Decentralization is the allocation of power between central and lower levels structures of the government. The dimensions and the extent to which powers are transferred from one level to another vary across countries depending on the goal a country wishes to achieve. But one of the common aspects included in the transfer of powers to the lower level structures is financial decentralization. The reason is clear. It makes no sense to transfer power to the lower level structures without finance to execute own decisions. Transfer of financial powers to lower level structures and creating an alignment that support efficient and effective operation of each structure, has often been one of the major challenges in the implementation of decentralization model of government. Tanzania has been one of the victims in this situation. In view of various government reports, since independent in 1961, the several attempt tried by the government to transfer powers to the lower level structures led to either little or no success. The adoption of Decentralization by Devolution (D by D) in 2000 could be considered as the government attempt to correct the existed bottlenecks that led to the failure in the previous initiatives to decentralise. This paper attempts to answer the question: ‘is financial decentralisation realised under the DbyD, and what are the factors that contribute or hamper the financial decentralisation? The paper is based on the research findings presented in Mbogela (2009). The report consisted of descriptive presentation on financial matters from four case councils namely: Mbozi District council, Mbeya City council, Mbeya District council and Morogoro Municipal council. The findings from the four cases are presented, examined and compared. Keywords: Decentralisation by devolution, financial management, Local government authorities.
Decentralization in Indonesia is principally implemented via two laws. Law 32/2004 on Regional Autonomy (original Law 22/1999) restructures the organizational arrangements of the regional government system, with a view to: (1) giving local governments at district and municipal level, greater representation, autonomy and resources; (2) giving emphasis to local knowledge and preferences about development; and (3) providing opportunities for local people to participate in decision making. The companion Law 33/2004 on Fiscal Balance between central and regional governments (original Law 25/1999) focuses on the intergovernmental fiscal system, intending to promote a more equitable distribution of resources, to increase responsiveness and fiscal capacity of local governments at district and municipal level, and to improve social welfare. By their stated objectives, these two laws depict the motives of Indonesia’s ‘Reformasi’ (reform) in 1999, in order to reform a long lasting centralized autocratic regime into a public-participatory democratic system. The outcome of these two key laws on decentralization, and more specifically on the alleviation of poverty, cannot be separated from two features. First, the role of central government transfers to sub-national levels to support the process of decentralization. And second, the commitment of local governments to allocate the resources for developmental purposes and poverty reduction. Although the latter plays a vital role in regards to empowering the poor, the former is equally important as a source of finance to support local governments that are lacking financial competency to perform regional autonomy.
After over thirty years of decentralization in Spain and having to face the acute economic crisis, it may be time to raise new proposals that could increase the economic efficiency by means of increasing the responsible performance of regional demand and supply of public goods and services. This is the context of this article, which is a critical analysis of expenditure and revenue responsibilities in Spain from a comparative law perspective. Regarding the expenditure responsibility, this article highlights the imprecision of the Spanish system and its underdeveloped legal theory and judicial cases on the subject compared to federal states. After a comparative analysis on the revenue responsibility, this article highlights some of the major drawbacksof Spanish system of regional financing, and finally it makes severalproposals addressed to improve the fiscal responsibility of the autonomous communities.
Gover Barja Daza, Sergio Villarroel Böhrt, David Zavaleta Castellón
The second generation fiscal federalism (sGff) approach is used as a reference to analyze the political and fiscal institutional design of Bolivia’s decentralization model and its evolution. subnational public finance data up to 2008 is used to verify that decentralization of expenditure was higher than that of revenue, establishing a context of vertical fiscal imbalance that increased due to growing fiscal transfers during the positive external shock (boom) period. consequently, the subnational fiscal surplus was not a result of internal efficiency but of excess revenues from such transfers. Panel models were estimated to identify and assess the implicit incentives embedded in fiscal institutions of the decentralization model. findings at the municipal level are: i) misalignment of local spending with local interests due to dominance of transfers over own revenue (dominance of central government development policies); ii) incentive to spend transfers faster than own revenue (flypaper effect); iii) greater marginal contribution of own revenue to positive fiscal balances compared to transfers, thus introducing the seed for a soft budget constraint but hidden by the fiscal surplus; iv) disincentive to generate own revenue (tax and non-tax) due to the size and growth of transfers (disincentive to the culture of contributing to own revenue). findings at the prefecturall level are: i) misalignment with regional interests given the dominance of transfers over own revenue due to absolute lack of tax powers (until 2009); ii) high tendency to a soft budget constraint and, eventually, also fiscal bail-out, hidden by the fiscal surplus; iii) in only two departments collection of national-level taxes were higher, compared to transfers received in the same departments; iv) disincentive to pay the VAt (national-level tax) due to higher royalty transfers received, an effect not extended to other national-level taxes; v) high dependence from hydrocarbon-based transfers, and fiscal risk when this natural resource declines (both in volume and prices) due to volatility of international oil prices. Also, as a result of the decentralization model a positive and significant impact was found on education-coverage indicators, an important development objective of the national government.
This paper summarizes the results of a Global Development Network study, carried on by sixteen multidisciplinary research teams and covering thirty developing countries, under the authors general direction, on the effects of different governance structures on the quality and equity of access in three public services: basic education, drinking water supply and roads. Governance reforms analyzed referred mostly to decentralization, formal processes of citizen’s participation and alternative modes of delivery and, within each of them, emphasis was placed on the effects of accountability systems, informational flows and incentive structures. Case studies used both econometric techniques and qualitative analysis based on surveys and structured interviews of policy makers, service providers and users. The impact of governance reforms and alternatives was found to vary significantly with country context, but three major conclusions emerged: 1) Political culture and legacy are the deeper determinants of effective accountability and results. Thus, countries with a history of highly centralized and authoritarian regimes find it harder to make decentralization, participation and competitive modes of delivery work effectively. However, a culture of accountability can be built overtime when adequate institutions and incentives are introduced and maintained overtime; 2) Adequate information flows are not only a necessary condition, but they often promote effective accountability and better results, as they lead citizens and clients to demand accountability and agents to be more responsive to user needs; 3) Self-financing schemes also promote more accountability and better results, as users demand better services when they pay for them and citizens are more demanding (and local authorities are more responsive to their needs) when local taxes finance local services.
Virtual currencies are online payment systems that may function as real currencies but are not issued or backed by central governments. As demonstrated by recent events, virtual currencies present regulators with significant challenges. On May 23, 2013, the U.S. federal government brought an indictment against the operators of Liberty Reserve, a popular virtual currency, charging the operators with money laundering and operating an unlicensed money-transmitting business. The same month, the Government Accountability Office ("GAO") made public a report exploring the potential tax-compliance risks associated with virtual currencies and economies. Legislators have also taken particular interest in one type of virtual currency-Bitcoin. On August 13, 2013, the U.S. Senate Committee on Homeland Security announced plans to start an inquiry aimed at establishing a regulatory framework for Bitcoin. This short Essay describes the mechanisms by which "cryptocurrencies"-a subcategory of virtual currencies-could replace tax havens as the weapon-of-choice for tax-evaders. I argue that it is reasonable to expect this shift to occur in the foreseeable future due to the contemporary convergence of two unrelated, yet parallel, processes. The first process is the increasing popularity of cryptocurrencies, of which Bitcoin is the most widely recognized example. Unlike other virtual currencies that are associated with the existence of a virtual economy-usually in computer games-cryptocurrencies "function as a unique currency with [their] own free-floating exchange." Over the past three years, Bitcoin gradually gained the confidence of consumers, retailers, and service providers, and it is now effectively functioning as a currency in the real world. In fact, in August 2013, Bitcoin was officially recognized as a legal form of tender in Germany. Only two weeks earlier, a federal judge ruled that for purposes of U.S. securities regulation, Bitcoin is indeed "money."
José Roberto Rodrigues Afonso, Sulamis Dain, Vívian Almeida, Kleber Pacheco de Castro · 5 authors
The literature on federalism often evokes an association between redemocratization and decentralization, in which the consolidation of democracy is associated with a strengthening of federalism and a trend towards administrative, political and fiscal decentralization (Souza, 1999). The fact that this is driven by the need to provide resources and supply better-quality public services, makes analysis of the distribution of social spending highly relevant. Accordingly, the aim of this chapter is to analyze the trend of social spending in Latin America. Several Latin American countries have been pursuing an intensive process of fiscal decentralization over the last two decades; and, at the same time, almost the entire region has made changes to its social policies. These two processes reflect, first, the desire to generate allocation efficiency gains, which have an impact on expanding the decision-making, fiscal, and financial autonomy of local governments; and, second, the desire to strengthen democracy. The latter has had repercussions on social policy actions and services, generating broader coverage and higher monetary benefits, together with improved access, expansion of coverage, and the decentralization of jurisdictions and resources for service provision. In some countries, decentralization was seen as a way to resolve institutional problems caused by a loss of resources and the ability of federal governments to finance social policies and restructure service provision, while at the same time adapting to the growing importance of local areas in federative resource sharing and autonomous governance.
The 1991 Local Government Code devolved substantial spending, taxing, and borrowing powers to local government units (LGUs). Moving governance closer to the people can generate a welfare gain, but local governments must have adequate revenues to finance local development. The paper examines the current status of the tax-expenditure assignment and the intergovernmental fiscal relations, and identifies areas for reform. There is a need for a clearer and more accountable assignment of expenditure by eliminating particular sections of the code, which serve as a route for national government agencies to be engaged in devolved activities, and for politicians to insert funding for pet projects, which distort local decision making and preferences. There is need as well to review the tax assignment to improve local revenue generation. The allocation of intergovernmental fiscal transfers may be improved by introducing matching grants to improve equalization transfers to local governments, and performance-based grants to motivate greater local revenue mobilization. Without a clear funding source, unfunded mandates imposed on local governments defeat the purpose of the policy objectives set in those mandates. Local government alliances and cooperative undertaking may provide public goods with interjurisdictional spillover benefits. Consolidation, better coordination of local government activities, and resource pooling for better local service delivery are pathways indicated by successful experiences of LGU collaboration.
Gover Baja Daza, Sergio Villarroel Böhrt, David Zavaleta Castellón
The second generation fiscal federalism (SGFF) approach is used as a reference to analyze the political and fiscal institutional design of Bolivia’s decentralization model and its evolution. Subnational public finance data up to 2008 is used to verify that decentralization of expenditure was higher than that of revenue, establishing a context of vertical fiscal imbalance that increased due to growing fiscal transfers during the positive external shock (boom) period. Consequently, the subnational fiscal surplus was not a result of internal efficiency but of excess revenues from such transfers. Panel models were estimated to identify and assess the implicit incentives embedded in fiscal institutions of the decentralization model. Findings at the municipal level are: i) misalignment of local spending with local interests due to dominance of transfers over own revenue (dominance of central government development policies); ii) incentive to spend transfers faster than own revenue (flypaper effect); iii) greater marginal contribution of own revenue to positive fiscal balances compared to transfers, thus introducing the seed for a soft budget constraint but hidden by the fiscal surplus; iv) disincentive to generate own revenue (tax and non-tax) due to the size and growth of transfers (disincentive to the culture of contributing to own revenue). Findings at the prefectural level are: i) misalignment with regional interests given the dominance of transfers over own revenue due to absolute lack of tax powers (until 2009); ii) high tendency to a soft budget constraint and, eventually, also fiscal bail-out, hidden by the fiscal surplus; iii) in only two departments collection of national-level taxes were higher, compared to transfers received in the same departments; iv) disincentive to pay the VAT (national-level tax) due to higher royalty transfers received, an effect not extended to other national-level taxes; v) high dependence from hydrocarbon-based transfers, and fiscal risk when this natural resource declines (both in volume and prices) due to volatility of international oil prices. Also, as a result of the decentralization model a positive and significant impact was found on education-coverage indicators, an important development objective of the national government.
This dissertation examines local governments’ efforts to promote economic development in Latin America. The research uses a mixed method to explore how cities make decisions to innovate, develop, and finance economic development programs. First, this study provides a comparative analysis of decentralization policies in Argentina and Mexico as a means to gain a better understanding of the degree of autonomy exercised by local governments. Then, it analyzes three local governments each within the province of Santa Fe, Argentina and the State of Guanajuato, Mexico. The principal hypothesis of this dissertation is that if local governments collect more own-source tax revenue, they are more likely to promote economic development and thus, in turn, promote growth for their region. By examining six cities, three of which are in Santa Fe—Rosario, Santa Fe (capital) and Rafaela—and three in Guanajuato—Leon, Guanajuato (capital) and San Miguel de Allende, this dissertation provides a better understanding of public finances and tax collection efforts of local governments in Latin America. Specific attention is paid to each city’s budget authority to raise new revenue and efforts to promote economic development. The research also includes a large statistical dataset of Mexico’s 2,454 municipalities and a regression analysis that evaluates local tax efforts on economic growth, controlling for population, territorial size, and the professional development. In order to generalize these results, the research tests these discoveries by using statistical data gathered from a survey administered to Latin American municipal officials. The dissertation demonstrates that cities, which experience greater fiscal autonomy measured by the collection of more own-source revenue, are better able to stimulate effective economic development programs, and ultimately, create jobs within their communities. The results are bolstered by a large number of interviews, which were conducted with over 100 finance specialists, municipal presidents, and local authorities. The dissertation also includes an in-depth literature review on fiscal federalism, decentralization, debt financing and local development. It concludes with a discussion of the findings of the study and applications for the practice of public administration.
During the past decade, Indonesia has \n transformed itself from centralized governance to \n decentralized local governance. Local governments were given \n extensive expenditure responsibilities while keeping the tax \n system centralized. To finance decentralized \n provincial-local expenditures, Indonesia implemented a new \n system of intergovernmental finance. This paper provides a \n review of the equity and efficiency implications of the \n current system of central-provincial-local transfers. It \n finds that the system of intergovernmental finance \n represents one of the most complex systems ever implemented \n by any government in the world. The system is primarily \n focused on a gap-filling approach to provincial-local \n finance to ensure revenue adequacy and local autonomy but \n without accountability to local residents for service \n delivery performance. This is done through a great degree of \n academic rigor using highly complex procedures. The \n complexity leads to a lack of transparency, inequity and \n uncertainty in allocation as well as creating incentives for \n jurisdictional fragmentation and reducing own-tax effort. \n Simpler alternatives are available that have the potential \n to address equity objectives while also enhancing efficiency \n and citizen-based accountability. Such alternatives would \n represent a move away from complex gap filling and special \n allocation approaches to simple, output based transfers to \n finance operating expenditures. These would be complemented \n by capital grants to deal with infrastructure deficiencies, \n and fiscal capacity equalization as a residual program with \n an explicit standard to ensure that all local jurisdictions \n have adequate means to deliver reasonably comparable levels \n of public services at reasonably comparable levels of tax \n burdens across the country. The paper argues that such an \n alternative system of intergoveernmental finance would \n preserve autonomy, while enhancing equity, simplicity, \n objectivity, transparency and accountability.
A “good” tax system for developing countries was once considered one based on progressive income taxes. More recently, the emphasis has been placed on securing revenues from broader bases at lower rates from consumption as well as income taxes. A framework for evaluating public finance structures and institutions in terms of revenue and spending as well as the fiscal balance is set out, and some key areas such as VAT, earmarking, tax evasion, and administration, and non-tax revenues are discussed. Increased globalization challenges national tax bases and makes it even more important to improve local fiscal expertise and institutions in developing countries. Finally, if local governments are sufficiently reliant on own revenue to promote fiscal discipline, decentralization may produce gains in both efficiency and local accountability that may outweigh any costs that might arise from the loss of some macroeconomic control and altered investment priorities.
In 1601, Elizabeth I and her government devalued the Irish coin from nine ounces fine to three ounces fine of silver in order to finance the high cost of the Nine Years War in Ireland. 1 This unilateral move by the English government, combined with the failure to remove the old sterling from circulation, caused catastrophic problems throughout Ireland. 2 In addition to rapid inflation in common foodstuffs, the people in Ireland would only accept the new coin at its reduced intrinsic value rather than face value. 3 Further, merchants refused to accept the devalued coin in commercial transactions leading to a shortage of vital goods from England. 4
Peru represents a laboratory for examining the different approaches to the centralized or decentralized delivery of public services over the past quarter of a century. There is a renewed and increasing interest in decentralization in Peru as a mechanism to generate more involved decision making at the sub-national level. This is tempered with a continuing emphasis on overall fiscal stability. Learning from the lessons of the ongoing decentralization, there is a recognition that considerable work needs to be undertaken to more clearly define expenditure responsibilities and financing mechanisms that would increase local accountability. In addition, improved expenditure management at all levels of government is needed. The paper suggests that there is a pending work agenda to grasp the benefits of the decentralization process, including the reduction in inequality and poverty across regions.
Decentralization policy in Indonesia has given an increase of authority to local government in managing their own local finance. One of the characteristics of the decentralization policy is to increase local taxing power, with the objective to optimize local own revenue in supporting local spending. Given the current data observation, it is obvious that many local governments do not have significant local own revenue to support their local spending. This paper-adopting tax elasticity method-attempts to evaluate the present local own revenue optimization. Furthermore, by adopting a decomposition of tax elasticity, this paper also attempts to elaborate factors affecting local own revenue collection. The estimated local own revenue elasticity show that most taxes and user charges, which are the main sources of local own revenue, are considered not a buoyant tax. More analysis using a decomposition of tax elasticity shows that tax to base elasticity is weak, suggesting that local governments need to improve discreationary tax changes at local level, such as local base changes, collection changes, and enforcement changes. The analysis also shows that some local tax bases are not responsive to the economic growth, which leads to the recommendation to improve local business environment, such as streamlining local regulations and reducing harmfull local taxes and user charges. Keywords: local finance, local government owned revenue, fiscal decentralization, local tax elasticity, local tax base, nuisance local taxes, local economic growth
This paper studies the impact of access to education in a search and matching model of the labor market representing a developping economy. It then addresses the issue of the impact on the market efficiency of public policies aiming at increasing education. Developing economies are well known for having a large pool of uneducated (low-productive) workers in the informal sector whereas the formal sector captures almost all educated (higher-productive) workers. Access to education may therefore distort the structure of the labor market and thus global output.To address this issue, we consider a segmented labor market with a formal sector and an informal sector. 3 states coexists: unemployment, formal employment and informal employment. Uneducated workers are forced to apply to the informal sector whereas educated workers may apply in both sectors depending on model specifications. The formal sector is subject to market frictions whereas the competitive wage clears the informal labor market. Unemployment thus only exists in the formal sector and acts as a pool of entry to formal employment. Informal employees may possibly search on-the-job for a formal job. This last feature of the model implies that modifying access to education distorts the repartition of workers in the labor market. Two assumptions are made: first, education is increased by external intervention (international subvention to education). Second, education is self-financed by taxes paid by the formal sector (the local government faces a budget constraint). We compare the decentralized equilibrium situation to the social planner equilibrium.Without any foundings consideration, 1) increasing education raises the number of workers applying in the formal sector. In the presence of search frictions in this sector, the probability of obtaining a formal job is reduced as well as formal job wages. 2) The asset values of informal and formal workers are getting closer which discourages informal on-the-job seeker to look for a formal job. The two impacts leads to opposite effect on informality. Further results on efficiency are on the run.
Published in: Jorge Martinez Vazquez. Local Finance in Latin America in <em>Local government finance : the challenges of the 21st century : second global report on decentralization and local democracy : GOLD II 2010 / United Cities and Local Governments</em>. 191-229. Cheltenham, UK ; Northampton, MA : Edward Elgar, 2011. (c) United Cities and Local Governments, published by <a href="http://www.e-elgar.co.uk/">Edward Elgar Publisher</a>. Posted with the permission of the publisher for personal use only.
Abstract When external effects are important, markets will be inefficient, and economists have considered several broad classes of economic instruments to correct these inefficiencies. However, the standard economic analysis has tended to take the region, and the government, as a given; that is, this work has neglected important distinctions and interactions between the geographic scope of different pollutants, the enforcement authority of various levels of government, and the fiscal responsibilities of the various levels of government. It typically ignores the possibility that the externality may be created and addressed by local governments, and it does not consider the implications of decentralization for the design of economic instruments targeted at environmental problems. This paper examines the implications of decentralization for the design of corrective policies; that is, how does one design economic instruments in a decentralized fiscal system in which externalities exist at the local level and in which subnational governments have the power to provide local public services and to choose tax instruments that can both finance these expenditures and correct the market failures of externalities?