Fiscal Decentralization and Subnational Government Investment in Developing Countries: The Case for Increasing Subnational Borrowing and Commercial Debt

Subnational governments in developing economies typically borrow considerably less than those in more advanced economies. Subnational borrowing has attracted attention in recent years due to better documentation of public investment gaps in sectors that are often decentralized, development needs highlighted by global development agendas, and recognition that public funding alone cannot meet the demand. Despite the global pattern, subnational governments in some middle-income countries do borrow, even commercially. This paper focuses on middle-income countries in which subnational governments that should be able to access commercial financing do not, suggesting they use public funding that should be targeted to those unable to borrow. This paper considers whether observed uneven subnational borrowing reflects identifiable contextual factors that could inform policy reforms. Data constraints limit systematic definitive assessment, but available information suggests the potential scope for more borrowing in at least some countries and argues that strategies to expand such activity and to improve overall subnational finance merit greater attention from the international development and finance communities. The conclusions recommend advancing debate on policy reforms and actions to increase subnational borrowing in developing countries.