Musgravian" externalities, formulated and illustrated by Musgrave in a 1966 paper on "social goods" are seen in this paper as one form of the interactions that occur between the components of a federation.The original formal apparatus is first exposed briefly.In that context, it is then considered whether and how alternative forms of federal structures are likely to achieve efficiency.Following suggestions from the literature, three such forms are dealt with: "planned", "cooperative" and "majority rule" federalisms.Next, the relevance of non cooperative equilibria is examined, in the light of an interpretation of them as "fall back" positions when disagreement occurs among members of a federation.Finally, the question is evoked of what economics and public finance may have to say on the limits to institutional decentralization, i.e. on the choice between federal, confederal and secessional structures.
From Introduction: "The first part of this paper describes the political changes, which induced technical and institutional evolutions of the RRD water-control systems, as the organization of the operation and even the technological nature of water-control systems, were influenced by national political choices. The second section describes the management framework and the financial organization of the RRD water-control systems. In-depth studies conducted at local level allow a better understanding of the present situation. Water management in the RRD appears to be strongly organized by the State into successive nested levels, from the central level of the Ministry of Agriculture to the local level of the cooperatives. This structure was challenged by the emergence of local pumping stations and water management practices, which superimposed themselves upon the officially existing structure. It is shown how the mismatch between administrative and hydraulic units adds to the complexity of the definition of both the financing and the management of hydraulic operations. The third and last section of the paper examines the financing of the different operators, the amount and the use of the water fees paid by farmers and questions the process of water management decentralization and privatization in the RRD."
This paper addresses the decentralization of health services financed by the Unified Health System (SUS) in the city of Natal initiated in the mid 90s. This decentralization primarily involved the transference of health services financed by SUS, which had previously been developed by the state of Rio Grande do Norte, to the city government of Natal. Based on the data gathered mainly from SUS¿ Ambulatory Information System (SIS/SUS), the authors attempted to verify to what extent this decentralization of health services provided by SUS in the city of Natal had improved public access to health services or, on the contrary, had resulted in a privatization process, implying more difficult access to those services.
The Indonesian authorities are exploring options for the establishment of subnational government endowment funds and the Ministry of Finance (MoF) has drafted regulations in that context. However, the motivations and objective for establishing an endowment fund at the subnational level diverge across various stakeholders. Clarity of the objectives and purpose of the endowment fund will be critical for informing features of its architecture, and the endowment fund should be aligned with the national fiscal policy objectives. Establishing such funds at a time of fiscal deficit entails a “borrowing-to-save” approach which is not optimal from a fiscal policy perspective. Currently, there is a misalignment between the design of inflow and outflow rules, the endowment fund’s objectives, and the fiscal/economic context. In addition, the current draft MoF regulations restrict the investment policy to conform with the law on decentralization enacted in 2022. This report emphasizes that regardless of the structure of the endowment fund, it needs to be fully integrated within the budget. The report also provides recommendations on assessing the full cost of the subnational government endowment fund, its design and implementation, and provides suggestions to improve the draft MoF regulations.
Ana Luiza d’Ávila Viana, Luiza Sterman Heimann, Luciana Dias de Lima, Roberta Gondim de Oliveira · 5 authors
This article discusses the trends and limits of the Brazilian health system decentralization process, identifying the three elements that constitute the strategic induction performed by the national system administrator in accordance with the guidelines contained in the Operational Norms of the Unified National Health System: systemic rationality, intergovernmental and service provider financing, and health care model. The effects of the Federal regulations are analyzed based on the results of the evaluation study focused on the implementation of the full management scheme at the Municipal level. The decentralization strategy induced by Basic Operational Norm 96 has succeeded in improving institutional conditions, management autonomy, and supply, as measured by the Federal resources transferred, installed capacity, production, and coverage of outpatient and hospital services, with the Municipalities authorized to conduct fully autonomous management, without altering the existing patterns of inequity in the distribution of funds to poorer Municipalities.
We analyze the governance structure and the financing of Kyrgyz education, with special emphasis on the general secondary education system. General secondary schools are under the authority of oblasts and rayons. Our main findings are as follows: 1. The oblast and rayon authorities in Kyrgyzstan are in fact delegated offices of the central administration, with highly non-transparent reporting lines, very little budgetary independence, diffused political responsibility and politicized control over financial flows to lower levels of government. 2. The principle that funds from the central budget for specific functions should be transferred directly (without any intermediaries) to the level of government responsible for those functions is not observed in Kyrgyzstan. In particular, the categorical grants for education are determined and negotiated in a very non-transparent way. 3. The Kyrgyz education sector is fragmented, and the divided responsibilities for management and for finances make rationalization and reform very difficult to accomplish. Moreover, the situation is compounded by the fact that education decentralization has a formal character, and is not accompanied by real delegation of authority and responsibility. 4. The general secondary education system in Kyrgyzstan, although managed according to the rules and procedures common to other post Soviet republics, displays a remarkable degree of regional and ethnic differentiation. The financing levels also vary significantly among oblasts. 5. Parental contributions make up at least 30% of the school budgets in Bishkek. Their collection and use vary greatly among schools, but in all cases are beyond the effective control of either parents or the central and local authorities. Moreover, the emerging system of entrance fees for first grade students is unconstitutional and violates human rights and pedagogical principles. In order to deal with these issues, the Kyrgyz Republic needs to correct the present non-transparent and dysfunctional governance structure of Kyrgyz education, because otherwise any efforts to improve the delivery of educational services or their financing may remain ineffective. The Kyrgyz Republic also needs to define education standards that it will be able to enforce and finance in all schools. Finally, it needs to implement a regulatory system governing parental contributions, which would serve the schools and at the same time allow for transparent and well-monitored use of private funds in public schools.
Carlos Eduardo Frickmann Young, Carlos A. Roncisvalle
The objective of this study is to examine the evolution and characteristics of the financing for the nvironment in Brazil, in order to identify the advances and retreats after the Rio 92 Conference. Brazil has a very decentralized administration, composed of three independent levels of public administration: the federal government, 27 state governments, and more than 5000 municipios, " or municipalities; all of them with specific environmental institutions. However, at the time of the completion of this report, there were no indicators that aggregate information from these different institutional levels for the 1992-2001 period.(1) Thus, this study was a first effort to generate this kind of figures. Given the very short time for its completion, the main priority was to identify the resource flows from the federal government and some selected states. Efforts to estimate spending on pollution control and other environmental activities by the private sector were also made. In addition, the issue of funding sources is also discussed. Despite many methodological problems involved in the elaboration of these indicators, it was possible to identify trends and conclusions for environmental spending. At the federal government level, it was estimated that environmental expenditures were between 0.4% and 1% of the federal spending. Another important finding was that, although there was an official commitment to increase efforts in this area after the Rio 92 Conference, the overall federal government expenditures in environmental issues did not increase during the 1993-2000 period. Moreover, a matter of concern was the declining quality of this spending, with fewer resources directed to end-activities and more money diverted to means-expenditures. An important cause of this was the increasing share of debt related expenditures (interests and amortization) in the total budget. On the other hand, investments suffered cutbacks, particularly in the more recent period, and the expenditures in personnel fell systematically by 25% in constant prices during the second half of the nineties. Environmental projects are the most important single element in international cooperation agreements. However, the flow of foreign resources presented a declining trend since 1994, oscillating between 6% and 17% of total expenditures. Most of these resources come from external credit operations (loans), which means that in the long term, they represent an extra pressure of financial expenses in the budget. The proportion of international donations/total expenditures in 2000 fell to the lowest level in the series (2.0%), clearly indicating the decline of international support for environmental projects in Brazil. Results for the 1996-98 period show that, if sanitation costs are included (an overestimate since it also considers water supply), environmental expenditures are relatively more important for local governments: around 9% of the total public spending in the sample of municipios considered. State governments are in the second position, spending around 1.5% of their budget on environmental issues, in contrast to the less than 1% of the federal government. For this reason, there remains a clear need to generate better aggregate figures for the states and municipios for the whole period. The methodologies used for public budgeting and expenditure control vary widely, making it very hard to supply compatible aggregate numbers. In the three states where longer time series were estimated (São Paulo, Paraná and Rio Grande do Sul), there was no consistent trend of increasing expenditures on environmental objectives. Another gap that needs to be fulfilled refers to the private sector environmental spending. There were positive signals which indicated that the private sector is getting more concerned with the environmental issues, particularly those agents that have interests/responsibilities at the international level. It was calculated that the environmental spending of the industry sector was around R$ 160 million per year, slightly less than 1% of its value added. Although it is expected that this number will increase in the future, it is considerably lower than the public sector spending on environmental issues. It is very difficult to aggregate all these figures, but assuming for the year 2000 that the public spending on environmental issues was of 1.5% of the total, the public environmental spending would be of 0.33% of GDP, and an annual expenditure per capita of R$ 22.9 per capita (US$ 9.2 per capita). If the estimated industrial environmental spending (R$ 160 million) is added, the total spending becomes R$ 4.1 billion (0.34% of GDP), or R$ 23.9 per capita (US$ 9.6 per capita). Most of the funding for environmental projects comes from the government (mainly federal, through BNDES), international development agencies, or from companies' own resources. The private financial sector has a minor role on the financing of environmental expenditures but, gain, there are signals of positive changes, with the creation of innovative private funds specialized in environmentally friendly projects that combine financial and "green" interests as an example. The consolidation of economic instruments in international environmental agreements, particularly the Kyoto Protocol on greenhouse gases emissions, may accelerate this new financial market. Another potential source of funding for environmental projects is connected to the implementation of economic instruments in the environmental management system. Command-andcontrol procedures, such as licensing and emission standards, largely dominate the environmental regulation in Brazil. However, some interesting experiences, such as the "green" tax rebound (ICMS verde) and the recent changes in the water resources policy adopting the user/polluter-pays principle, indicate that the role of economic instruments will increase and, consequently, that there is potential for developing self-sustained financial mechanisms to sponsor environmental expenditures. (1) After the completion of this research, the Brazilian Institute of Geography and Statistics (IBGE) published estimates of public spending for the 1996-98 period (IBGE 2001). Whenever relevant, these figures were also added to the analysis, but with an alert that they were obtained using different methodological procedures."
Fernando Filgueira, Herman Kamil, Fernando Lorenzo, Juan Andrés Moraes · 5 authors
This paper analyzes the reasons behind Central Government (CG) bailouts of Subnational Governments (SNGs) in the case of Uruguay. We argued that Uruguay represents a good example of the risks of fiscal decentralization, in the context of adjustment policies, and when SNGs` responsibilities and resources have not been carefully defined. We show that, in unitary countries where SNGs lack the opportunities to misbehave that they have in federal countries (e. g. , public debt issuance, international borrowing), SNG officials find ways to finance deficits through non-compliance with politically contestable obligations. In particular, SNGs in Uruguay finance their deficits by accumulating debts with other government agencies and obtaining discretionary transfers from the CG. Through statistical analyses we show that debts and deficits are mainly related to vertical fiscal imbalances and economic conditions in the SN jurisdictions. Yet, the analysis of recent bailout episodes suggests that institutions and political factors play a role (i. e. , they are important ex-post factors). This implies that bailouts have been more than simple compensations for structural imbalances, thus creating opportunities for strategic behavior on the part of SNG authorities (partly confirmed by the disparate fiscal performance of Montevideo vis-à-vis the rest of the country).
We analyze Georgian education finance and show that it is embedded in the overall structure of Georgian rayon finances, reflecting all their weaknesses: inequalities, lack of transparency, unmanageability, room for corruption. The budgetary and political independence of rayons is very limited. The steep fiscal inequalities between rayons are only partially and ineffectively addressed by the system of transfers. The transfers moreover are heavily negotiated and non-transparent. Thus education finances depend on general income of the rayons, which effectively determines the level of financing. At the same time, however, the role of the rayons in the management of the sector is very limited. The actual spending patterns for Georgian general education schools are very closely related to per capita income of the rayons without the transfers (about 75% of education spending), and to student teacher ratio (about 25% of education spending). The dependence of the education system on rayon wealth is our main empirical finding, and it contradicts widespread belief among Georgian education professionals. It is not surprising therefore that the education sector in poorer and in mountainous rayons with very low student teacher ratio has to adapt to this situation. It responds by reducing the number of teachers per class, thus lowering standards of service delivery despite high per student costs. The first step required to change this situation is to increase budgetary independence and education management role of rayons. Without strong local governments it will not be possible to decentralize Georgian education. Moreover the influence of fiscal inequalities on education finance should be broken by taking it out of general rayon income and by basing it on a per student education grant to rayons (education subvention). This would lead to significant redistribution of public funds in Georgia. Such a move needs to be carefully prepared. It is necessary to subject education subvention to buffer mechanisms, in order to protect rayons from drastic changes to their present education spending patterns. Moreover, Georgia should begin thinking about a per student formula for education subvention, which recognizes unavoidable higher per student costs of providing education in different geographical and social settings.
The decentralisation of educational administration in Indonesia has recently been the focus of much interest throughout the Asia-Pacific region. With its massive population and multi-ethnic social background, Indonesia serves as an interesting example when considering the real impact of decentralized systems on the financing of Junior Secondary Education in developing countries. In this paper, first, the decentralisation scheme and the current financial budgeting system at the school level of junior secondary education in Indonesia are outlined. Second, a quantitative analysis of the unit cost among provinces, districts and schools is detailed. Finally, policy tasks for the further development of decentralised administration will be identified. Even under the former centralised regime, each school or district was operating in a varied way, while it is also true that the process of this diversified financial budgeting was not always a strategic one.
During the last three decades the planning region "Amazônia Legal" with 5 million km2, the world's largest area of tropical forests, endured six phases of regional development programmes with far-reaching state and private activities: 1) National Integration, 2) Polamazônia, 3) Integrated rural development, 4) Grande Carajás, 5) Strategies of sustainable development in the Pilot Programme, 6) Avança Brasil. Consequence of all regional development programmes, with the exception of the Pilot Programme, has been an increasing destruction of tropical forests, comprising 14 % of the total forest area. The new Avança Brasil Mega-Programme, financed mostly by the government, with enormous expansion of infrastructure and complex economic activities, is provoking large environmental impacts, representing a major challenge for the future development of Amazonia. After the abolishment of SUDAM because of fraud and corruption, decentralized regional development will have to satisfy the basic needs of the regional population on the basis of sustainable management of forest resources and the preservation of biodiversity in Amazonia.
This paper compares optimal financial contracts with centralized and decentralized\nfirms. Under centralized contracting headquarters raises funds on behalf of multiple projects and then allocates the funds on the firm’s internal capital market. Under decentralized contracting each project raises funds separately on the external capital market. The benefit of centralization is that headquarters can use excess liquidity from high-cash flow projects to buy continuation rights for low cash-flow projects. This allows headquarters to make greater repayments to investors, which eases financing constraints ex ante. The cost is that headquarters may pool cash flows from several projects, thereby accumulate internal funds, and make follow-up investments without having to return to the capital market. Absent any capital market discipline, however, it is more difficult for investors to force headquarters to pay out funds, which tightens ex-ante financing constraints.
The term "development finance \n institutions" (DFI) encompasses no only government \n development banks, but also nongovernmental micro-finance \n organizations, that match grants to attempt to promote \n community development, decentralization of power, and local \n empowerment. Measures of the social cost of DFIs that \n receive public funds, help to check whether DFIs are good \n uses of public funds, i.e., if the social benefit of a DFI \n exceeds the social cost, then public funds are indeed \n well-spent, further improving social welfare. This report \n describes the measurement of costs but not of benefits; but \n even without knowledge of benefits, knowledge of costs can \n help to adequately spend funds. Two measures of social cost \n are presented: first, the Subsidy Dependence Index (SDI) - \n the ratio of subsidy received to revenue from loans; and, \n subsidy is the social cost of the public funds used to run a \n DFI - which does not discount flows, rather it works in \n short time frames, or when the rate of time preference is \n low; second, the Net Present Cost to Society (NPCs) - like \n standard present-value measures, it discounts cash flows, \n and works in any time frame. Both SDI and NPCs are tools, to \n help establish benchmarks, chart trends, and compare a DFI \n with identical clients, and services. It is stipulated that \n measurement of the social cost of public DFIs matters \n because funds earmarked for development are scarce, while \n subsidies for DFIs could be adequate, provided social \n welfare improves in a broader scale.
The Act No. 221999 on regional government and No. 251999 on the balance of finance between central government and regional government, have vast impact on all aspects of the nation life. The impacts are not only on politic and economic aspects, but they also have logic consequence on the changes of Indonesian education form and system. Based on the rules above, the education process in schools should be independent gradually and will not depend on central government moreover on regional government especially in finance. Consequenly, the quality of school must be improved either in planning or process or outcome aspect. To reach the aimed quality of the schools need a management system that can improve the quality of schools. In this frame, this writing offers the total quality management system as a medium to autonomous education having a certain quality in decentralization era.
Teresa García-Milá, Timothy J. Goodspeed, Therese J. McGuire
As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments bydevolving fiscal responsibility and authority to newly empowered regionaland local governments. Although decentralization in each country proceedsdifferently, a common element tends to be an initially heavy relianceon central government grants to fund regional spending. We develop atheoretical model of regional borrowing decisions in which the incentivesfor regional borrowing depend crucially on how the regions expect thefederal system of finance to evolve. We examine the implications of themodel using data on Spanish regions for the period 1984-1995 and findevidence that regions may be borrowing inefficiently in response toincentives imbedded in the Spanish system of fiscal decentralization.
This article studies the effects of political institutions on inflation. In our view, hyperinflation is the manifestation of a tragedy of commons in a divided society with a weak central monetary authority. Economies with fiat money are inherently inflation-prone: the collection of seigniorage through the inflation tax is less conspicuous than other taxes, and the printing of money is essentially costless. In many countries, the control of the money supply is de facto or de jure decentralized. Sets of agents (in various regions or interest groups) can effectively pressure the central government to finance their expenditures. As these interest groups pursue their self-interest, they neglect the welfare effects of the inflation tax on individuals in other groups. These elements combine to imply that countries which rely on the inflation tax to meet the resource demands of competing interest groups will typically experience inefficiently (due to negative spillovers) high inflation.
The paper provides information and analysis in support of the Bank's subnational development strategy (GN-2026). The strategy will guide future Bank operations in support of decentralization to address the complex issues countries are facing in their efforts to promote the socioeconomic development in subnational territories. The document is divided in three sections: the first section provides an overview of the decentralization process in Latin America and the Caribbean and sets the stage for an analysis of the key isuues that need to be addresses by the Bank when supporting the decentralization process in the region; the next chapter discusses the challenges confronted by subnational governments. The development of subnational governments is key to improving well-being. The next section focuses on the structure of intergovernmental relations and concludes that a well-designed structure provides subnational governments with incentives to efficiently allocate resources to the most socially profitable uses. The next chapter discusses the governance issues involved in decentralization, while the next section concentrates on the institucional aspects of the institucional aspects of decentralization and concludes that the Bank should emphasize the need for subnational governments to have sufficient institutional capacity at socially acceptable levels of performance. Finally, the last chapter discusses the variety of issues related to financing subnational governments and recommends that the Bank stress the paramount importance of sufficient sources of financing for ensuing good subnational government performance.
Based on cross-country data for up to 78 countries, this paper shows that fiscal decentralization-the assignment of expenditure and revenue mobilization functions to subnational levels of government-is associated with various indicators of governance, such as corruption, rule of law, and government effectiveness. Unlike previous studies in the decentralization/governance literature, which focus primarily on expenditure-based measures of decentralization, the results reported in this paper show that the relationship between decentralization and governance depends on how subnational expenditures are financed. The higher the share in total subnational revenues of nontax revenues and grants and transfers from higher levels of government, the stronger the association between decentralization and governance.
This paper analyzes financial dual track in China. We show that the co-existence of a soft-budget track (under centralized financing) and a hard-budget track (under decentralized financing) can be strictly more efficient than the two pure cases. Our argument is as follows. First, a hard budget constraint alone is not sufficient to induce sound firm performances, positive incentives in terms of firms' profitability are needed as well. Second, for an economy such as China where many firms are hopeless money losers, there is pecuniary externality in financing. That is, the total number of firms financed into operation in the economy can affect the profitability of all firms. This paper offers a number of examples of such externality. In such an economy, centralized financing helps internalize the externality, improving firms' profitability, and yet it leads to a soft budget constraint. Under decentralized financing, budget constraint is hard, but firms suffer from low profitability. A financial dual track does better: the existence of the soft-budget sector improves profitability, enhancing the disciplinary effect in the hard-budget sector. Based on this analysis, the paper sheds light on the complementary relation between soft budget constraint syndrome in the state sector and the remarkable growth of the non-state sector in China
After the 1988 Constitution, as a consequence of an unplanned decentralization process, the increase of social expenditures by local governments has contributed to aggravate the financial situation of these governments. This aggravation poses a serious problem to the financing of social policies, thus threatening their future implementation and implying the worsening of social inequalities. This paper discusses the decentralization process of public policies and the federative equilibrium in Brazil.
The note focuses on the leading role of \n local level institutions (LLIs) in Burkina Faso, in rural \n decentralization, and poverty eradication, to enhance \n equitable prosperity. It is based on the study undertaken by \n the National Decentralization Commission in Burkina Faso, \n which draws on case studies in Sanmatenga, Sissili, Houet, \n and Yatenga, and, presents sociological evidence that \n certain high-performing LLIs contribute to equitable \n economic development. Economic findings support this, \n showing that both lower inequality levels, and lower poverty \n levels, are linked to a high degree of internal village \n organization. Contextually, LLIs surround, connect, and \n manage communities, incorporating many different kinds of \n indigenous organizations, and functions. Three categories of \n institutions active at the local level are identified: value \n institutions, which focus on activating, and maintaining the \n stability of local governance, and values of the society; \n production institutions, focused on accessing resources from \n the national government, so as to increase productivity; \n and, service-asset management institutions, which integrate \n productivity, and growth values, focused on managing, and \n expanding local assets for sustainable development. External \n aid will need to map these LLIs to guide pro-poor \n investment, and financing of community driven development, \n and encourage local governments to formalize participation.