More than You Can Handle Decentralization and Spending Ability of Peruvian Municipalities

This paper builds on a comprehensive dataset for Peru that merges municipal fiscal accounts with information about municipalities’ characteristics such as population, poverty, education and local politics to analyze the leading factors affecting the ability of municipalities to execute the allocated budget. According to the existing literature and the Peruvian context, we divide these factors into four categories: the budget size and allocation process; local capacity; local needs; and political economy constraints. While we do find that all four factors affect decentralization, the largest determinant of spending ability is the adequacy of the budget with respect to local capacity. The results confirm the need for decentralization to be implemented gradually over time in parallel with strong capacity building efforts.