The decentralization1 of governments throughout the world has brought new prerogatives and responsibilities to subnational governments as ser- vice providers to their local constituents. Part of a larger move toward greater democratization of government, reliance on markets, private provi- sion of many activities formerly carried out by governments,2 and global- ization of commerce and finance, decentralization also has encompassed a desire to use private capital markets as allocators of credit.
In developing countries the twin tasks of building more dispersed and de- mocratic governments and opening economies to freer markets and greater private ownership have been attempted in tandem—and have proved a diffi- cult undertaking. A reduction in barriers to the movement of capital and goods has been a nearly universal objective.3 However, implementation of the required reforms has meant tough competition for domestic industries and in- creasing constraints on the fiscal and monetary policies of national govern- ments. In the face of economic slowdowns and unstable financial markets, many emerging and developing economies have found privatization and the opening up of their economies to be painful and unpopular. The steep price and uncertain benefits of joining global markets have their critics.4
Subnational governments, for their part, are being required to do more things, to do them more efficiently, and to be more self-reliant in raising re- sources.5 At the same time devolution and hard-pressed budgets have con- strained the ability of central governments to provide for the needs of sub- national governments. After years of neglect and with expectations rising, the needs for infrastructure are particularly daunting. The enormous fund- ing requirements cannot be met either practically or equitably without long-term investment. International lending and grant-giving institutions, another traditional source of funds, are also limited in their resources and restricted by rules and customary practice to dealing only through sover- eign governments.