76379 APRIL 2013 • Number 112 Subnational Debt, Insolvency, and Market Development Otaviano Canuto and Lili Liu State and local debt and the debt of quasi-public agencies have grown in importance as a result of fiscal decentralization, rapid urbanization, and the increasing role played by private capital. However, with debt comes the risk of insolvency. This note outlines a set of aligned fiscal incentives that should be in place, as well as the design issues to be considered in debt restructuring frameworks. Drawing on Canuto and Liu (2013)1, this note also suggests some broad lessons extracted from several country experiences with subnational debt restructuring, insolvency frameworks, and debt market development. Subnational Debt and Insolvency structure services thus can be paid for more equitably by the beneficiaries of the services. State and local debt and the debt of quasi-public agencies have Third, the subnational debt market in developing coun- grown in importance. Three structural trends have contrib- tries has been going through a notable transformation. Private uted to the rising share of subnational finance, including sub- capital has emerged to play an important role in subnational national debt as a share of general public debt (Canuto and finance, and subnational bonds increasingly compete with Liu 2010a). traditional bank loans. Notwithstanding the temporary dis- First, decentralization in many countries has given sub- national governments (SNGs)2 certain spending responsibili- ruption of the subnational credit markets during the 2008– ties, revenue-raising authority, and the capacity to incur debt. 09 global financial crisis, the trend toward more diversified With sovereign access to financial markets, SNGs are seeking subnational credit markets is expected to continue. In various access to these markets as well. countries, SNGs, or their entities, have already issued bond Second, rapid urbanization in developing countries re- instruments (for example, in China, Colombia, India, Mexi- quires large-scale infrastructure financing to help absorb in- co, Poland, the Russian Federation, and South Africa). More fluxes of rural populations.3 Borrowing enables SNGs to cap- countries are considering policy frameworks for facilitating ture the benefits of major capital investments immediately, subnational debt market development (for example, Indone- rather than waiting until sufficient savings from current in- sia), while others are allowing selected subnational entities to come can be accumulated to finance them. Infrastructure in- pilot transaction and capacity-building activities (for exam- vestments benefit future generations who therefore should ple, Peru). bear a portion of the cost. Subnational borrowing finances With debt comes the risk of insolvency. When SNGs fol- infrastructure more equitably across multigenerational users low unsustainable fiscal policy, it can jeopardize their ability of infrastructure services because the debt service can match to service their debt, the services they manage, the safety of the economic life of the assets that the debt is financing. Infra- the financial system, their country’s international creditwor- 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise thiness, and overall macroeconomic stability. Too often the that excess borrowing could drive residents away and leave central government gets dragged in to provide bailouts, which those remaining with more debt per person than they an- can disrupt its own fiscal sustainability and reward the popu- ticipated. list fiscal tactics of the recipient SNGs. The second challenge is free riders. The interests of indi- Several major emerging markets experienced subnation- vidual SNGs may diverge from the common national interest al debt crises in the 1990s. Newly decentralized countries when factors such as electoral pressures motivate SNGs to fol- face potential fiscal risks. To many observers, runaway pro- low unsustainable fiscal policy. An individual government vincial debt in the provinces of Mendoza and Buenos Aires would bear only part of the cost of its misbehavior, but would was a factor behind Argentina’s sovereign debt default in still receive all of perceived benefit accrued, only if (most of) 2001. Brazil experienced three subnational debt crises in the other governments continued to follow good fiscal behav- the 1980s and 1990s. In India, many states experienced fis- ior. So, there might be a prisoners’ dilemma—a situation cal stress from the late 1990s to the early 2000s, with in- where the equilibrium of isolated individual choices leads to creases in fiscal deficits, debt, and contingent liabilities. The suboptimal outcomes for all.4 1994–95 Tequila Crisis in Mexico exposed the vulnerabili- The third challenge is moral hazard. Subnational borrow- ty of subnational debt. ers might have an incentive not to repay their creditors, and Subnational insolvency is a recurring event in history. In creditors might lend without risk differentiations if they per- 1842, eight U.S. states and the Territory of Florida defaulted ceive that defaulting debtors could be bailed out by the cen- on their debt, and three other states were in perilous financial tral government. condition (Wallis 2005). During the Great Depression, 4,770 In a country with multilevel governments, the national local governments defaulted on US$2.85 billion of debt government exists for the purpose (among others) of protect- (Maco 2001). As capital markets and their regulatory frame- ing the common interest and typically has special powers work matured, the default rates of U.S. local governments de- such as running the central bank and regulating the financial clined. Yet, there are recent episodes, including the default of sector. The national government also provides transfers to the Washington Public Power Supply System in 1983, the SNGs, giving it additional leverage over SNGs and their fiscal bankruptcy of Orange County, California, in 1994, and of behavior. However, the constitution and rules (such as on rev- Jefferson County, Alabama, in 2011. enue sharing) may constrain the national government’s power The 2008–09 global financial crisis has had a profound over the SNGs. Political considerations, such as the national impact on subnational finance across countries, as a result of political cycle or subnational political cycles, may bias the de- the slowing economic growth, rising cost of borrowing, and cisions of the national government away from the optimal deteriorating primary balances. The impact has been mitigat- (Braun and Tommasi 2004). For instance, when a state gov- ed in various countries by fiscal stimuli, monetary easing, and ernment of the same political party as the national govern- increasing fiscal transfers. However, looking forward, pres- ment faces a close election, the national government might be sures on subnational finance are likely to continue—from the inclined to “condone� the state’s fiscal misbehavior by offer- potentially higher cost of capital, the fragility of the global re- ing a debt bailout or rescheduling guarantee. Also, under covery, and refinancing risks as well as sovereign risks (Canuto some configurations of political institutions, the national ex- and Liu 2010b). ecutive might “purchase� blocks of legislative votes by giving SNGs fiscal favors. Aligning Fiscal Incentives The incentives in the political system affect the need for Subnational debt crises have led governments across coun- effective subnational fiscal control institutions. To the ex- tries to search for frameworks to restructure subnational tent that the constitution and party system lead to more cen- debt and to undertake legal, regulatory, and institutional re- tralized power, the country will have less need for special in- forms that will sustain subnational debt finance in the long stitutions to coordinate fiscal discipline across governments run. In a multilevel government system, the reforms need to over time and among SNGs. Decentralization and market resolve three challenges (Liu and Webb 2011). The first chal- decontrol, however, increase the need for coordination of fis- lenge applies to governments at any level, whereas the second cal discipline. and third are mainly relevant in countries with multilevel The subnational debt crises or fiscal stress of the 1990s government. in several major developing countries led to reforms in subna- The first challenge is the short time horizon of public tional borrowing frameworks including the development of officials, who have shorter terms of office than citizens’ life ex ante fiscal rules and debt limits. The search for insolvency spans. Public officials face the risk of being forced out of of- resolutions has also intensified, since ex ante rules have not fice if results are painful in the short term. The mobility of been sufficient on their own without ex post mechanisms. In- citizens and businesses between local jurisdictions means solvency mechanisms should increase the pain of circumvent- 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise ing ex ante regulation for creditors and debtors, thereby en- of different tiers and branches of the government? These ques- forcing preventive rules. tions are among the key issues, and the answers vary—as seen in the case studies presented in Canuto and Liu (2013). Key Design Issues in Subnational Debt Subnational fiscal adjustment is also complicated by the Restructuring legislative mandates of the central government vis-à-vis SNGs The country experiences reported in Canuto and Liu (2013) and the intergovernmental finance system (Ianchovichina, reveal several design issues with respect to debt restructuring Liu, and Nagarajan 2007). Unable to issue their own curren- frameworks: (i) how to balance the tension between the con- cy, SNGs cannot use seigniorage finance. SNGs may not freely tractual rights of creditors and the need for maintaining pub- adjust their primary balance due to legal constraints on rais- lic services in the event of subnational insolvency; (ii) how to ing their own revenue, dependence on central government define the respective role of different levels and branches of transfers, and the central government’s influence on key ex- government in resolving insolvency; (iii) how to develop a col- penditure items such as wages and pensions. Many other poli- lective framework for debt resolution; and (iv) a basic choice cies that affect economic growth and fiscal health of the sub- among a judicial, administrative, or hybrid approach. The national economy may also be determined largely by the country cases show that country-specific circumstances—his- central government. torical, constitutional and economic context, and entry points Debt restructuring and debt discharge are complex pro- for reform—influence framework design in each country. cesses, but can be distilled into two basic questions: whether Framework design ultimately needs to address the chal- the creditors and the debtor can reach agreement on debt lenges of fiscal incentives facing SNGs in a multilevel govern- resolution; and who holds the “cram down�6 power when ment system. A sound framework should reduce the moral both sides fail to reach an agreement (Liu and Waibel 2009). hazard of subnational defaults, discourage free riders, bind all In Brazil and Mexico, the national government led SNG debt SNGs to pursue sustainable fiscal policies, and extend the restructuring, and there were no debt write-offs. In Hungary, short-term horizon of SNGs to minimize the impact of un- South Africa, and the United States, the courts hold cram sustainable fiscal policy on future generations. down power when local governments and creditors negotiate. Public and private insolvency Clarity of rules and collective enforcement The insolvency of SNGs differs from that of private corporate Without an insolvency framework, subnational debtors and entities—the main difference being the public nature of the ser- their creditors resort to ad hoc restructuring negotiations. vices provided by SNGs. Thus, debt restructuring inevitably The need for a collective framework for resolving debt claims involves a difficult balance between the interests of the debtor is driven not only by conflicts between creditors and the debt- (and the citizens it serves) and the creditors (and savers). While or, but also by competing interests among creditors and com- a corporation can be dissolved, this route is typically barred for peting demands by constituents of the debtor. Individual SNGs. When a private corporation goes bankrupt, all of its as- creditors may have different security provisions for the debt sets are potentially subject to attachment. The ability of credi- owed to them and may demand preferential treatment and tors to attach the assets of SNGs is constrained in many coun- threaten to derail debt restructurings voluntarily negotiated tries. In the United States, a judicial doctrine typically holds between a majority of creditors and the subnational debtor— that only proprietary property is attachable. Proprietary prop- the “holdout problem.� Individual ad hoc negotiations can be erty, subject to debt foreclosure, was defined by the U.S. Su- costly and harmful to the interests of a majority of creditors preme Court as “held in (the municipality’s) own right for (McConnell and Picker 1993). The holdout problem is not as profit or as a source of revenue not charged with any public serious if debts are concentrated in a few banks. A collective trust or use�5 (McConnell and Picker 1993). framework for restructuring takes on more importance as the Who has the authority over what? subnational bond market develops and grows to include thou- Fiscal adjustment by debtors requires difficult political choices sands of creditors. to bring spending in line with revenues and to bring borrowing The absence of clear rules for insolvency is likely to raise in line with debt service capacity. In a decentralized system, borrowing costs, and may limit market access for creditwor- tension exists between the role of the national government in thy borrowers. South African policy makers viewed clear enforcing collective fiscal discipline of SNGs and the fiscal au- rules for insolvency as critical to the growth of a broad-based tonomy of SNGs. Can a higher-tier government force spending competitive subnational capital market. In the United States, cuts and tax increases in a lower-tier government? Can courts utilization of Chapter 9 of the bankruptcy code has carried a influence spending priorities and tax choices that are normally strong stigma for a defaulting municipality to offset debtor preserved for legislative and executive branches? How do a moral hazard. Municipalities are thus wary that capital mar- country’s legal framework and political reality define the roles kets would interpret the filing for federal bankruptcy protec- 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise tion as a strong signal of financial mismanagement, to which are broadly similar—strengthening fiscal management and lenders are likely to react by charging a risk premium. preventing future insolvency. Often, these reforms proceed in The tension between maintaining essential services and tandem with broader public finance reforms, macroeconom- creditors’ contractual rights would imply that the pain of in- ic stabilization, and the development of a robust medium- solvency needs to be shared between the creditors and the term fiscal framework and transparency. The reform paths debtor. The insolvency mechanism needs to balance these and sequences countries choose reflect their historical con- competing interests and guide the priority structure of set- text, legal framework, and reform dynamics. tling competing claims. The priority structure will depend Canuto and Liu (2013) survey selected countries’ re- first on the distributional judgment of the society concerned, form experiences in strengthening subnational fiscal disci- and second, on the effect of a chosen priority structure on the pline and developing a framework for the resolution of subna- capital market and its impact on new financing (Liu and tional debt stress. Two types of debt restructuring approaches Waibel 2009). were observed. The first type is national government–led Judicial vs. administrative approach debt restructuring, which includes the experiences of Brazil, The two approaches to subnational insolvency procedures India, and Mexico. The review by Canuto and Liu (2013) also discussed in Canuto and Liu (2013) are the judicial and the includes China’s central government–led restructuring of administrative.7 Various hybrids also exist. In judicial proce- SNG rural education legacy debt, which it undertook so that dures, courts make decisions to guide the restructuring pro- local governments could gain stronger fiscal capacity for edu- cess. The judicial approach has the advantage of neutralizing cation service delivery. The second debt restructuring type political pressures during the complex restructuring. Howev- focuses on a framework that spells out, in advance, the proce- er, the courts’ ability to influence fiscal adjustment of SNGs is dure in place in the event of a subnational default. Canuto limited because mandates for budgetary matters usually rest and Liu (2013) compare the experiences of Colombia, France, with the executive and legislature. In some administrative in- Hungary, and the United States in using this approach. Sub- terventions, by contrast, a higher-level government intervenes national insolvency is not limited to developing countries— in the entity concerned, temporarily taking direct political the reform experiences of developed countries offer impor- responsibility for many aspects of financial management and tant lessons. restructuring the subnational’s debt obligations into longer- Canuto and Liu (2013) also discuss the experiences of term debt instruments. China, the Philippines, Russia, and South Africa in develop- The choice of approach varies across countries. In Hun- ing their subnational credit markets. This topic is highly rele- gary, the desire to neutralize political pressure for bailing out vant to aligning fiscal incentives for SNGs and developing a insolvent SNGs favors the judicial approach. South Africa’s robust regulatory framework. When the central government legal framework for municipal bankruptcy is a hybrid, blend- refrains from bailouts, creditors serve as an enforcer of fiscal ing administrative intervention with the role of courts in de- discipline on SNGs by pricing risks of defaults. Note that re- ciding debt restructuring and discharge. Colombia has a for- ducing default risks is not the same as minimizing the use of mal administrative process, where central government debt instruments. As already noted, debt instruments are es- representatives facilitate restructuring negotiations between sential for financing large-scale infrastructure and supporting the subnational borrower and creditors and supervise imple- economic growth. Competitive supply of subnational credits mentation of the agreement on fiscal adjustment and debt lowers borrowing cost and extends loan maturity. workouts. In Brazil, the federal government restructured the Canuto and Liu (2013) also reviews the experience of subnational debt in the late 1990s conditional on SNGs un- the United States, which has the largest subnational capital dertaking fiscal reform and adjustment packages. Similarly, market in the world, with outstanding SNG (states and local the federal government in Mexico restructured states’ debts governments and their special purpose vehicles) debt of after the Tequila Crisis, and a few years later introduced regu- US$3.4 trillion and an annual average issuance of US$450 lations on the lenders that effectively constrained the borrow- billion. However, the United States was not endowed with a ers as well. In India, the federal government used a debt swap mature, well-functioning market from the onset. Over its instrument as an incentive to encourage states to enact their long history, the U.S. subnational capital markets experienced own fiscal responsibility laws. episodes of widespread defaults in the 1840s, 1870s, and 1930s. The reforms of legal frameworks and institutions have Reforms to Align Fiscal Incentives and been gradual and path dependent in the sense that later re- Develop a Robust Framework forms built on earlier reforms. The United States experience Reforms in subnational borrowing frameworks and debt re- offers lessons for developing countries, including the impor- structuring mechanisms have been gathering momentum in tance of tying revenue sources to borrowing, transparency in developing countries since the late 1990s. Reform objectives markets for government credit, and creating interest among 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise creditors in strengthening borrowing rules. Although a devel- bargaining and adverse incentives; hard budget constraint oping country cannot simply duplicate the institutions that prevents moral hazard; and burden sharing provides proper currently govern subnational borrowing in the United States, incentives and avoids free-riding behavior, while also recog- it can take into account lessons from the U.S. experience nizing that higher levels of government can create incentives when forging a path tailored to its country context. for reform. What are some of the broad lessons that one may take The purpose of borrowing and insolvency controls is not away from the wide range of country experiences? First of all— to minimize the use of debt financing, but rather to promote as shown by Canuto and Liu (2010a)—subnational credit sustainable debt financing through a competitive and diversi- risks are intertwined with broader macroeconomic and insti- fied subnational credit system. Such a system can help ensure tutional reforms. Macroeconomic stability and sovereign the lowest cost of capital and a sustainable supply of credit. strength set an effective cap on the credit ratings of SNGs and Debt financing is valuable for infrastructure development influence the availability and cost of funds. Debt sustainabil- where the maturity of assets is generally longer than the cur- ity of SNGs is determined by the interplay of the existing rent terms of taxation and transfers. debt stock, economic growth, cost of borrowing, and primary The dynamics of subnational-central government inter- balance. The macroeconomic framework and policies strong- action provide reform momentum. On the one hand, one or a ly influence the interplay of all these factors. The history of few SNGs can serve as catalysts for fiscal reform, and as a dem- subnational debt crises shows that unregulated borrowing, onstration for national reform. On the other hand, the na- particularly in an unstable macroeconomic environment, is tional government can offer fiscal incentives to encourage extremely risky; unfettered market access by subnational bor- subnational fiscal adjustment. One common trait of success- rowers can outpace the development of sound revenue sys- ful debt restructuring for SNGs is the commitment of the tems and adequate securitization. central government to its own fiscal prudence. Deficits and debt arise from the joint decision of govern- The design for regulating debt and insolvency needs to be ments making fiscal policy and their creditors. These deci- consistent with the broader cultural, economic, legal, consti- sions are made in light of not only the rules governing issu- tutional, and social context of the country. Subnational fiscal ance of the debt, but also the expectations about what will adjustment and debt restructuring operate within a country’s happen to the debtor and the creditors if payment difficulties specific intergovernmental system that defines the respective arise—who will lose money or who will be forced into painful authority of each level of government, and within a country’s adjustment. The decisions of that lending moment become a political system that defines the respective authority of each fait accompli conditioning the subsequent decisions. This branch and level of government. Capacity and entry point for points to two important dimensions of control of govern- reform matter. The maturity of the legal system and the ca- ment borrowing: first, the type or timing—ex ante controls or pacity of the judiciary influence the choices in the debt re- ex post consequences; and second, whether the ex ante con- structuring process. trols and ex post consequences act on borrowers or lenders. Regulations on debt and insolvency cannot compensate Ex ante constraints on subnational borrowers include for inadequacies in the design of overall intergovernmental procedural rules for incurring debt, limits on debt and deficit fiscal relations. The intergovernmental fiscal system under- ceilings, rules for borrowing in international markets, and pins the fundamentals of the subnational fiscal structure. regulation of subnational borrowing based on fiscal capacity Without increased fiscal autonomy and greater own-source criteria. To complement the ex ante constraints and to make revenues, subnationals will rarely be in a position to borrow them credible, there need to be ex post consequences for fail- sustainably on their own. In addition, an intergovernmental ures in fiscal prudence. Without lenders, there is no borrow- fiscal transfer system that routinely fills deficit gaps will un- ing or debt, so their constraints and incentives deserve equal dermine the incentives for a balanced budget. The regulations attention. Relying on constraints only on borrowers means on debt and insolvency cannot substitute for other reforms in that lenders still have incentives to push loans and may find areas including budgetary and financial management, taxa- reckless officials willing to borrow despite the rules. Relying tion, and governance. The incentive signals of insolvency only on ex ante constraints, without ex post consequences, mechanisms require a more competitive subnational capital gives irresponsible borrowers and lenders an incentive to get market. around the ex ante rules and execute transactions that will It is critical to understand the interaction of rules, en- later get bailed out. Relying only on ex post consequences al- forcement, and capital markets. In government borrowing, lows irresponsible (and large) entities to build up such large decisions to spend in the present must be matched with deci- debts that they could threaten macroeconomic stability. sions to tax and service debt in the future. Well-functioning Debt restructuring needs to pay close attention to its in- capital markets are a way for societies to pool the best infor- centive effects: rule-based debt restructuring reduces ad hoc mation about conditions today and changes tomorrow. When 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise governments possess the discretionary ability to change the to meet demand, whereas lower-middle-income and upper- rules between today and tomorrow, it becomes difficult for middle-income countries should spend 8.2 percent and 2.3 the capital markets to assess both the returns from financing percent, respectively. infrastructure spending and the risks that debts will not be 4. Inman (2003) formally develops the prisoners’ dilemma repaid. model for this situation and shows how restrictive the condi- The importance of closely tying borrowing decisions to tions are under which the market successfully establishes sub- revenue decisions as a feature of good institutional design national fiscal discipline if the central government takes a cannot be overstated. Debts have to be repaid, and debt issu- hands-off, no-bailout approach. The conditions include com- ance that is tied to tax increases or dedicated revenue sources petitive suppliers of local public services, a stable central gov- is much more likely to be repaid. The country experiences ernment, clear and enforceable accounting standards, a well- surveyed in Canuto and Liu (2013) show the importance of managed aggregate economy, and an informed and moving to rule-based systems in which higher-level govern- sophisticated local government bond market. ment treats all lower-level governments according to the same 5. This might include, for example, an unused vacant lot out- rules. No matter what the rules are, ad hoc or discretionary side the corporate limits or a private residence taken for fail- application is likely to be plagued with moral hazard and com- ure to pay taxes (McConnell and Picker 1993, 432). mon pool problems. 6. To “cram down� is the ability to force dissenting minority creditors to accept an agreement between a majority of credi- Conclusions tors and the debtor. 7. In many places, there is no system, so “ad hoc� is a third Structural trends of decentralization and urbanization are system. In other places, defaults are dealt with as political likely to continue in developing countries, requiring massive problems, and there is no (or little) judicial or administrative infrastructure investments at the subnational level. A range capacity to deal with the default. of middle-income countries, as well as low-income countries in transition to more open market access, are contemplating References expanding subnational borrowing and debt financing for in- frastructure investments. The country experiences covered Braun, Miguel, and Mariano Tommasi. 2004. “Fiscal Rules for by Canuto and Liu (2013) suggest a range of possible lessons Subnational Governments: Some Organizing Principles and Latin American Experiences.� In Rules and Practice in Inter- to consider when designing reforms to align fiscal incentives governmental Fiscal Relations, ed. G. Kopits. Washington, DC: and develop a robust subnational debt framework that can be International Monetary Fund and World Bank. used to effectively manage the insolvency risks that will inevi- Canuto, Otaviano, and Lili Liu. 2010a. “Subnational Debt Finance: tably accompany the new dynamism of subnational finance. Make It Sustainable.� In The Day after Tomorrow: A Handbook on the Future of Economic Policy in the Developing World, ed. About the Authors Otaviano Canuto and Marcelo Giugale, 219–38. Washington, DC: World Bank. Otaviano Canuto is Vice President of the World Bank and Head ———. 2010b. “Subnational Debt Finance and the Global Financial of the Poverty Reduction and Economic Management (PREM) Crisis.� Economic Premise 13, Poverty Reduction and Economic Network. Lili Liu is a Lead Economist at the PREM Economic Management Network, World Bank, Washington, DC. Policy and Debt Department. ———, eds. 2013. Until Debt Do Us Part: Subnational Debt, Insol- vency, and Markets. Washington, DC: World Bank. http:// go.worldbank.org/QBSP5MH7W0. Notes Estache, A., and M. Fay. 2010. “Current Debates in Infrastructure 1. This note is based on the “Overview� of Until Debt Do Us Policy.� Commission on Growth and Development, Working Part: Subnational Debt, Insolvency, and Markets (Canuto and Paper 49, World Bank, Washington, DC. Ianchovichina, Elena, Lili Liu, and Mohan Nagarajan. 2007. “Subna- Liu 2013). tional Fiscal Sustainability Analysis: What Can We Learn from 2. The term subnational in this note refers to all tiers of gov- Tamil Nadu?� Economic and Political Weekly 42 (52): 111–19. ernment below the federal, or central, government. The cate- Inman, Robert P. 2003. “Transfers and Bailouts: Lessons from U.S. gory also includes special purpose vehicles or investment Federalism.� In Fiscal Decentralization and the Challenge of Hard- companies created by SNGs. Budget Constraints, ed. J. Rodden, G. Eskeland, and J. Litvack, 3. At the national level, estimates of future infrastructure in- 35–83. Cambridge, MA: MIT Press. Liu, Lili, and Michael Waibel. 2009. “Subnational Insolvency and vestment requirements vary greatly by income level. Estache Governance: Cross-Country Experiences and Lessons.� In Does and Fay (2010) discuss methodologies for quantifying these Decentralization Enhance Service Delivery and Poverty Reduction?, requirements and estimate that low-income countries should ed. Ehtisham Ahmad and Giorgio Brosio, 333–75. Chelten- spend 12.5 percent of GDP on investment and maintenance ham, UK: Edward Elgar. 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Liu, Lili, and Steven Webb. 2011. “Laws for Fiscal Responsibility McConnell, Michael, and Randal Picker. 1993. “When Cities Go for Subnational Discipline: International Experience.� Policy Broke: A Conceptual Introduction to Municipal Bankruptcy.� Research Working Paper 5587, World Bank, Washington, DC. University of Chicago Law Review 60: 425–35. Maco, Paul S. 2001. “Building a Strong Subnational Debt Market— Wallis, John J. 2005. “Constitutions, Corporations, and Corrup- A Regulator’s Perspective.� Richmond Journal of Global Law and tion: American States and Constitutional Change, 1842 to Business 2 (1): 1–31. 1852.� Journal of Economic History 65 (1): 211–56. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 7 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise