Report Nº: 101921/06/2023
The Census shows that the provinces that benefit the most from co-participation have the worst infrastructure. The reason is that the money is used more for clientelism than for development. That is why co-participation must be eliminated. Each province should be self-financed.
The Federal Co-participation of Taxes is a mechanism through which the national State collects most of the taxes and then distributes them between the national level and the provinces as a whole (primary distribution) and among each province (secondary distribution). To have an idea of the order of magnitude, the total tax burden in Argentina is around 30% of GDP, of which 25% of GDP are national taxes and 5% of GDP are taxes collected directly by the provinces. In addition, the provinces receive approximately 8% of GDP through co-participation.
The fact that the provinces receive more money through co-participation than through their own collection is extremely relevant. Co-participation not only generates profound distortions in the distribution of public funds (the most notable is the exaggerated transfer of resources from the province of Buenos Aires to the northern provinces), but also distorts the incentives of the provincial governments.
Leaving aside Tierra del Fuego, the three provinces that benefit the most from co-participation are Catamarca, Formosa and La Rioja, in that order. They receive, per capita, almost 3 times more than the average of the provinces. But, according to the 2022 Census, it is observed that:
These data show that, after 35 years of the co-participation law, the three most benefited provinces still have a large part of their population living in homes without a floor, without sewers and without connection to the gas network. As a reference, in the Autonomous City of Buenos Aires, 2% of households do not have a floor, 1% do not have sewers and 6% do not have a gas connection. The comparison refers to the most extreme situations, but in the rest of the country, it is also observed that receiving more co-participation funds does not generate more development. Evidence shows that co-participation is ineffective in reversing regional development asymmetries.
Co-participation takes resources away from the most productive regions in the center and south of the country to redistribute them to the northern region, which is the least developed. This appears to be a mechanism of geographic solidarity. But, in practice, it operates as a mechanism of general impoverishment and widening of development gaps. The reason is that those who receive more money from the co-participation are more tempted to use those funds to increase public employment and other clientelistic actions that allow them to perpetuate themselves in power. The underdevelopment of the northern provinces is not the fault of local leaders. It is the fault of the incentives imposed by co-participation.
The most direct way to change the incentives is to eliminate co-participation. This leads to returning to the scheme originally foreseen in the National Constitution for the distribution of tax sources. The national State should be financed by taxes on foreign trade, income, and social security. Each province should be financed with the sales tax, resulting from unifying the current VAT with the current provincial sale tax, and municipal taxes, generated in its territory. This will radically change the incentives. Whoever spends has to collect first, and in order to collect, first, he has to promote the generation of added value in his territory.
Co-participation benefited the leaders of the poorest provinces and impoverished their population. Therefore, as a historical reparation, it is advisable to contemplate a Convergence Fund. Resources contributed jointly for the poorest provinces to implement a development plan. The Fund should operate as a conditional transfer, not as a “blank check”, as is the case of co-participation.
