Market-Oriented Subnational Debt Regimes: Empowering the Developing World to Construct Infrastructure
Globally, as national governments continue to decentralize fiscal and governmental responsibility, the sound facilitation of subnational debt markets will play a critical role in the construction of infrastructure. However, sparse scholarship exploring the optimal legal and financial frameworks for encouraging the construction of infrastructure at the subnational level has left a number of open questions. This Note primarily provides a basic overview of subnational debt trends and policies. It first reviews subnational debt regimes, comparing market-oriented regimes with regimes with varying levels of involvement by central governments. Though not always possible, the Note concludes that market-driven incentives generally produce the best subnational debt regimes. Though it has faced some struggles historically, as the largest and most liquid subnational debt market in the world, the United States’ municipal bond framework can provide a useful model. The Note then presents a market-oriented proposal for U.S. policy makers. By extending tax-exempt status to the public debt instruments of select subnational entities abroad, the United States could provide a promising investment opportunity for U.S. financial institutions and citizens, facilitate the construction of infrastructure in some of the most desperate areas of the world, and encourage sound international municipal finance practices through the extension of a largely self-regulated system. This market-enabling tax exemption could prove to be far more effective than any sort of direct spending. Finally, the Note argues that a fluid and competitive subnational debt market in developing countries is in the best interest of both investors and humanitarians alike.