In the 1990’s descentralization in Colombia, a process which had begun a decade earlier, was sharply accelerated. The percentage of current Central Government revenues that are automatically transferred to the regional governments quickly jumped from about 20% to over 40%. Many analysts attribute the sharp fiscal deterioration experienced in the country to this decision. Regional governments, indeed, accumulated substantial amounts of debt and currently face serious financial difficulties. This paper is policy oriented. After a discussion of the central issues associated with descentralization in general, we turn to the specific case of Colombia. Our analysis highlights three aspects: (a) the rules that govern how a particular region’s transfers are defined. (b) the rules that govern how these resources must be spent and (c) the rules governing a regional government’s ability to issue debt. Rules governing how a region receives transfers from the central government have several problems. Firstly, they are not linked to any explicit and simple consideration of its contribution to total central government revenues, they lack simple redistributive criteria (from richer to poorer regions) and they do not sufficiently reward regional fiscal performance. Our proposals seek to correct these three deficiencies.
