Via regression analysis, this study is able to establish factors that impinge on per capita social sector expenditures. In addition, 32 out of the 62 provincial governments have allocated less on social sectors than what is needed to maintain their 1991 expenditure level in real terms. Inconsistencies regarding budget allocation of provincial governments on the social sectors and the objective indicators are detected.
This article describes and evaluates the financing aspects of the social sectors decentralization process in Chile. The article reviews the analytics of the optimal financial mix of decentralized social services; assesses the municipal income distribution
Robin Boadway, Isao Horiba, Raghbendra Jha, Boadway, Robin · 6 authors
It has realized since Pigou (1947) that if public goods are financed by distortionary taxation, the marginal social cost of providing the public good will exceed the actual resource cost by the marginal deadweight cost of taxation.
While decentralization is on the forefront of the reform agenda of many developing countries, few studies have performed empirical analysis to provide a holistic picture of the important fiscal, efficiency, and equity issues. Specifically, decentralization nearly always involves fiscal and administrative decisions by both national and sub‐national governments, as well as intricate intergovernmental relations. Here, two empirical models are presented for the Mexican primary and secondary education sector. The first analyzes the efficiency‐equity trade‐off implicit the Mexican Federal Government's educational fiscal transfers to states. Unlike most similar analyses, this model analyzes the distribution of outcomes not simply expenditures. The second model analyzes the relative productivity of separate expenditures by the Federal and state governments before Mexico's recent educational decentralization legislation. The findings show that before the decentralization, the Federal Government exhibited some concern for equity, but that in doing so also treated states unequally according to criteria that have little to do with either efficiency or equity. In addition, the results show that the Federal Government may indeed have been the more efficient provider of primary and secondary education, raising concern for the fiscal and administrative relationship set up by the decentralization legislation: the Federal Government will continue to pay, while the states have gained relative autonomy over expenditures.
Richard M. Bird, Jennie I. Litvack, M. Govinda Rao
A successful poverty alleviation strategy has four distinct elements: 1) identifying who the poor are, where they are located, and what they do; 2) analyzing why they are poor; 3) developing policies to improve their standards of living; and 4) supplementing income-improving policies with direct"safety net"policies to increase the poor's short-term consumption etitlements. The precise mixture of"capacity-improving"investments and"safety net"policies appropriate for any country will depend on the country's income level, the extent and nature of its poverty problem, and many other factors. The strategy chosen must be implemented effectively. Spending and revenue decisions need to be more decentralized to ensure that the poverty alleviation policies adopted reflect the preferences, needs, and fiscal abilities of different regions of the country. The nature of that decentralization depends on the country. Pro-poor services throughout Viet Nam are underfunded. This problem is particularly acute in the poorer areas. Improvements in the system of intergovernmental finances could help ensure that each level of government, even in the poorer provinces, is adequately funded - and provided with sufficient expenditure and revenue raising autonomy - to support local investments and their operation and maintenance. Since poor provinces are less able to mobilize additional local revenues to support services, well-designed intergovernmental transfers are particularly important. Provinces must play a greater role both in raising revenues and in allocating expenditures, with incentives built in to ensure that they do so responsibly and efficiently. Local governments must - if they are tobe held accountable for their actions - have some responsibility for determining local tax rates. This will allow them to vary rates to collect more revenues to finance higher levels of public services if they so choose, and at the same time allow the central government to design its transfers in such a way as to ensure that local fiscal efforts are not discouraged by the receipt of such transfers. Richer provinces will tend to collect greater revenues. When transfers are needed to finance local spending in poorer areas, they should provide incentives for local revenue mobilization and allow for some degree of equalization. Services deemed of national importance (for example, a minimum level of education, health care, and social relief) can be promoted by designing specific-purpose transfers. These services must be identified and varying matching requirements established for different provinces depending on such factors as their own revenue base and the cost of providing services in that province.
Abstract Renewed interest by the Indonesian government in decentralization and cost‐recovery practices has led to both real and illusory reforms, though the distinction between the two is often not clear. This is particularly true with respect to infrastructure planning and finance. Recently, the allocation criteria for capital grants to local governments have been substantially revised, nearly every year, to reflect long lasting concerns regarding differences in interregional development needs and resources. In addition, the level of funding for local government investment has risen dramatically to support increased local responsibility in planning. Most development spending does not pass through local budgets, however. In either case, the project planning process has remained firmly under the direction of the central government's technical ministries. Infrastructure investment thus tends to be segmented, not only by sector, but also by funding source. The rate at which these two factors balance off in current practice does not indicate a strong commitment to effective decentralization. The article suggests that greater regional government participation in the national planning process would be beneficial. To deal with the fragmented nature of sectoral planning is more problematic, as a more integrated approach would in the long term require either a new layer of bureaucracy or a substantial reorganization of the technical ministries. In the shorter term, a gradual shift toward general purpose grants would also generate regional development plans more consistent with the goals of decentralization while maintaining substantial central control and oversight.
A major issue in Latin. America is the decentralization of public finances and the autonomy of local government. This article begins with a brief review of the ongoing decentralization debate. We then discuss key features of local government finance and autonomy among unitary and federal governments in Latin America. Against that backdrop, we focus on the Chilean case, which has been a widely celebrated success story in the economic development literature. We argue that despite major gains by municipal governments over the past two decades, financial decision making powers still rest with the national government. This creates financial complacency among local governments. To remedy this, we conclude with six proposals for promoting effective decentralization.
Economic decentralization emerged as an issue in Albania following the first election of a noncommunist government in Albania in 1992. It is one of many challenges in creating a fiscal system that supports reform. Decentralization has begun with the central government's transferring spending responsibilities primarily for some local infrastructure services to local governments. But, given Albania's small size, it is unclear whether"people"services such as education and health care need to be delegated to local governments. Although the destruction of local health and education facilities accompanying the demise of the old regime argues for giving communities a greater sense of ownership of these facilities, they should not be handed down without mechanisms to ensure uniform service standards. Draft laws focus on the transfer of assets (schools and clinics) to local jurisdictions but are vague about responsibilities for recurrent spending. And because local spending responsibilities are expanding, local governments need increased revenues to finance them. Providing an adequate social safety net is vital in Albania - the poorest of the economies in transition - and the government has taken steps to ensure that parts of it are locally administered, though centrally funded. The key to a well-designed intergovernmental financial system is to clearly define spending responsibilities so that a revenue system can be designed to accommodate them. Such a system would combine revenue-sharing, own-source revenues, and intergovernmental transfers. Tax-sharing of central government revenues based on district of origin cannot be the only means of local finance in Albania, as most revenues are collected in only a few districts. To meet financial needs, local governments need some authority over significant own-source revenues (such as user charges and property and vehicle taxes). Privatization revenues can also help local governments but only in the short run, as they are nonrecurrent. Matching grants with spillover effects may be appropriate. And for low-income regions incapable of meeting their spending needs alone, a transparent, equalizing transfer system should be developed. Albania's draft laws allow for this possibility, having established constituent and independent budgets for the local level.
The author reviews the conceptual basis for fiscal equalization transfers, analyzes the theoretical implications for optimal design of equalization transfers, and suggests quantitative approaches for assessing the fiscal needs of subnational governments and determining their entitlement to transfers. The author illustrates proposed methods using data for local and provincial Canadian governments. The proposed methods could be useful tools, he says, for undertaking systematic objective reviews of aggregate and sectoral public spending in developing countries. The author argues that in a decentralized federation, fiscal inefficiencies and inequities arise because of subnational governments'differing levels of ability to provide comparable public services at comparable tax rates. Fiscal equalization transfers that reduce or eliminate differentials in net fiscal benefits create a rare instance in economics when considerations of equity and efficiency coincide. These transfers must allow for differences in the spending needs and revenues-raising abilities of the various subnational governments. The author argues for a two-tiered approach to equalization. The first tier would be a federal responsibility to equalize the burden of federal taxes. The second tier would be an interprovincial equalization fund to be administered by the Council of Provincial Finance Ministers. It would entail a comprehensive equalization system that takes into account provincial spending needs. The standard of equalization would be negotiated.
Oded Hochman, David Pines, Jacques‐François Thisse
The authors show that space matters in designing the optimal provision of local public goods. Geography imposes a particular institutional structure of local governments due to the overlapping of market areas associated with different local public goods. The optimum can be decentralized through local governments that have jurisdiction over market areas of all local public good types. This implies that the appropriate suppliers of local public goods are metropolitan governments which finance them through user charges and land rent. In addition, the authors' approach invalidates the prevailing theory of fiscal federalism, according to which a layer of government should be established for each type of local public good. Copyright 1995 by American Economic Association.
The author examines the many faces of infrastructure decentralization: the costs and benefits, the government structure (constraint or variable?), the"polycentric"approach, and how to make decentralization work (for whom?). He proposes basic principles and guidelines for policy design, for both small projects and large. Broadly, these guidelines are summed up in a few propositions. In all countries, some critical infrastructure is provided through a decentralized political structure. Current trends make that likely to be more true in the future. Decentralization, however defined, in and of itself had no necessary implications for good or evil so far as infrastructure is concerned: its effects depend on the incentives various decisionmakers face. The key to ensuring that these incentives are conducive to"good"decisions (about design, siting, timing, finance, pricing, operation, maintenance, and use of infrastructure) is to ensure that those who made the decisions bear the financial (and political) consequences, as much as possible. Politically, this means that political leaders at all levels should be responsive and responsible to their constituents, and that those constituents are fully informed about the consequences of all decisions. Making politicians bear the consequences of their own mistakes is as close as one can get to a"hard"political budget constraint. Economically, it must be difficult for local residents to shift cost to nonresidents who do not receive benefits and to make local decisionmakers fully responsible to their citizens for the use they make of revenues collected from them (through local taxes), to users of infrastructure (local or otherwise) for the use made of the revenues they contribute (through user charges of various sorts), and to taxpayers in general for the use made of any transfers (or subsidized loans) they receive. Administratively, what such a system requires is a clear set of"framework"laws (on local budgeting, financial reporting, taxation, contracting, dispute settlement, rules to be followed in designing user charges and so on), as well as adequate institutional support for localities to operate in this environment. To the extent that these conditions are not met, the perverse incentives that too often exist because of the structure and finance of the public sector in many countries will probably be exacerbated by the current tendency to decentralize more and more decisions in the public sector.
In the past decade, there is an emerging trend for the use of game theoretical framework in studying government tax plicies. The game theoretical approach allows the possibility of simultaneous interactions between government policy and decentralized private decisions. This paper develops a stochastic differential game between the government and the public. The public chooses an investment strategy to maximize the present value of income net of tax and investment expenditures. The government controls the tax system and aims at maximizing a weighted sum of tax collected, the level of bonds outstanding and income net of investment expenditures. Two dynamic processes — one for the capital formation and the other for bonds accumulation — are present in the model. The dynamic processes are subject to stochastic shocks. A feedback Nash equilibrium solution of the game is obtained. The parabolic partial differential equations characterizing the value functions of the game equilibrium is solved explicitly. Closed-from solutions of the equilibrium investment strategy and tax policy are provided. The stationary (longrun equilibrium) joint density function of capital stock and bonds is also obtained. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
Decentralization has been a popular theme in development thinking and practice due to the impact of decentralisation of government expenditures and revenues upon human development. This survey explores the extensive literature on decentralisation, revealing the lack of quantitative and rigorous studies. A detailed analysis of the various dimensions of decentralisation - participation, financing and comparative priorities - and of the relevant effects upon efficiency, resource availability and equity, enable the author to draw some interesting lessons from its theory and practice.
China's thirteen years of economic reforms (1979-1991) have achieved an average GNP annual growth rate of 8.6%.What makes China's reforms differ from those of Eastern Europe and the Soviet Union is the sustained entry and expansion of the non-state sector.We argue that the organization structure of the economy matters.Unlike their unitary hierarchical structure based on functional or specialization principles (the Uform), China's hierarchical economy has been the multi-layer-multi-regional one mainly based on territorial principle (the deep M-form, or briefly, the M-form).Reforms have further decentralized the M-form economy along regional lines, which provided flexibility and opportunities for carrying out regional experiments, for the rise of nonstate enterprises, and for the emergence of markets.This is why China's non-state sector share of industrial output increased from 22% in 1978 to 47% in 1991 and its private sector's share from zero to about 10%, both being achieved without mass privatization and changes in the political system.2 Data sources in this paper are from Statistical Yearbook of China (various issues from 1985 to 1992), otherwise noted.3 Statistical Communique of the State Statistical Bureau on the 1992 National Economic and Social Development, February 18, 1992. 4 The export-GNP ratios are calculated based on the official exchange rate and are upward biased.But the dramatic increase of export share in GNP during the reform is unmistaken. 2 both before and after their radical transformations in 1989.It appears that China had no coherent reform programs, no commitment to private ownership, and no changes in the political system, and China's economy was still not fully liberalized.From both the theoretical and policy perspectives, China's different reform strategies and outstanding reform performances are particularly interesting and puzzling.The economic reforms in China formally started in 1979 following the Third Plenum of the Eleventh Congress of the Chinese Communist Party in December 1978.The starting time was later than that of Yugoslavia (1950) and Hungary ( 1968) and was about the same as for Poland (1980), and earlier than the Soviet Union (1986).Between 1979 and 1991, China's GNP grew at an average annual rate of 8.6%, or at 7.2% on the per capita basis. 2 In 1992, the growth of GNP reached 12.8%. 3Exports grew at a faster pace, so that China's export-GNP ratio increased from below 5% in 1978 to nearly 20% in 1991. 4 Also in this period, inflation was kept within a single-digit range except for three years (11.9% in 1985, 20.7% in 1988 and 16.3% in 1989); the household bank deposits to GNP ratio increased from 6% in 1978 to 46% in 1991; and the government budget deficit accounted for about 2-3% of GNP, about half of which was financed from bond issues (Table 1.1).Even more convincing evidence of the success of the reform is the increase in consumption and consumer durable goods by an average Chinese consumer in physical terms.For example, between 1978 and 1991, an average Chinese consumer increased his/her consumption about three times for edible vegetable oil, pork, and eggs (Table 1.2).In the rural areas, which account for about 75% of total population, the living space per person increased about 130% between 1978 and 1991 (Table 1.3).The 5 Data source for Hungary and Poland is from Table 9.1 of Kornai (1992).6 For example, Summers (1992) expressed this view when he highly praised China's reform performance.Sachs (1992) also expressed similar ideas during his interview with the Chinese Journal of Comparative Economic and Social Systems.
Fiscal decentralization in many guises has become a central concern around the world. This paper discusses several aspects of this complex subject that have turned out to be important in policy work on the issue in a number of countries. First, I discuss briefly the meaning and rationale of fiscal decentralization. There is much that has to be disentangled before one can approach the issue in a particular policy setting, including distinguishing between the problems of federal finance and fiscal federalism. Second, I review the issue of the choice of local revenue sources from the perspective of establishing efficient local governments, including the roles of user charges, property taxes, and income taxes. Finally, I sketch some considerations with respect to the design of intergovernmental transfers from the same perspective, with particular emphasis on the desirability in many settings of transfers that are both conditional and equalizing.
The decentralization of government in Eastern Europe represents a reaction both from below (to tight central political control) and from above (to privatize the economy and relieve the central government's fiscal stress). In all transitional economies, the developing structure of intergovernmental relations is intimately related to such critical policy issues as privatization, stabilization, and the social safety net. In the fiscal sphere, tax reform, deficit control, and intergovernmental finance are a tripod. Unless each leg is set up properly, the whole structure could collapse. The present strategy of devolving expenditures downward while holding back on revenue flows and transfers to balance the central budget is unlikely to succeed for more than a year or two at best. Net spending reductions at the subnational level may be difficult to achieve. From 10 to 40 percent of outlays go to the subnational sector, and in many countries local governments provide much of the social safety that makes the pain of the economic transition politically tolerable. And, most housing and many enterprises have been shifted to local ownership, with the maintenance and subsidy cost this implies. Since the revenue sources assigned to local governments cannot finance expected levels of local activity, the result of shifting spending downward is likely to be strong demands for increased, rather than decreased, transfers. Alternatively, subnational government may look to coping mechanisms such as holding on to their enterprises (which provide vital social services), developing extrabudgetary revenues, or borrowing. These coping mechanisms threaten privatization, reduce budgetary transparency, and impede stabilization policies. The authors describe the risks to privatization, to macroeconomic stability, and to an adequate social safety net that present policies toward local government may imply. Its themes are that the subnational sector needs to be more realistically factored into national plans - and that subnational expenditures be more clearly assigned and revenue needs more realistically assessed. Such assessments are likely to acknowledge a larger sphere for subnational governments and the need for access to more robust revenue sources. Giving local government a share in the personal income tax is one possible and perhaps desirable approach to meeting these revenues needs. Careful attention needs to be paid to the design and implementation of the intergovernmental fiscal transfers likely to remain prominent features of the intergovernmental landscape for years to come. Caution is also needed on borrowing by subnational government. Consolidating and integrating extrabudgetary funds at the subnational (and national) levels is crucial to enhanced budgetary transparency and macrostability.