In the context of recent decentralization of regional development in Indonesia, the local authorities and communities need to understand by how potential sources for financing regional development effect the economic growth. There is three sources of financing such as government, private investor and local communities. The purpose of this paper is to explain the role of financing resources of the economic sectors in regional economic growth. Using panel data generated from economic sectors among 20 kabupaten/kota (municipalities) in Jawa Barat Province during 1991-2000 I examine the effect in economic growth of different financing sources. The pattern of development financing was varied among regions. The financing concentration was occurred in some regions where have good available infrastructures and characterised with industry-based development. The results from empirical analysis suggest that the impact of both government and private financing on economic growth is significant in industry-based regions. In the period analysis, communities financing through bank loans supported the regional development significantly in both industry-based and agro-based regions. The implication based on this study is that the local authority should encourage the private financing sources to promote local economic growth.
Very few researchers have addressed the long‐term financing arrangements of municipal governments in developing countries. No research has evaluated empirically either the elements that affect municipal borrowing in developing countries or what those elements reveal about the municipal credit system. Analyzing Brazilian municipal loan and financial data with a series of simultaneous equations, this paper addresses the following questions: What factors determine municipal government investment levels, borrowing levels, and borrowing prices? What do empirical data reveal about the character of the Brazilian municipal credit system? The results show that investment, borrowing, and borrowing prices are interconnected. Furthermore, while some signs of a market‐based system exist, there is evidence that investment and borrowing decisions are made within an administered market.
The main proposal of this paper is to try to make calculable how politicians are favoring in their discourses, regarding the new General Law of Budgetary Stability approved in December 2001, the process, which is still taking place in Spain. For this goal the research offers a new approach through the construction of a of decentralization. The index of decentralization developed from the matrix goes from 9.69 for the family of arguments A (budgetary and financing autonomy) to only 3.33 for the family of arguments B (income redistribution and spending on social issues). It is remarkable how most of the political parties attacking the law and in opposition of the government reach 10.00 points. In other words, they are really supporting through their discourses. The political party in the government reaches only 3.80 points, but also he is offering decentralized arguments supporting the law.
RESUMEN El desarrollo del modelo de descentralización fiscal español ha atravesado desde su inicio por diversas vicisitudes, de las cuales las últimas han ido siempre en la línea de incrementar la corresponsabilidad fiscal de los gobiernos subcentrales, bajo la hipótesis de que este incremento y la consiguiente mejora en la aplicación del principio de equivalencia por parte de los gobiernos tiende a mejorar la eficiencia en la asignación del gasto público. En este artículo se analizan las principales novedades de la reciente reforma del sistema de financiación local haciendo especial hincapié en sus efectos esperados sobre la corresponsabilidad fiscal. Las conclusiones alcanzadas son ambiguas en este sentido, por cuanto la práctica desaparición del IAE para muchos ayuntamientos y los efectos inciertos de la reforma sobre el indicador de esfuerzo fiscal apuntan en la dirección de menor corresponsabilidad fiscal, mientras que la ampliación de los topes máximos de tributación para la mayoría de municipios y la mayor discrecionalidad a la hora de establecer bonificaciones por razones diversas pudieran operar en sentido contrario. En todo caso, se apuntan graves deficiencias técnicas al nuevo modelo y se cuestiona seriamente la equidad y la eficiencia del nuevo modelo de transferencias, cuyo hito principal (la nueva participación en impuestos individualizados para los municipios de mayor dimensión) en modo alguno incrementa la corresponsabilidad fiscal. ABSTRACT The development of Spanish fiscal decentralization model has always aimed to increase the fiscal responsibility of sub-central governments, by hoping that the advances in the principle of equivalence tend to improve the efficiency of public expenditure. In this article the main novelties introduced by the recent reform of local financing system are analyzed, by focusing specially on their expected effects on fiscal responsibility. The conclusions are ambiguous. The eventual suppression of the Business Tax in many councils and the uncertain effects on the fiscal effort index seem to decrease fiscal responsibility. However, the higher availability to allocate reductions in local taxes and the faculty to reach higher rates in those taxes could have the opposite effects. Anyway, important technical deficiencies in the new model are pointed out and equity and efficiency of the new grants system are seriously questioned. Concretely, the main reform by including for the higher municipalities a new share on concrete central taxes (Income Tax, Value Added Tax, ...) does not increase at all fiscal responsibility.
Konstantin Sonin, Centre for Economic Policy Research (United Kingdom)
In a federal state, political leaders of constituent units might protect their enterprises from the federal center (e.g., allowing them not to pay federal taxes). The effectiveness of such protection depends crucially on the ability of local authorities to extract rents from enterprises. They can easily do so, if there are a small number of enterprises with large employment, and local monopolies can be effectively sustained. They cannot do it so easily if regional industry is competitive, political opposition is strong, and the federal center has enough means to enforce payment of taxes. We build a simple model to argue that it is the industrial structure of constituent units that determines political relations between them and the federal centre. The theory is supported by the recent experience of Russia, China, and Argentina.
Bob Searle, Jun Ma, Stefano Piperno, Ehtisham Ahmad
Intergovernmental equalization grants have been described as “the glue that holds a nation together.” Getting the grants system right is critical to countries as they decentralize. This paper illustrates general principles with an example based on Indonesia in 2000. A general grant should be used to supplement own revenues and to finance local service provision where there are no central mandates. The special needs of backward regions would be better provided for by specific grants. Specific grants need to be taken into account in the general grants scheme.
The opening page of this book says that, in recent decades, there has been a ‘substantial increase in the mobility of capital and population between the individual jurisdictions of long‐established federal states (such as Canada, Germany and the USA) and among the formerly independent member countries of the European Union.' It adds that the book will seek to show that the results of this increasing mobility are that fiscal decentralization is essentially beneficial for resource allocation, at least for local public goods, but not for income distribution. It would be apt to start such a book with some data illustrating the ‘substantial increase' in the mobility of population and capital in the places cited. However, the author gives no information for Canada or Germany. For the USA, his data show that inter‐state population mobility has actually fallen since 1970; and while he seems to infer from the falling inter‐regional distribution of incomes in the USA between 1900 and 1990 that capital mobility has increased, this fall might reflect the effects of sustained rather than accelerating migration. For the EU, he accepts that the mobility of labour between member countries is still very low. So the only clear evidence given for increased mobility seems to be that of capital within the EU.
We provide a model incorporating features of local public finance in Japan, including close fiscal ties between different levels of government as well as bureaucratic determinations of intergovernmental transfers. The discretionary nature of transfers softens local budgets ex post, which exerts perverse incentive effects on local governments ex ante. Fiscal decentralization that assigns more revenue responsibility to the local level serves to counteract this moral hazard incentive. The emphasis is on the endogenous nature of regional fiscal capacities at the local level. Fiscal devolution motivates local jurisdictions to become fiscally independent wherever possible.
This paper investigates a model where a decentralized manager gathers private information about the profitability of an investment project that must be financed internally. The choice of information acquisition effort depends on a tradeoff between her expected marginal information rent and the associated private effort cost. Expected information rents are higher if asymmetric information arises endogenously rather than being exogenous. Therefore, the manager puts in too much information-gathering effort and headquarters reacts with a sharp rationing of capital. Monitoring the manager's information acquisition mitigates underinvestment but even increases the manager's information gathering activity. Finally, efficiency unambiguously rises if headquarters can commit to an investment budget before the manager gathers the information.
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.
South Africa is at a crossroads in its decentralization policy. On the one hand, it has declared its intention to strengthen the fiscal powers of local governments. On the other hand, the institutional arrangements to guarantee fiscal decentralization -- revenue powers and expenditure responsibility -- have not yet been fully defined. Nor has a target been set for the vertical division of resources between the central and lower levels of government. The revenue dimension of fiscal decentralization in South Africa, particularly the question of an equitable vertical share for local governments, is the subject of this paper.In the first section of the paper, we ask how South Africa fits the profile of countries that are “good” candidates for decentralization. We then turn to a description of vertical revenue sharing as it presently exists in South Africa. We also offer a proposal about how an equitable vertical share for South Africa should be determined. A final section summarizes the results. The policy question raised in this paper is straightforward: What percent of all tax and non-tax revenues should be assigned to the central government and what percent should be assigned to the local government? The implementation question is also straightforward: Once the assignment is decided, how do we structure each revenue instrument to guarantee the “desired” assignment of resources?
Uganda has been engaged for a number of years in an ambitious programme of political and financial decentralization involving significantly expanded expenditure and service delivery responsibilities for local governments in what are now forty‐five districts. Fiscal decentralization has involved allocation of block grants from the centre to complement increased local tax revenue‐raising efforts by districts and municipalities. This article is concerned with the financial side of decentralization and in particular with an examination of district government efforts to raise revenue with the tax instruments which have been assigned to them. These are found to be deficient in a number of ways and their tax raising potential not to be commensurate with the responsibilities being devolved. Achievement of the decentralization aims laid down, therefore, must depend either on the identification of new or modified methods of raising revenue locally, or increased commitment to transfer of financial resources from the centre, or both.
This paper takes a fresh look at the trade-off between centralized and decentralized provision of local public goods. The point of departure is to model a centralized system as one in which public spending is financed by general taxation, but districts can receive different levels of local public goods. In a world of benevolent governments, the disadvantages of centralization stressed in the existing literature disappear, suggesting that the case for decentralization must be driven by political economy considerations. Our political economy analysis assumes that under decentralization public goods are selected by locally elected representatives, while under a centralized system policy choices are determined by a legislature consisting of elected representatives from each district. We then study the role of taste heterogeneity, spillovers and legislative behaviour in determining the case for centralization.
This Article argues that the restoration of a communitarian approach to taxation can help soften the widespread anti-tax sentiment that has engulfed the United States. It proposes and analyzes a concrete plan for the collection of revenue that taps into the same sense of shared community sacrifice that was invoked in fourteenth-century England. It proposes that the United States adopt a modernized, decentralized system of revenue collection modeled after the requisition, which was the chief means of raising revenue in the early American republic. Whereas the federal government currently collects approximately seventy percent of the nation's tax dollars, and the state and local governments collect the remaining thirty percent, this Article contemplates how the United States, and the individual states themselves, might differ if those numbers were reversed. The article begins by explaining why, due to the historical peculiarities of America's fiscal history, a decentralized approach to collecting revenues is not currently under consideration. Further, the article proposes a tax system in which the federal government would abolish the individual income tax, and discusses the likely effects of such a program on governmental spending by the states and on citizen mobility. The Article then explores the justifications for such an approach to taxation. The Article also consists of a utilitarian analysis of the costs and benefits of shifting to requisitions finance. Finally, the Article confronts the serious policy challenges that would arise if society were to implement requisitions finance, and ends with a discussion of several variations on the requisitions finance model that can address several of the communitarian and utilitarian criticisms.
Fiscal decentralization has been an important topic among public finance economists for nearly 40 years now, but recently it has become important in the real world as well. The United States has, in effect, implemented a decentralization strategy as it has tried to cut its federal government budget deficit, largely by reducing state and local grants. For Canada, fiscal decentralization is tied up closely with the Quebec issue, and, for Germany, with the unification issue. The European Community is beginning to worry about fiscal decentralization issues in connection with policy harmonization—what policies and/or conventions should be harmonized and what need not be? Many developing countries are also groping with decentralization issues as they try to find a way to manage the public sector side of their growth process. Decentralization has always been understood to mean the proper location, by level of government, of various taxes, spending programs, grants, and regulations. What types of spending should be conducted by what levels of government, what types of taxes should be assessed by what levels of government, how should grants help fill in gaps, and how should regulations be harmonized? On the one hand, taste differences across jurisdictions argue for separate policies—governments in jurisdiction x should do what the voters in jurisdiction x want. On the other hand, the existence of benefit spillovers across jurisdictions and the potential migration of taxpayers and spending beneficiaries across jurisdictional lines make things complicated.
During the five-millenium history of Korea, 1995 was the first time mayors and governors were elected by local residents, instead of being appointed by the central government. This could be the starting point of fiscal decentralization in this country, and, whether intended or not, this has the potential of enhancing allocational efficiency through the realization of local preference in the provision of local public services. Hence, this research aims to review and analyze the indigenous characteristics of the current local public finance system from the view point of the western normative theory, and develop a more equitable revenue sharing formulas to support Korean new fiscal decentralization. Since this is one of the first attempts to examine the evolving local autonomy squarely using the lens of normative theory of intergovernmental relations, its results could make a great contribution to the theory of local public finance in Korea. This research has developed two conceptual frameworks for the new revenue sharing formulas, and presented their aid simulations. The first model is the economic activity model, which tries to measure economic income of residents by measuring the level of economic activity in each jurisdiction. This model improves on the existing system, because it could motivate local governments to utilize the flexible tax rate system, and measure non-tax revenue as well. The other one is the expenditure need model, which measures the expenditure needs beyond local control in the form of expenditure need index. By controlling for expenditure needs beyond local control in the revenue sharing formula, mayors and governors could fairly compete with each other to provide better services with less cost. Unfortunately, lack of relevant data as well as service quality measures have confined this research to develop aid formulas for only garbage/road services instead of for overall local public services of city governments. This research finds that the fiscal capacity measure derived from the economic activity model and the expenditure needs indices from the expenditure need model are highly consistent with the reality of Korean city governments. Moreover, aid simulations for garbage/road services using the revenue sharing formula in this dissertation would result in a very different distribution of aid than the present formula. With the development of relevant data of service quality for local services, this approach could be a foundation for the new general revenue sharing formulas to support fiscal decentralization in Korea.
I construct an agency model of local public goods producers with special reference to public schools. The model assumes that households make Tiebout choices among jurisdictions, but it has more realistic assumptions about information and the cost of residential mobility. I examine producers' effort and rent under local property tax finance and centralized finance. I show that, if there are a sufficient number of jurisdictions to choose among, conventional local property tax finance substantially reduces the agency problem and associated loss of productivity. Specifically, I demonstrate that local property tax finance can attain about as much productivity as a social planner with centralized finance can, even if the social planner is armed with more information that a real social planner could plausibly have. The key insight is that decentralized Tiebout choices make some information the social planner would need verifiable and other information unnecessary.
The note highlights the importance of \n sound intergovernmental fiscal relations, and proper \n regulation for successful sub-national borrowing, and \n illustrates the potential macroeconomic hazards of \n decentralizing borrowing powers, arguing that the impact of \n a possible moral hazard problem, namely, the access to \n financial markets by sub-national governments, may generate \n unplanned liabilities for central governments. Yet academia, \n and country experiences do not suggest adverse links between \n decentralized borrowing powers, and the central \n government's ability to maintain fiscal discipline, and \n macroeconomic stability. Rather the key seems to lie in the \n design of fiscal decentralization, particularly the \n regulatory framework under which borrowing powers are \n decentralized. The note outlines the reasons why \n sub-national governments require access to financial \n markets: to finance capital spending, and foster political \n accountability, which can be achieved through direct \n borrowing by central government, through a public financial \n intermediary, or, through direct borrowing. As per designing \n the regulatory framework, the note suggests better \n information systems, bankruptcy laws, and access to tax \n bases, in addition to separate fiscal/financial systems, and \n sound legislation to impose budget discipline, enabling \n access to capital markets to complement fiscal powers \n devolution to regional authorities.