Rents from natural resources can alter the relationship between central and local governments by providing a new source of government financing. We develop a model to explore the relationship between fiscal decentralization and resource abundance. Our model indicates that natural resource rents can detach central government expenditures from the tax base so that the central government can spend more to persuade a fractious periphery to remain under central government control. Thus, other things being equal, higher natural resource rents can result in less decentralized government expenditures. We empirically explore the relationship between fiscal decentralization and natural resource rents using a panel of 60 countries over the past 40 years. Empirical results support our economic model: A 1% increase in natural resource rents as a fraction of gross domestic product results in government expenditures that are 0.53% less decentralized.
This chapter examines the fiscal structure of the Brazilian from 1822 to 1930 to ask how the government proposed to pay for the public goods mandated in its political documents. It shows that Brazil established a century-long practice of relying on indirect taxes on the circulation of goods and services and on wealth transfers to pay for public goods. This reliance on indirect taxes increased the cost of goods and services, while their regressive nature placed the greatest fiscal burden on those with the least. Moreover, Brazilâs fiscal structure disproportionately channeled public finance to the national government, and then favored the state government, depriving municipalities of resources necessary to fulfill their extensive mandate. Finally, because taxes and fees on the local economy financed local government, the ability to investment in the quality of life to raise standards of living varied from community to community. The institutional shift from highly centralized empire when municipalities had no fiscal autonomy (1822-1930) to decentralized republic when municipalities had nearly complete autonomy (1890-1930) did not alter these fundamental characteristics. The chapter details the sources and evolution of revenue streams for the seven municipalities, demonstrating their inadequacy to satisfy local requirements of public goods investments.
This paper considers growing fiscal capacity of the European early modern states as contingent to taxpayerâs consent in higher tax loads. It puts forward the hypothesis that war damages were the main factor guiding the taxpayerâs cost-benefit assessment of consenting or violently resisting to a fiscal innovation. To test the hypotheses, we consider data on Portugal in times of political struggle against the Habsburgs to restore and keep the political autonomy after 1640. The war was financed by an entirely new, universal income tax, remaining in the Portuguese fiscal system well until the liberal revolution in 1820, although enforced by a decentralized and nonspecialized administration. A model derives the optimal tax rate from the standpoint of the taxpayer as a function of war intensity, risk aversion, and awareness that evasion would enhance war damages. Data on damages, contemporary assessments of the tax base, and amounts enforced allow the modelâs calibration. Results suggest the accuracy of the hypothesis and draw the conclusion that taxpayersâ utility in paying the new tax determined the efective tax rate (tax enforced). This paper claims that ultimately improvements in the fiscal capacity of states needed taxpayerâs perception of high levels of destruction, hence any political regime in early modern Europe must have found in war damages a persuasive argument to make efective a fiscal innovation. The other contribution of this case study is pointing out the advantage of the assignment of the tax collection to local, non-professional administration, for the endurance of a fiscal system, which incorporated an income tax that withstood the liberal revolution. It enhanced the role of peer monitoring and turned out to be an efective way of instilling social norms contributing to build up the taxpayerâs liability, which somehow the liberal state in 19th century exploited within a different technological environment.
The relationship between economic growth, growth volatility and financial sector development continues to attract attention in the theoretical and empirical literature. Over time, some studies hypothesize that finance has a causal linear relationship with growth. Recently several other authors contradict this claim and argue that the relationship that exists between finance and growth is nonlinear. We investigate these claims for Nigeria for the period between 1970 and 2015, using semi-parametric econometric methods, Hansen sample splitting techniques and threshold estimator. We observed no evidence of ‘Too much finance’ as claimed by many researchers in recent times. We show that the relationship between financial development and economic growth is U-shaped. This is equally true for the relationship between financial development and growth volatility. We also discuss policy implications of our findings and recommend financial innovations and decentralization of stock exchanges to boost access to financial services, in addition, improved regulation to enhance financial market efficiency.
This paper examines the impact of fiscal decentralization on both public investment in innovation (measured as the share of research and development - R&D - spending in total government budget) and on the intensity of basic research within the public R&D bundle. We present a theoretical model where a âbenevolent governmentâ invests in R&D aiming at maximizing net income available in the country (central government) or in the respective region (subnational government), where states compete to attract capital investment, and where R&D results are subject to interregional knowledge spillovers. The model predicts that decentralization leads to a lower level of public spending on innovation and to a lower share of basic research in government R&D budgets. The implications of the model are empirically tested utilizing country aggregate data. We find evidence that expenditure decentralization leads to lower intensity of basic research within public R&D and that both revenue and expenditure decentralization negatively affect the size of innovation spending. The findings suggest that fiscal decentralization policy, expected to be beneficial in many other dimensions, should be accompanied by measures to compensate for the otherwise decrease in innovation spending and that the assignment of expenditure responsibilities should have central government play a greater role in financing and carrying out basic research.
DarĂo Cestau, Burton Hollifield, Dan Li, Norman SchĂŒrhoff
The effective functioning of the municipal bond market is crucial for the provision of public services, as it is the largest capital market for state and municipal issuers. Prior research has documented tax, credit, liquidity, and segmentation effects in municipal bonds. Recent regulatory initiatives to improve transparency have made granular trade data available to researchers, rendering the municipal bond market a natural laboratory for the study of financial intermediation, asset pricing in decentralized markets, and local public finance. Trade-by-trade studies have found large trading costs, contemporaneous price dispersion, and other deviations from the law of one price. More research is required to understand optimal market design and the impact of post-crisis regulation, sustainability, and financial technology.
This paper discusses how decentralized countries can achieve sound fiscal relations between the central government and lower government levels. The concepts of âvertical gapâ and âvertical balanceâ provide an analytical framework for identifying and addressing key challenges. These concepts can help policymakers ensure that the financing of subnational governments (composed of transfers received from the center, own revenues, and borrowing) is both efficient and adequate given the allocation of spending responsibilities. More generally, the paper offers some perspectives about the optimal design of decentralization systems by examining the sequencing and economic principles underlying revenue and expenditure assignments, the use of transfers, and borrowing.
This article generalizes arguments and counter-arguments within the scientific discussion regarding the determination of the optimal decentralization level, which will provide the countryâs innovative development, since the key task of decentralization has to be not only to expand the income and expenditure powers of the subnational formations but also to understand the final goal of this process â qualitative transformation of the countryâs economic system towards improving its innovativeness and competitiveness. Thus, the decentralization reform has to be the driver of the innovative economic development, which is the expected result of the managerial decision-making freedom increase at the local level, the subnational formationsâ financial self-sufficiency increase and more effective spending policy (expansion of the innovative projects financing amounts that will promote the sustainable economic growth). Systematization of the scientific works on the above problems proves that there is no one idea regarding the decentralization impact on the countryâs economic and innovative development among scientists. That is why it is urgent to continue the empirical searching in this area, that will enable to take into account the dual nature of consequences regarding the activation of the decentralization processes. The empirical study is carried out through using of the non-linear analysis form of dependence (GLM regression, which enables to identify the linear and nonlinear character of the relationship between variables) based on the panel data, formed for set of 23 states-OECD members (Austria, Belgium, Canada, the Czech Republic, Denmark, Estonia, Finland, France Germany, Greece, Hungary, Italy, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Great Britain and the USA) during 2002-2015. The expenditure decentralization index, calculated as the ratio between the consolidated expenses amount at the subnational level and state consolidated expenses, expressed in parts of the whole, is chosen as the factorial variable model. The final variable (traditional for the economic growth models) is GDP per capita (dollars the USA). Besides, the set of control variables is added to this regression model (which explain the regularities of the resultative feature change and have a strong relationship with it). The control variables are selected on the basis of correlation analysis. The practical implementation of all stages in this research is performed using the software product Stata 12/SE. The results of the study confirm the non-linear character of dependence (the inverse U-shape) regarding the GDP change per capita on the expenditure decentralization level change, and also the maximum extremum of the function in the point with expenditure decentralization level 1.35. It means that excessive expenses load (above the specified norm) on the local budgets will be accompanied by inhibition of the innovative and economic dynamics, that should be taken into account by the relevant authorized executive bodies in investigation of the concrete measures regarding intergovernmental relationships reforming in direction of their decentralization, and in the formation of the well-balanced economic and innovative policies.
The success of federalism in multiethnic societies greatly depends on fiscal decentralization. It empowers the provincial governments along with the local bodies at the grass root level. In this perspective fiscal decentralization needs structural arrangements in order to ensure revenue generation and appropriate expenditures. It helps to strengthen the national grid to avoid inter-provincial or intra-provincial discrepancies. This study illustrates the relationship between fiscal devolution and symmetrical horizontal economic development. It envisages the devolution plan (2001) introduced by former General Pervez Mushraff in Pakistan under which the Provincial Finance Commissions were established. This research would focus on Punjab as a case study to analyze the working of Provincial Finance Commission. This research tends to address the questions like what have been the patterns of fiscal decentralization in Pakistan? Did National Finance Commission and Provincial Finance Commission promote the principles of equitable devolution of resources in the divisible pool on the basis of need assessment? Could PFC be able to mitigate the intra-provincial disparities in Punjab? Did PFC take efficiency advantage in Punjab through the empowerment of local governments? This study would encompass the analysis of the resource allocation formula opted by the successive governments in the past till present and the counter arguments by the academia and the local body members. Qualitative and quantitative both methods would be used while incorporating primary as well secondary sources. This research concludes with the proposition that empowered local bodies and effective finance commission are the sine qua non of fiscal decentralization in democratic state like Pakistan.
<strong>Abstract</strong><br> Many reforms have been undertaken in local governance after the collapse of the<br> totalitarian, centrist and bureaucratic regimes in Central and Eastern Europe. Albania<br> has demonstrated that decentralization is a major development tool. More than two<br> decades of decentralization activities have revealed that the decentralization process has<br> brought about changes in the operation of institutions and delivery of services, even<br> though this change has taken place gradually. Fiscal decentralization is one of the three<br> dimensions that characterize the decentralization process. Local finance issues are an<br> everyday topic in countries in transition and should be addressed by means of an approach<br> that favors consolidation of local autonomy. Local governments in Albania have lacked,<br> and continue to lack, the fiscal capacity to deliver on the promise of decentralization<br> to improve public services and to promote and nurture local economic development.<br> Decentralization can promote economic development and improve citizensâ welfare<br> and living standards when service delivery and the quality of the decisions over how<br> public resources are deployed are improved, but local governments remain hampered<br> by inadequate transfers from the central government and from restraints imposed on<br> various revenue-generating options. However, inadequate financial instruments,<br> especially those of intergovernmental transfers, have affected regional disparities. In this<br> paper, through comparative analysis, analyzing a part of the Region (Qark) of Lezhaâs<br> LGUs, economic development indicators, will approve the need for reform of these LGUsâ<br> financial instruments in order to narrow the gap of regional disparities in Albania.
The Albanian government has been decentralizing decision making. Central to decentralization is a system of intergovernmental revenue transfers, especially unconditional transfers. This study examines in what ways market conditions and policy options affect the central government and local government relationship. It analyzes unconditional intergovernmental revenue transfers between the central government and local governments to better understand Albanian fiscal decentralization. While the unconditional intergovernmental transfers during the time of this study were found to be stable, the fragmentation of local government units and the evolving role of the regions, could complicate decentralization. The lack of a clear path to local government debt and borrowing, coupled with the system of intergovernmental transfers, has resulted in few viable policy options for balancing local government budgets. A more diversified local revenue structure, coupled with the ability to borrow on the open market, could allow larger and better growth-enhancing public investments without additional budgetary pressures.
INTRODUCTION Discrete-time, infinite-horizon, general equilibrium models are routinely used in macroeconomics and in public finance for exploring the quantitative features of model economies and for counterfactual policy analysis. With the development of powerful desktop computers, economists have started to use modern numerical methods for integration, interpolation, and for solving nonlinear systems of equations. Depending on the exact specification of the model â for example, whether there is one representative agent or several agents, whether agents are finitely lived or infinitely lived, or whether there is uncertainty in the model or not â there are various computational methods for approximating equilibria numerically. This paper focuses on computational methods for stochastic equilibrium models with heterogeneous agents and aggregate uncertainty where the welfare theorems fail and the equilibrium allocation cannot be decentralized by a simple (convex) social planner problem. These could be models with overlapping generations (as in, e.g., Krueger and Kubler, 2006; Favilukis et al., 2010; or Harenberg and Ludwig, 2014), models with heterogeneous producers (as in, e.g., Khan and Thomas, 2013 or Bloom et al., 2012), or models with infinitely lived heterogeneous consumers (as in, e.g, Bhandari et al., 2013; Brumm et al., 2015; Chien et al., 2011; Krueger et al., 2015; or McKay and Reis, 2013). There are many excellent surveys on the computation of equilibria in these models and we will discuss the most popular methods briefly below. Instead of comparing those methods in detail, the main part of this paper focuses on a particular high-performance computing (HPC) approach for solving models with large heterogeneity. This approach was first introduced in Brumm and Scheidegger (2017) and we will expand it in this paper to tackle models with overlapping generations and with idiosyncratic risk. Our approach makes use of two recent developments in scientific computing. First, advances in numerical analysis enable researchers to approximate very-high-dimensional functions. Employing standard discretization methods for the domain of such functions is computationally infeasible, as these approaches yield too many gridpoints at which the functions have to be evaluated.
It is well-known that competition for factors of production, including competition for residents, affects the public services provided in the communities. This paper considers the determination of local investment in urban transport systems. Many specialists question the effectiveness of the current U.S. top-to-bottom transportation institutional arrangement in which the federal government plays a dominant role and recommend a shift toward a decentralized organization. We examine how such a shift would affect the levels of transport investment. Specifically, we consider a model of two cities, and assume, as in Brueckner and Selod (2006), that transport systems are characterized by different time and money costs. We compare the outcomes reached when the transport system is decided by a central authority (a state or federal government) to the one decided by each jurisdiction in a decentralized way. In the latter case, city or local transportation authorities choose the system that maximizes residents? welfare, taking as given the decisions made elsewhere, essentially competing for residents (or workers). Our analysis shows that even though a shift toward a decentralized arrangement of the transportation system would generally lead to overinvestment (relative to the centralized case), the extent of this bias depends on the specific factors that drive transport authorities in deciding the transportation system, on the landownership structure, and on the financing arrangements in place. The paper also shows that, in a more general setup, when the two cities differ in their productivity levels, the more productive city will tend to overinvest in transportation systems that connect the two cities, and the less productive city will tend to underinvest in those systems.
Sustainable and inclusive growth in emerging Asian economies requires continued high levels of public sector investment in areas such as infrastructure, education, health, and social services. These responsibilities, especially with regard to infrastructure investment, need to be devolved increasingly to the regional government level. However, growth of sources of revenue and financing for local governments has not necessarily kept pace, forcing them, in some cases, to increase borrowing or cut spending below needed levels. This chapter reviews alternative models of the relationship between central and local governments, and provides an overview and assessment of different financing mechanisms for local governments, including tax revenues, central government transfers, bank loans, and bond issuance, with a focus on the context of emerging Asian economies. The chapter also reviews financing mechanisms for local governments and mechanisms for maintaining fiscal stability and sustainability at both the central and local government levels. Based upon the evidence on the decentralization process in Asia, it proposes some policy implications for improving centralâlocal government relations and fiscal sustainability.
There are two distinct but related elements that have been put forward as arguments in favour of greater role for local governments in delivering public services. The first is the extensive literature on âfiscal decentralizationâ following the works of Tiebout (1956), Oats (1972) and others. This line of argument has been reviewed intensively by various studies. However, the other element that has received relatively little attention from economists working in the area of public finance is the recent literature on public service delivery lays great emphasis on fixing the governance and accountability of service provision â especially in health and education. Pritchett and Pande (2006) put forward the proposition that âeffective decentralizationâ (in the context of elementary education in India) will not be possible until the principles of public finance are harmonized with the principles of accountability in the design of the decentralization strategy itself. It is currently the accepted wisdom that decentralization provides an answer to increasing participation of the users (âvoiceâ) and enhancing monitoring by the community or the user group at the service provider level (âclient powerâ). In that sense, there is a direct line of accountability between the decentralized institutions. Following the analytical framework discussed in Chapter 1, laid down by the World Development Report (2004), we can visualize the accountability framework below: There are four basic external elements of accountability corresponding to citizens (or clients), the state (politicians/policymakers) and service providers (education/health) â voice, compact, management and client power. In the general case, citizens elect their representatives to national/state legislatures, who are in a compact with service providers made up of national or state government employees. The latter are supposed to provide service to the citizens in terms of delivery of education and health care. However, in this model, the route to accountability is âlongâ, implying that if the citizens are not satisfied with the service providers, they would need to wait until the next electoral cycle to vote on their preferences. Citizens can exercise little control over the compact and, therefore, suffer from weak client power.
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Ghanaâs industrial sector has evolved with the various stages of political and economic reforms since independence in 1957. Efforts to decentralize its key institutions to enhance economic growth has seen very little success especially in the area of linking industries to local institutions. Recently, the economy has been dampened by worsening macroeconomic environment, huge regional disparities and power crises. A number of policy and programme initiatives by the government have been undertaken especially in the area of revamping the local economies through the existing decentralized systems. This paper presents a critical review of the role of decentralized institutions in industrialisation in Ghana. The paper utilises annual data from the Ministry of Finance and Ghana Statistical Service from 1981 to date to show trends in growth patterns in the selected indicators.Despite key interventions, some regions in Ghana have failed to develop. The envisioned industrial geographical dispersion has not been realised as we find many Ghanaian industries concentrated in a few regions. The paper highlights the challenges facing Ghanaâs decentralized institutions and identifies the opportunities that can catalyse the growth of Ghanaâs industrial sector if key policy strategic reforms are undertaken. An industrial-led growth will ensure that the manufacturing sub-sector will be boosted to improve production and provide jobs. Industrialisation has been projected at the forefront of governmentâs development agenda. The paper provides a review that highlights the need to support decentralised institutions to enable them stimulate investment in industrial sector.
Ministry of National Development Planning, Alen Ermanita
For more than a decade, Indonesia has been practicing decentralization. During this period, local governments still experience difficulties in generating local revenues to fund their development. Local government bonds (LGBs) are actually one of the finest sources for financing local development. However, until now there is no real practice in issuing local bonds in Indonesia though it is allowed in the existing regulation. There are still many considerations which hindered the realization of LGB issuance ranging from the rule of mechanism to the local governmentsâ readiness themselves. To gain more insights about the issue, learning from another country (in this case: Japan) on how they manage LGBs effectively and securely will be beneficial. Comparison model between the two countries is chosen to see the regulation and managerial aspects in LGB implementation including the main institution in central level, rules of the game, buyers and purposes. By having this comparison, it is expected that some crucial factors can be looked at, which may then provide us some information on why LGBs are yet to bloom in Indonesia. Moreover, the comparison is expected to provide some basics about the possibility to ease policy adoption for Indonesia in managing LGBs.