Considerations for Fiscal Decentralization: Guidelines for the Peruvian Experience

Since its independence, the Republic of Peru has followed a centralized model of public administration, the results of which have not met the population’s expectations. This widespread dissatisfaction has led various governments, at different stages of the republic’s history, to attempt to implement various decentralization processes. The current government has undertaken a more comprehensive project, as its objectives are: to achieve greater efficiency in public spending, to democratize Peruvian society, and to create mechanisms for civil society oversight of public administration.

These civic aspirations have intensified in recent years in direct response to political and economic centralization, rising poverty, and the high level of government corruption observed by the public. In response to this deterioration, social pressure for change has emerged, which has resonated with the political class and been embraced by the current government through a reform of the state centered on political, economic, and administrative decentralization—conceived as a tool to increase the efficiency of public spending and adequately respond to citizens’ demands.

While it is true that there are currently significant historical differences from previous processes, the resounding failures of past experiments and the latent risks that the decentralization process may generate fiscal imbalances at the national level necessitate an analysis of the application of certain fiscal criteria or constraints and the consideration of behavioral rules to prevent decentralization from collapsing due to uncontrolled public finances, as has occurred in the past and in other countries.

Considering the problem described above, the main objective of this study is to propose—based on an assessment of the outcomes of decentralization in other countries (primarily Argentina, Brazil, and Colombia; although of these three, Colombia most closely resembles the Peruvian case due to its status as a unitary republic)— recent theoretical developments, and an analysis of the current state of Peruvian legislation and regional governments, to propose a set of recommendations for establishing criteria and guidelines that will allow for the full exploitation of the benefits of the decentralization process already underway and, at the same time, reduce existing risks of fiscal destabilization. Our proposals will focus on three specific areas: revenue decentralization and transfer mechanisms, expenditure decentralization, and institutional factors, which include the establishment of fiscal rules and the evaluation and monitoring of compliance with the goals of the various levels of government.

It is important to understand that Peru is currently undergoing a process of decentralization that is advancing at a rapid pace, driven by significant unmet demands stemming from previous failed attempts and the current political context, in which government officials have already been elected and are carrying out their respective duties. It is not the purpose of this paper to discuss or criticize the legal framework already in place—with strong “restrictions” at the constitutional level—nor the sequence in which the stages have been implemented—which began with the election of officials before a clear delineation of their actual functions—but rather to look ahead, proposing guidelines that can help shape a set of fiscal regulations to support the desirable objectives of a decentralization process.