Ernesto Stein: Most of the literature on fiscal federalism, at least the literature written by economists, tends to focus on the immediate causes of the problems observed in the countries studied, such as the rules that govern intergovernmental relations (for example, rules regarding intergovernmental transfers or subnational government borrowing). The approach followed here goes a step further by focusing on the costs of political transactions, suggesting that while these rules may be problematic, they must be seen as the outcome of a broader political game. The approach identifies characteristics of the environment in which this political game takes place as the key determinants of the outcomes of the fiscal federalism system. Policy reform efforts should therefore center on this political transactions environment.
Changing the rules that govern intergovernmental relations, under this approach, would not be sufficient, since the lack of a proper political transactions environment may result in the rules not being enforced. I find this emphasis on the political transactions environment to be very appropriate. Numerous countries have adopted rules that appear to be very reasonable, but they are not enforced or are not effective because of failures in the political environment. The rules for subnational government borrowing in Colombia are a case in point. Colombia has established a system of controls to limit the autonomy of subnational governments to issue new debt. The controls, which are related to indicators of solvency and liquidity, function like traffic lights: if the indicators are in the red light zone, then the government in question loses its borrowing autonomy. In spite of these rules, subnational government debt has increased substantially, and most of the territorial entities in the country are in the red light zone. As a result of the lack of enforcement, Colombia's subnational governments would appear to have as much respect for red lights as do taxi drivers in Bogotá. This suggests that rules alone are not enough. They have to be set in an environment in which they will be effective. For this reason, it is [End Page 201] important to emphasize the political transactions environment and, in particular, the key ingredients of the environment that can render it cooperative or uncooperative, which is exactly what the paper does.
Focusing on a single country, however, even if studied in great detail, is not the best way to go about discovering what the key ingredients of the political transactions environment may be. It would be better to undertake a detailed comparison of the institutional structure of a few Latin American countries, which should be similar in a number of dimensions, but different in some of the potentially crucial political dimensions of the political transactions environment (such as, for example, the electoral rules of the national legislature or the degree of legislative turnover). I encourage the authors to move in this direction in future research.
Other countries demonstrate the same types of failures (namely, opportunism, economically inefficient choices, suboptimal policy reform, and underinvestment in capacity), but with very different characteristics with respect to the three aspects of the political transactions environment identified as crucial in the paper: the short-term horizon of legislators (due to high turnover); the relative weakness of legislators vis-à-vis the governors; and the weak horizontal separation of power. Take, for example, the cases of Colombia and Brazil, which are the other most highly decentralized countries in Latin America. Both countries have electoral rules that are very different from those in Argentina. In Brazil, the party leadership has very little power over the careers of legislators, and both countries have a much higher rate of reelection of legislators (close to 50 percent compared to 17 percent for Argentina). Colombia is a unitary country, which should also alter the transactions environment, since it reduces the independence of the subnational units. And yet the two countries have very similar outcomes, with high subnational deficits, overindebtedness, and bailouts. This suggests that they also have an uncooperative transactions environment.
The question, then, is whether the ingredients identified by the authors are really that important. Have other important ingredients of the political transactions environment been overlooked? A comparison of a few countries, rather than the analysis of...