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reforms of the local revenue sharing systems with the restructuring and establishment of Municipal Development Funds and aims **1o** mobilize additional resources, to improve their utilization through technical appraisal of local investment proposals and to adjust the pricing of capital as well as that of urban services."/

# B. ExDenditure Side Factors

4.15 General. Different considerations apply to the growth of expenditures, which increase much faster than revenues. First of all, most subnational expenditures are made in labor-intensive sectors and therefore result in high recurrent costs, while offering low levels of recovery. This is the case of education, health and welfare services, but also of police and fire protection, general administration and a variety of other urban functions which are not directly chargeable to end-users. In rapidly urbanizing areas, the demand for these services grows faster than the taxable population. Local leaders are subject to constant social claims to increase payroll expenditures or social services and their short terms of office make them not always accountable for the consequences. Moreover, subnational authorities receiving capital improvement grants or loans from the central government, are subsequently saddled with the problem of staffing, operating and maintaining the new facilities under job-protection and minimum wage policies which are externally determined. CaDital expenditures present a different set of problems. Certain urban investments (water supply, sanitation, power, drainage, transport facilities) are lumpy and require large sunk investments to achieve economies of scale. A conventional response to resource constraints is to neglect maintenance of the existing capital stock and to defer to better times their needed upgrading. Over time this results in a backlog of obsolescent housing and infrastructure, deteriorated environmental conditions, water rationing and intermittent power failures. Finally, categorical grants or project loans made to encourage new capital formation tends to concentrate counterpart funds on those subsectors for which external loans are more readily available.

4.16 Subnational Participation in Public ExRenditures. Unfortunately, the allocation pattern of subnational expenditure by economic type or function is difficult to trace for the LAC countries as a group, because this information is only available for few individual countries. IMF data on expenditures by function are generally limited to central government operations and the distinction between recurrent and investment expenditures is not always available at the subnational levels. There are also problems in separating the expenditures made directly by the subnational governments and those made by decentralized sector agencies of the central government within their territorial jurisdictions. With these qualifications, one can still infer from IMF statistics, some broad comparisons of the subnational expenditure patterns prevailing in different groups of countries. A first observation is that LAC 25/ See the recent review by K. Davey: Municipal Development Funds and Intermediaries, PPR Working Papers, World Bank, 1988.