Report Nº: 103922/10/2023


Co-participation impoverishes the Province of Buenos Aires because it takes away resources and also the northern provinces because it generates bad incentives to their governments. The solution is a new tax and functional coordination agreement signed by most of, not necessarily all, the provinces.       

The Palestinian-Israeli conflict is very old and originated from multiple causes. One of them that keeps it alive is the lack of economic and social sustainability in the Gaza Strip. It is an area with a high incidence of poverty and is very poorly administered by the Hamas government. Hamas finds support, beyond the fanatics, thanks to the distribution of public employment and welfare benefits. So bad is its management that essential and basic public services, such as water, sanitation, and electricity, are provided by Israel.

Leaving aside the complexities of the Middle East conflict, from the point of view of the risks generated by the lack of economic and social sustainability, there are coincidences with the Buenos Aires suburbs (Conurbano) surrounding the City of Buenos Aires. An area where 50% of the population is poor and in the most deteriorated districts only 20% of the people of working age have formal salaried jobs. Consequently, a high proportion of the families live on public employment, informal occupations, and welfare assistance. The national State has to provide water, sanitation, and electricity services. 

The causes of this degradation can be unraveled by considering the resources that the Province of Buenos Aires contributes to the national State and those that it receives. According to estimates presented in a study by García and Vera, it is observed that the Province of Buenos Aires:

  • Contributes to the collection of national taxes with 8.5% of GDP.
  • Receives from the national State –through automatic and discretionary transfers and national spending in the territory– 6.5% of GDP.
  • This implies that the Province of Buenos Aires loses approximately 2% of GDP per year.  

These data show that the lack of sustainability of the Province of Buenos Aires is associated with the enormous mass of resources it transfers to the rest of the country. The key factor that explains this distortion is the tax co-participation regime. The co-participation law was sanctioned in 1988 in a very particular political instance at the end of the Alfonsín government. It was explicitly foreseen to be in force until 1989, but it was automatically renewed until today. The distribution parameters are so arbitrary that they have led the Province of Buenos Aires to lose, in the 35 years that the co-participation has been in force, the equivalent of 2 times its Gross Geographic Product.

Co-participation induces bad governments and bad management practices (including corruption) in the Province of Buenos Aires. This causes damages that are not compensated by the aid of the national State taking charge of water, sanitation, electricity, urban transportation, and welfare services. But the most paradoxical issue is that co-participation also contributes to the underdevelopment of the northern provinces, which enjoy very beneficial distribution parameters. In this case, the abundance of resources induces them to be used for practices such as excessive public employment and welfarism.

In order to get out of this decadence, it is essential to change this perverse way of distributing fiscal resources. This does not require the unanimity of all the provinces; a simple majority in Congress is enough. The starting point should be a tax and functional coordination agreement between the provinces and the Nation. This agreement should be approved by the National Congress and the provincial legislatures.  The provinces that delay the adhesion to this agreement will maintain the right to continue receiving, automatically, the amount of co-participation they were receiving at the time of the change.

The design of the tax and functional coordination agreement must respond to the principle of fiscal co-responsibility. This is materialized by clearly delimiting the responsibilities of each level of government and establishing that each jurisdiction is financed by the taxes collected from its inhabitants. In this way, overlaps between jurisdictions that generate inefficiencies can be eliminated and progress can be made towards the unification of taxes, in order to have a simpler and less distorting tax system. Solidarity with the less developed provinces will be channeled through a Convergence Fund for their economic and social development.  


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