Making Bonds Work: Are governments always Over-Indebtedness and Fiscally Irresponsible?
Governmental
debt and financial sustainability are pressing issues in all countries around
the world. Many if not all subnational governments play an important role in
delivering public services which helps to end poverty and promote economic
development. Yet, current
tension exists between policy experts encouraging harder budget constraints to
control ostentatious subnational debt issuance, while trying to stimulate
equitable and sustainable public financial mechanisms.
Public finance is the capital that makes
governments run well, municipal bonds in particular grease the wheels to ensure
public services are delivered at the local level by allowing project based
support to build infrastructure. Unfortunately, many developing economies do
not know how to develop management techniques that allow markets to function,
especially at the subnational level. For example, Mexican state
and municipal debt has increased in real terms over the past decade by 121.2
percent. The Mexican system is unique because it created public and private
souses of capital to manage its funding (trust funds, commercial banks, a bond
bank and the local bond market). Reaction by the government in 2016 was to
create a fiscal discipline law which may supersede more stringent state
government policies.
International financial institutions, such as IMF and the
World Bank, have focused more on the financial sustainability of central
governments than subnational governments. Nevertheless, we do not have a clear
understanding on how to control or manage subnational government spending and
debt in order to improve financial sustainability. For example, according to a study on public
debt in OECD countries, fiscal decentralization has two faces: it causes
excessive borrowing of subnational governments on the one hand, while improves
fiscal stability of the public sector on the other. Often what happens is
political maneuvering where national congress, like in the US, passes debt
selling increases thus making finances unsustainable. These
factors become more problematic during elections.
Other
examples of unclear management include the United States. For example, Hillary
Clinton’s 2016 campaign proposed to create a bond bank to resolve the
diminishing transportation trust fund. The proposal used the United Kingdom’s
model for supplying infrastructure finance throughout the country without
including a bond board, which is necessary for oversight of such highly
political decisions. Early consensus
agreed that implementation in the United States could work, few if any,
analyzed additional models of how this proposal could end up in elite capture,
bureaucratic manipulation and corruption at the highest level.
Despite the growing
attention of unsustainable municipal finances in places like China, Mexico and
the Philippines few analyst, if any, have explored whether or what management
factors may be important in determining the level of subnational government
debt or how subnational governments should access foreign capital. Research to understand how the Chinese bond
market, for example the largest subnational market in the world, is initiating.
Managing important elements of the municipal bond market, such as political
indicators of elections, accountability and participation, could determine
which countries sink or swim in the upcoming decades.
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