Regional Unconditional Transfers: The Case of Riverside Regions in a Developing Country

Disadvantaged communities worldwide have been the focus of government-sponsored programs aimed at improving living standards and fostering economic development. Decentralization has emerged as a central strategy in this effort, strengthening accountability, and promoting local development, a trend to which Colombia is no exception. This paper examines the effects of a regionally targeted transfer program that designated additional resources to municipalities allocated along the Magdalena River, the longest country’s waterway. To identify causal impacts, we exploit the 2002 reform that significantly reduced these transfers and apply a difference-in-differences approach using panel data for the period 1994-2019. The findings reveal no effects on social outcomes but a slowdown in economic activity, accompanied by reductions in municipal operating expenditures and investment, while revealing an increase in tax revenues. These results highlight the complex interplay between fiscal decentralization and regional development, raising important questions about the effectiveness of targeted transfers in achieving their intended objectives.