This book examines institutional aspects of subnational capital mar- kets and presents case studies of subnational borrowing, showing what has worked, what has not, and why. As decentralization contin- ues and urbanization spreads, local authorities need to provide more services with fewer resources from the central government. Subna- tional borrowing, leveraging on reliable cash flows and prudent fiscal management, can be an alternative for funding some investments, especially when the useful life of the service is long (such as schools, roads, and public utilities).
Worries that fiscal decentralization may contribute to structural deficits and fiscal imbalances are common, especially in countries where the main policy priority is to control aggregate public sector borrowing. When traditions of fiscal responsibility are weak, account- ability systems are immature, and administrative discipline is poorly developed, there is a risk that lower-level governments may abuse their borrowing authority, contributing to aggregate fiscal imbalance with adverse macroeconomic consequences.
However, many analysts argue that, with an adequate legal frame- work and sound macroeconomic fundamentals in place, local gov- ernment access to capital markets is compatible with fiscal stability and promotes development of an important segment of the financial market. Necessary conditions include effective supervisory authori- ties; judicially enforceable contracts; tax decentralization; civic norms that promote fiscal prudence; availability of skilled staff; and adequate accounting, disclosure, and reporting standards.
Increasing numbers of local governments are borrowing from banks and issuing bonds, although in these turbulent times the path has been neither steady nor smooth. During the 1990s 120 subnational governments in Latin America engaged in market bor- rowing, 150 in Eastern and Central Europe, 11 in East Asia, and nearly 500 in Africa. Domestic bond markets started to blossom in