for equitable growth. Second, it provides a theoretical perspective as to why local government is needed to promote business friendly policies and ultimately economic development. Finally, this paper tests the proposed theoretical perspective and provides tentative conclusions.