Global Decentralization and the Subnational Debt Problem

Document Type

Article

Publication Date

2002

Abstract

According to the World Bank, decentralization of government is a pivotal force that will shape global development policy in the twenty-first century. Subnational debt restructuring has emerged as one of decentralization's most difficult problems. Financially troubled municipalities face many of the same concerns, for example, as financially troubled nations: holdout creditors can stymie collective attempts at debt restructuring, and reliance on politically motivated lenders of last resort (the International Monetary Fund in the case of troubled nations, the central government in the case of troubled municipalities) can foster moral hazard. In a prior article, I argued that an international convention for sovereign debt restructuring based on several universal principles of bankruptcy reorganization law can effectively address these concerns for nations. In this Article, I argue that similar principles can be applied even more easily to the financial problems of subnational governments. To this end, I propose a model law bsed on these principles that might form the foundation for national laws, informed by local political and legal culture. Then, using the Japanese municipal crisis as an example, I show that countries enacting such a law can prudently and equitably resolve their subnational debt burdens.

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