A Fiscal Need Approach to sub national Fiscal Equalization. An Application for the case of Chile

Abstract

This research is intended to measure the gap between the existing level of grants for municipalities for school level education, primary health services and other services, regarding a theoretically advisable per beneficiary expenditure level based on the so-called 'Fiscal Need Approach to Equalization' as developed by Shah (1996, 2007). This general aim is being tackled while acknowledging that decentralization is a multi-dimensional concept, of which the fiscal one is imbedded in a wider political and economic context. Since the early eighties, Chilean municipalities have administered both school level public education as well as primary health centers, on account of which the central government grants municipalities a certain amount per beneficiary. Our main fmdings suggest that Chile is not a fiscally 'centralized' country as far as the distribution of general government spending in the areas being examined is concerned. Nevertheless, this result does not preclude acknowledging that Chile is still centralized from an economic view point. In this regard, future research should explore ways of promoting convergence across regions nationwide.