Subnational governments in a stabilization program: lessons learned in Argentina

Autonomous subnational governments pose a serious challenge to national stabilization strategies. As illustrated by the case of Argentina, fiscal reforms that have been successfuly implemented at the national level have proved to be much harder to induce among subnational governments. Provincial reform is still largely pending and provincial governments continue to generate large public deficits, posing a threat to the success of Argentina's overall reform program in the medium and long term.

This paper provides a retrospective on Argentina's reform program with a focus on subnational governments. It identifies elements within the reform program itself, such as windfall increases of guaranteed central transfers, that systematically undermined early efforts to induce provincial reform. It also examines the government's strategy to neutralize their effects through the decentralization of services and the negotiation of two fiscal pacts, as well as its success in introducing major reforms by capitalizing on the financial pressure that resulted from the Mexican crisis. Finally, it draws lessons of experience that may be useful for policy makers faced with the similar challenge of inducing fiscal reform within autonomous subnational goverments.