Sustainable finance and horizontal fiscal equalization: the case of bolivian municipalities

Sustainable finance is consistently gaining relevance in financial markets across the world including Bolivia, a country where more than seventy percent of the population live in urban areas. Even though municipalities should be a top destination of sustainable funding to address the country’s most urgent development challenges, they have struggled to access the local financial market mainly due to their highly heterogeneous financial strength. To address this, the paper proposes a novel financing scheme that combines the notion of horizontal fiscal equalization – a redistributive approach to transfer resources from richer to poorer jurisdictions to mitigate size and development differences – and the principles of sustainable finance to face major development challenges associated with poverty, inequality and climate change vulnerability. To illustrate this, the paper estimates and characterizes the relative financial strength of Bolivia’s ten main municipalities and shows that three well-known investment vehicles amenable to the notion of horizontal fiscal equalization can be effectively used for channeling much needed sustainable funding to local governments. In effect, the proposed financing scheme could increase financial inclusion amongst Bolivian municipalities and channel much-needed funding to significantly enhance the country’s efforts to achieve its climate commitments and development goals.