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August 7, 2026

Devolving power to local governments

Greater political autonomy yielded lasting economic gains in Brazilian communities.

Tyler Smith

Source: luiz rocha

Between 1988 and 1996, Brazil added more than 1,300 new municipalities, a 34 percent increase in the smallest governmental units with decision-making authority. The 1988 constitution had handed states the authority to set their own rules for creating municipalities, and the rules tended to be permissive. A number of districts—administrative subdivisions with no political autonomy of their own—requested to break away from the municipalities that governed them. In 1996, Congress closed the door with a constitutional amendment.

In a paper in the American Economic Journal: Applied Economics, authors Ricardo Dahis and Christiane Szerman show that these voluntary splits stimulated long-term economic activity in the new municipalities.

Because petitioning districts were poorer, more remote, and more often neglected by the town halls administering them, comparing them to non-requesting districts would include confounding factors making it difficult to identify causal impacts. To get around this difficulty, the authors obtained digitized archival records of split requests across eleven states and then compared districts whose requests were ratified against districts whose requests failed for reasons unrelated to local economic conditions—including gubernatorial vetoes, committee rejections, and the arrival of the 1996 deadline before a vote could be held. The final sample covered 448 municipalities and 1,259 districts.

Panel A of Figure 6 from the authors’ paper shows the effects of the splits for districts that requested to split ("applicants"); districts that did not request a split, but were in a municipality where some districts did ("remaining"); and districts that served as headquarters in municipalities where at least one district requested a split ("headquarters").  A “successful municipality” is defined as one in which at least one district successfully split.

Based on nighttime luminosity, the authors plotted the average difference in economic activity between (a) applicants whose requests were ratified and those whose requests failed; (b) remaining districts in successful and unsuccessful municipalities; and (c) headquarter districts in successful and unsuccessful municipalities.

Panel A of Figure 6 from Dahis and Szerman (2026)

The chart plots event-study coefficients over roughly two decades, with the year of the split at zero, which is indicated by the red vertical line.

The blue diamonds track the applicant districts. The change in activity of successful applicants compared to failed applicants climbed steeply after the successful applicants’ split, peaking near 40 log points, and settling around 34 log points fifteen years out. The green squares show that activity in headquarter districts in successful municipalities gained about 6 percent relative to their counterparts. The red triangles show the remaining districts, which hovered near zero.

The pattern suggests that gains largely accrued to the districts that asked to leave and successfully became new municipalities. According to the authors, the increase in economic activity was likely the result of two different mechanisms. First, municipal revenues rose about 15 percent, driven by federal transfers allocated through a formula favoring small municipalities. And, second, local fiscal and political autonomy led to better public services.

The findings lend evidence to the idea that handing more control to local authorities can have significant economic benefits for local economies.