Impact Assessment of Scenarios of Interregional Transfers in Colombia

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Banco de la Republica de Colombia, Documentos de trabajo sobre Economía Regional y Urbana, No: 272

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Haddad, Eduardo A.; Galvis-Aponte, Luis Armando; Araújo-Junior, Inácio F.; Vale, Vinicius A.
Banco de la República de Colombia
Descentralización; Desigualdades regionales; Transferencias subnacionales; H77 - Intergovernmental Relations; Federalism; Secession; R12 - Size and Spatial Distributions of Regional Economic Activity; R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies; D58 - Computable and Other Applied General Equilibrium Models; O54 - Economywide Country Studies: Latin America; Caribbean; Decentralization; Regional inequalities; Subnational transfers; Desarrollo económico regional -- Colombia; Economía regional -- Colombia; Desigualdad económica regional -- Colombia; Transferencias Intergubernamentales -- Colombia; H77 - Relaciones intergubernamentales; Federalismo; Secesión; R12 - Distribución espacial y dimensional de la actividad económica regional; R13 - Análisis de equilibrio general y bienestar económico de las economías regionales; D58 - Modelos computables y otros modelos aplicados de equilibrio general; O54 - Estudios económicos globales de países: América Latina; Caribe; Decentralization, regional inequalities, subnational transfers, descentralización, desigualdades regionales, transferencias subnacionales.
paper description
We assess the economic effects of different scenarios of regional allocation of the current interregional transfers’ scheme in Colombia, highlighting potential tradeoffs between regional equity and efficiency. The simulations conducted in this work, using an interregional computable general equilibrium model, contribute to the analysis of the growth impact related to some of the broad objectives that central governments pursue when allocating subnational transfers to local governments. We simulate counterfactual scenarios in which redistributive policies are designed to assess potential Gross Regional Product (GRP) outcomes had they been applied to the Colombian economy. The results show that when the distribution is carried out based on regional population shares, there are potential gains in national growth together with an increase in regional disparities. However, when the distribution is carried out according to other redistributive criteria, such as the number of people impoverished or the horizontal equity gaps, there is a potential improvement in regional inequality despite negative growth effects. In this sense, if we prioritize the redistributive criterion in order to offset the reduction of growth, regions that face a net increase in transfers should allocate the additional resources to improve in terms of Total Factor Productivity (TFP), specifically, in long-term TFP-enhancing investments, such as human capital in the form of education and health outcomes.