Conventional wisdom postulates that there are benefits from decentralizing government finances but there is little empirical evidence about actual country practices. This paper presents data on fiscal decentralization for about 80 countries over a period of about 20 years (1990-2008) from the IMF’s Government Finance Statistics Yearbook (GFSY), the only global database with fiscal data for several levels of government. The data show that in many countries, revenue collection remains relatively more centralized than expenditures and that employment tends to be concentrated in lower levels of government. Except for transition economies, the levels of decentralization are relatively stable over the time period. The findings are shown by degree of economic development, constitutional power arrangements, and geographic area, broadly confirming key factors identified in the literature as determining the extent of fiscal decentralization.
These essays comprehensively cover key aspects of fiscal federalism in India both in theoretical and empirical terms. An analysis of experiences and challenges of fiscal federalism as it evolved over the last sixty years since the First Finance Commission-reveals the emerging patterns in transfer of resources from the centre to the states. Management of Central and state finances relating to sustainability of debt and fiscal deficit is also an important aspect of the present discussion. Attention is drawn to the re-emergence of high levels of fiscal imbalance and the implementation of fiscal decentralization in India, particularly in the light of the recommendations by the Thirteenth Finance Commission. Comparison with two developed federal systems in the world, the Canadian and the Australian systems, is an important feature of this study.
Claudia Dziobek, Miguel Alves, Majdeline El Rayess, Carlos Alberto Gutierrez Mangas · 5 authors
A useful but little known feature of the IMF’s Government Finance Statistics Yearbook (GFSY) is the information on the structure of governments. Institutional tables, included in the GFSY, provide detail on the central, state, and local levels of governments, social security, and extrabudgetary units. We refer to the main levels of government as GL1, GL2, and GL3 in ascending order of institutional coverage. We present maps of the various levels of government for 74 countries to illustrate the usefulness of this database and make it more accessible to users. The maps provide information about how centralized or decentralized government finances and employment are and their size relative to the overall economy. Government map data facilitate the monitoring of fiscal policy and fiscal rules.
We contribute to the literature on the political determinants of regional financing by analyzing the case of Spain, a largely decentralized country. Using a dynamic panel data model, we argue that the rise in relative bargaining power of regional parties in Spain can partly explain the increase in budgetary allocations to regions observed during the period 1986 – 2006. In particular, our results show that the rise in parliamentary representation of the nationalist Catalonian party, measured by the Banzhaf voting power index, has been a significant factor in ensuring increasing financial resources to regional governments. In addition, the traditional hypotheses of the political economy literature on legislative apportionment are tested for the case of Spain, with no significant results observed. The overall distribution of regional financing in Spain seems to be in general well aligned with the basic economic principles of efficiency and equity recommended for such a system.
Claudia Dziobek, Carlos Alberto Gutierrez Mangas, Phebby Kufa
Conventional wisdom postulates that there are benefits from decentralizing government finances but there is little empirical evidence about actual country practices. This paper presents data on fiscal decentralization for about 80 countries over a period of about 20 years (1990 - 2008) from the IMF’s Government Finance Statistics Yearbook (GFSY), the only global database with fiscal data for several levels of government. The data show that in many countries, revenue collection remains relatively more centralized than expenditures and that employment tends to be concentrated in lower levels of government. Except for transition economies, the levels of decentralization are relatively stable over the time period. The findings are shown by degree of economic development, constitutional power arrangements, and geographic area, broadly confirming key factors identified in the literature as determining the extent of fiscal decentralization.
Man-made self-organizing systems date back to antiquity; for example, elaborate water clocks found from Alexandria (Ctesibius's clepsydra) to Seoul (King Sejong's Chagyongnu) were designed to keep constant rates or strike at regular time intervals without human adjustment. More modern examples include Watt's centrifugal governor, Black's negative feedback amplifier, and Nyquist's stability test, which enabled engineered systems to stabilize themselves. These and numerous innovations in control theory and engineering optimization have contributed much to modern communications technology. But there is a need for advances in both methods and applications beyond what has been achieved in the precise settings of mechanical, electronic, and optical switching and transmission towards the self-management and control of large-scale systems with many interacting and semi-autonomous components. Natural phenomena may be a guide for us, a model for self-organized decentralized systems. Spontaneous magnetization, crystallization, lasers, and superconductivity are examples of structural self-organization in physics where cohesive behavior emerges from initial disorder. In self-assembly and auto-catalytic networks in chemistry, molecules organize themselves in well-ordered arrangements without external action, and in biology, we observe highly complex coordinated action as in the folding of proteins, homeostasis, and flocking.
Rural local governments in India provide essential services to over 70 percent of the national population. Yet, little is known about the efficacy of the financing system that supports these local governments, nor is there a fiscal information system that will allow a tracking of rural local government expenditures and revenues. In this article, we describe the role of rural local governments in India's; federal system, and use a database, newly gathered for West Bengal State, to present an analysis of rural local government financing patterns. We find that expenditures are significantly higher in less populated and more backward gram panchayats. At the margin, however, higher rates of literacy also are associated with higher levels of spending, suggesting an education effect.
This study is intended to examine the influence of the current worldwide financial and economic crisis on financial decentralization process in Bulgaria and identify the answers of the central and lo-cal governments to the critical situation in the context of specific conditions of the national economy and the stage of financial decentralization reform. Analysis is focused on dynamics of the main mac-roeconomic indicators, based on fact figures for the period 1990–2009 and forecast for the period 2010-2011, and its impact on the public finance. The most important actions, taken by the national government to consolidate the crisis are described and evaluated on the base of their effects on the lo-cal finance. A comparison is made between the loss of Bulgarian economy in the beginning of transition (1991-1993), during the financial crisis in 1996-1997, caused by credit crunch and series of bank bankruptcies, and the current financial and economic crisis. Finally, some conclusions and pol-icy recommendations are outlined, intended to improve crisis management in Bulgaria both on the national and local level.
Local governments can make an important contribution to public well-being through the execution of local government policies and the delivery of public services that are important to the local citizens. For this reason, through the local budgets are financed the public goods that are selected to be more important. But if the own revenues of the local budgets are low, the local authorities are dependent on the central ones, fact that affect the allocation of resources by the destinations. Because of the unlimited needs, the local governments search for alternative sources of financing, like bank loans, loans from the capital market, leasing, using some collaboration formulas with the private sector, like public-private partnerships and other financing forms. In a analysis on Romanian case, we shows that a greater level of decentralization give to local governments greater possibilities to cover local needs by attracting new resources, also from alternative ways.
Fiscal federalism has been an important topic among public finance theorists in the last four decades. There is a series of arguments that decentralization of governments enhances growth by improving allocation efficiency. However, the empirical studies have shown mixed results for industrialized and developing countries and some of them have demonstrated that there might be a threshold level of economic development below which decentralization is not effective. Developing and transition countries have developed a variety of forms of fiscal decentralization as a possible strategy to achieve effective and efficient governmental structures. A generalized principle of decentralization due to the country specific circumstances does not exist. Therefore, decentralization has taken place in different forms in various countries at different times, and even exactly the same extent of decentralization may have had different impacts under different conditions. The purpose of this study is to investigate the current state of the fiscal decentralization in Mongolia and to develop policy recommendations for the efficient and effective intergovernmental fiscal relations system for Mongolia. Within this perspective the analysis concentrates on the scope and structure of the public sector, the expenditure and revenue assignment as well as on the design of the intergovernmental transfer and sub-national borrowing. The study is based on data for twenty-one provinces and the capital city of Mongolia for the period from 2000 to 2009. As a former socialist country Mongolia has had a highly centralized governmental sector. The result of the analysis below revealed that the Mongolia has introduced a number of decentralization measures, which followed a top down approach and were slowly implemented without any integrated decentralization strategy in the last decade. As a result Mongolia became de-concentrated state with fiscal centralization. The revenue assignment is lacking a very important element, for instance significant revenue autonomy given to sub-national governments, which is vital for the efficient service delivery at the local level. According to the current assignments of the expenditure and revenue responsibilities most of the provinces are unable to provide a certain national standard of public goods supply. Hence, intergovernmental transfers from the central jurisdiction to the sub-national jurisdictions play an important role for the equalization of the vertical and horizontal imbalances in Mongolia. The critical problem associated with intergovernmental transfers is that there is not a stable, predictable and transparent system of transfer allocation. The amount of transfers to sub-national governments is determined largely by political decisions on ad hoc basis and disregards local differences in needs and fiscal capacity. Thus a fiscal equalization system based on the fiscal needs of the provinces should be implemented. The equalization transfers will at least partly offset the regional disparities in revenues and enable the sub-national governments to provide a national minimum standard of local public goods.
Tax increment financing (TIF) is the most widely used local government program for financing economic development in the United States, but the proliferation of TIF is puzzling. TIF was originally created to support urban renewal programs and was narrowly focused on addressing urban blight, yet now it is used in areas that are plainly unblighted. TIF brings in no outside money and provides no new revenue-raising authority. There is little clear evidence that TIF has done much to help the municipalities that use it, and it is also a source of intergovernmental tension and a site of conflict over the scope of public aid to the private sector. Yet, the expansion of TIF makes sense in light of the basic structure of American local government law. Studying TIF can illuminate central features of our local government system. TIF succeeds -- in the sense of its widespread adoption and use -- because it, like local government more generally, is highly decentralized; reflects and reinforces the fiscalization of development policy; plays off the fragmentation of local governments and the resulting interlocal struggle for investment; and fits well with the entrepreneurial spirit characteristic of contemporary local economic development policy. A better understanding of TIF contributes to a better understanding of the political economy of American local government.
*Abhay Pethe is Professor at the Department of Economics, University of Mumbai. B. M. Misra is Adviser and Rakhe.P.B. is Research Officer, Department of Economic Analysis and Policy, Reserve Bank of India. The views expressed in this study are the authors ’ own and do not necessarily reflect views of the organizations to
This report is about the fiscal performance of rural local governments in the state of West Bengal. Specifically, our goal is to develop a comprehensive fiscal information system for all rural local governments, and to use these data to valuate the intergovernmental finance structure in the state. The work is of significant policy importance, given the need to implement programs to respond to the constitutional amendments mandating fiscal decentralization, and to support central and state government initiatives to use the Panchayat Raj Institutions (PRIs) as an important part of its poverty alleviation strategy. A more immediate need in West Bengal (and other states as well) is to support the work of the State Finance Commissions to better integrate rural local governments into the intergovernmental fiscal framework. To date, there has not been a comprehensive review of rural local government finance in West Bengal.
This project tries to look at decentralization of VAT revenue and administration to sub national governments in Ethiopia in light of the international practices. It used individual in-depth interview to collect primary data from Ethiopian revenue and custom Authority (ERCA), Addis Ababa regional city administration tax office and ministry of finance and economic development (MOFED). The methods used for analysis were both qualitative and quantitative. The project discusses the problems in connection with decentralization of VAT administration and assignment of VAT revenue. The project suggests that decentralization of VAT administration needs capable and autonomous regional government and strong central government that could monitor and evaluate decentralization; and the assignment of VAT revenue also needs the central governments' follow up to minimize the distortions and should be applied in consistent with the constitution
The paper intends to analyse a model of decentralization specific to Continental Europe, which shows that a transferof responsibility to the local authorities has not always been appropriately followed by a transfer of resource, the consequencebeing the appearance of budgetary imbalances at the level of local communities. In this situation, the local communities areforced to identify the funding source and, therefore, they have used the most rapid instruments provided by the law and thefinancial institutions – the borrowed sources. As long as the borrowed funding sources have been used to the restoration of thepublic infrastructure and, therefore, to the public investments, the solutions identified by the public manager are not to beblamed, the problem being the use of borrowed sources in order to cover certain consumerism needs which illegitimatelycharges, in our opinion, the public cost, the obligation to finance the maturity rates including the interest falling back on thefuture generations.
In most local developing settings, the political leader and the municipal manager are embodied in the same figure, the directly elected mayor. This research explores the impact of mayoral quality on local public finances in a developing country. Mayoral quality is operationalized as educational background and job‐related expertise to analyze its impact on two local financial indicators: property tax collection and social spending per capita. The mayoral quality thesis is tested across 40 Colombian municipalities over five years (2000–2004). After considering other political, economic, and external influences, the findings reveal that mayoral quality is associated with greater property tax collection and more social spending per capita. This positive influence, however, decreases under external constraints—such as presence of illegal armed groups. This study demonstrates how much influence the mayor can have when circumstances permit. The findings point to the significance of electing qualified mayors, as decentralization may not directly improve subnational finance. Instead, through decentralization, qualified mayors contribute to improved local public finance.
This article empirically examines the interaction mechanism between fixed capital formation and government investment in an intertemporal framework,employing data on China and Japan.We found that although China and Japan both implement fiscal decentralization,the respective mechanisms through which economic development and investment are boosted are quite different.While correlation between the growth rate of GDP and capital formation is weak in Japan,its central government investment stimulates the formation of capital.In China,local governments have played an irreplaceable role in the formation of public and fixed capital.The paper makes a comprehensive and comparative study of the fiscal systems in China and Japan in terms of the demand,supply,financing and efficiency of public investment.The better performance of Japan's public investment should be attributed to its effective incentive mechanism,under which local governments are encouraged to invest to build good infrastructure for economic growth.
Decentralization reforms in CEE countries have been an essential component of the overall transformation process that took place after the collapse of the former communist regimes. It entered public thought as a panacea to the political, economical and social problems that emerged because of and during the transformation. It also featured prominently in social policy reforms, particularly in the case of social assistance. Local government involvement in the financing and administration of social assistance schemes has been widely promoted by various international organizations as holding the key to reducing the financial cost of such schemes through improved targeting. However, the theory of fiscal federalism provides us with sound theoretical arguments against decentralization of social assistance. According to this theoretical framework, fundamental constraints on redistribution by lower level governments would negatively affect the generosity of poverty relief systems and facilitate a ‘race to the bottom’.
This paper provides an in-depth analysis of the relationship between fiscal decentralization and pro-poor outcomes based on the role of fiscal incentives. The literature on the relationship between fiscal decentralization and pro-poor outcomes is not well established in this area. A conceptual model is developed to explore in more detail this relationship, while endeavoring to illuminate the complexity of the issues involved for policy makers in developing countries. Four types of fiscal incentives are explored: namely, resources, responsibility, autonomy, and accountability. The paper then assesses the effectiveness of the Vietnamese system of fiscal decentralization for achieving pro-poor outcomes through a devolved system of fiscal incentives. The paper suggests that evidence from the Vietnamese case indicates that fiscal decentralization may contribute to poverty reduction outcomes, but does not provide evidence that fiscal decentralization is in and of itself inherently pro-poor. Rather, the lesson from Viet Nam is that if poverty reduction is an explicit objective for government, the system of fiscal decentralization should target pro-poor outcomes through an appropriate system of fiscal incentives. Since 2002, budgetary reallocation and income redistribution linked to poverty outcomes has been more strongly associated with equalizing fiscal transfers than with devolved finances in general. This represents a broadly correct approach to target poverty outcomes in a territorially unbalanced country like Viet Nam. Targeted transfers contribute to pro-poor outcomes by increasing the level of resources available to finance poverty spending. However, increasing the level of fiscal transfers for poverty spending will not ensure that fiscal transfers are then spent efficiently. In order to better realize these efficiency objectives, the government can promote greater fiscal and administrative decentralization of resources and responsibility to district- and commune-level governments. Further gains in this area must also be supported by greater levels of fiscal autonomy and fiscal accountability at the local government level.
:This paper aims to show how state intervention within the European Monetary Union can have positive effects not only on growth but also on public balances and debt. The relation between centralized monetary policy and decentralized fiscal policy partly solves the lack of coordination between the two. Each time a fiscal expansion in an EU country is not accompanied by a Central Bank interest rate increase, the expansionary effect of public spending, initially financed through the emission of public bonds, will be reinforced by endogenous money creation due to the increase in growth. The final result, if growth exceeds the rate of interest, is not only an increase in equilibrium income, but also a reduction in debt.
INTRODUCTION American state and local governmental fiscal institutions present a contrast. Many scholars regard these institutions as dysfunctional: balanced-budget provisions do not produce balanced budgets; debt restrictions do not restrict debt issue; tax and expenditure limitations limit neither taxes nor expenditures; and budget stabilization funds fail to provide budget stabilization. Richard Briffault, for example, concludes “state constitutional debt restrictions have been circumvented by new and creative financing devices that tend to drive up the cost of borrowing, encourage the fragmentation of state governments, and facilitate the evasion of balanced budget requirements.” In contrast, American state and local governments are quite responsible by any reasonable measure of fiscal probity. They borrow large amounts of funds and rarely fail to service or repay their debts. The vast majority of state and local debt is issued to finance infrastructure investments, and American infrastructure is in many respects the best in the world. The decentralized structure of American government, while far from perfect, often is held up as a system of how to constrain the powers of government through the institutional mechanism of federalism. We resolve the apparent contradiction of these two views by looking deeper into the effect of fiscal rules on the structure of American governments. The structure of American state and local governments has changed frequently, if episodically, since 1776. We argue that scholars have failed to appreciate the degree to which fiscal issues have shaped the structure of American state and local government.