The driving forces behind the allocation of public resources are a central question in the study of politics in general and specifically in the context of fiscal decentralization. This study relates this question to a prominent instrument of foreign aid and social policy, namely Social Investment Funds. If organized in a decentralized manner, such Funds can provide an interesting self selection process for local infrastructure provision that potentially hinders centralist patronage politics. Against this background, this study provides empirical evidence on the resource allocation of a decentralized investment fund, namely the Bolivian Fondo de Inversión Productiva y Social (FPS). The econometric analysis is embedded in a case study, Bolivia from 2001-2004, which is characterized by political instability and the erosion of the traditional party system. The paper attempts to explain the varying success of different municipalities in applying for project funding from the FPS. The study tests the impact the level of a 1) municipality’s poverty, 2) additional financial resources of a given municipality for co-financing projects, 3) party affiliation of the local government and 4) local neighborhood (diffusion) effects on the allocation of FPS resources. While there is considerable anecdotic evidence from Latin America’s decentralization processes that suggests the existence of local spillover effects, the analysis is among the first studies that systematically look at local diffusion effects between neighboring municipalities. The (still preliminary) findings show, that while poverty and geographic diffusion at the local level had a strong impact on resource allocation, party politics played only a marginal role. Linking these findings to the context of the country case suggests that the importance of party politics in fiscal decentralization is only of minor importance during processes of party system transformation and the existence of institutional firewalls that shield allocation mechanisms from centralist party politics.
