China has experienced more than 25 years of extraordinary economic growth. Underlying this growth has been a decentralized fiscal system, in which provinces and large cities are given the freedom to make infrastructure investments to stimulate local development, and are allowed to retain a large part of the fiscal revenues that are generated from economic activity. Although successful as a growth strategy, this policy created two problems for national fiscal management. First, it significantly reduced the central government's share of fiscal revenues, which fell from 34.8 percent in 1980 to 22 percent in 1992. Second, it widened economic and fiscal disparities between the rapidly growing urban coastal region and the rest of the country. Rapid growth in subnational debt (which rose 23-fold in a decade) and subnational nonperforming loans (estimated by the authors to range between US$100 billion and US$150 billion) has placed pressure on China's financial system. Traditionally, China has favored bank lending as a source of finance because the banking system has provided a vehicle for central political control over local debt. But as China's financial system matures, creditworthiness standards must become more important. The authors recommend greater use of the revenue streams from infrastructure assets as a financing source, and gradual relaxation of central political control over subnational debt. One step in this direction would permit leading cities to issue municipal bonds based on objective financial standards.
The 1971 ruling of the California Supreme Court in the case of Serrano v. Priest initiated a chain of events that abruptly ended local financing of public schools in California. In seven short years, California transformed its school finance system from a decentralized one in which local communities chose how much to spend on their schools to a centralized one in which the state legislature determines the expenditures of every school district. This paper begins by describing California's school finance system before Serrano and the transformation from local to state finance. It then delineates some consequences of that transformation and draws lessons from California's experience with school finance reform.
This comparison is not restricted to Mumbai and Shanghai but also to Bangalore and Hangzhou, Delhi and Beijing and so on. The Chinese and Indian economies are expected to be the growth engines of the global economy. In this process cities are expected to play an important role, through their transformation into âWorld Classâ cities, a term now doing rounds in the policy circles in Mumbai, to be achieved through massive infrastructure investments made in them. In China, this has been possible because of the decentralized administrative and fiscal system in China. In contrast, in India, the system of urban infrastructure is currently evolving and making a transition from a centralized to a decentralized system. This paper: (i) compares the Chinese and Indian financial systems to explain differences in the quantum of funds available in cities in both countries; (ii) looks at urban responsibility allocations in terms of institutions; and (iii) compares capital investments made by one city each in the two countries, in Beijing (China) and in Mumbai (India). Edited by Xinyu Fan
The Russian Federation has undergone a process of major constitutional change in the post-communist period, as a strong central government has ceded extensive powers to the regions. This has important implications for the organization of the health care system which, as with other elements of the Soviet system, had previously been highly centralized. Although it is now well-recognized that the powers of the Federal Health Ministry have weakened considerably, the precise scale and nature of the process of decentralization remain imperfectly understood. This paper provides new evidence on the nature of decentralization in the Russian Federation since the breakdown of the USSR, reporting the results of case studies undertaken in six regions of Russia (Samara, Tver, Tula, Chelyabinsk, Sverdlovsk and Moscow oblasts) to describe the organization of health care financing, regulation and delivery. It shows that while there is a common model of health system (with the exception of Samara, where an innovative model was implemented), there are many minor variations. The study confirms the limited scope for action by Federal authorities, but also shows that the power vested in the regional governments is more limited than was previously thought. Instead, the municipalities (rayons) emerge as important bodies, as they own the facilities in which much of the routine health care is delivered and, both directly and indirectly, by virtue of their contributions of insurance premiums for the non-working, provide a substantial amount of health care financing. The study demonstrates the complexity of the Russian health care system and identifies the widespread absence of mechanisms that might be used to bring about much needed change.
In this essay, we survey the literature on local public finance. The first part deals with the normative theory of local public finance, starting from the question when it is beneficial to decentralize public services. We then analyze the functioning of a system of competitive jurisdictions in the spirit of Tiebout. The final part of the essay deals with constitutional design. In particular, we ask when and how local governments have to be regulated in order to prevent destructive competition or contain monopoly power, and we describe which institutions might perform these tasks.
This book addresses a variety of issues \n relating to intergovernmental finance and the provision and \n financing of local services including budgeting and \n financial management, the institutional framework for the \n conduct of intergovernmental relations, appropriate methods \n of service delivery in metropolitan agglomerations and \n remote rural areas, local government enterprises, user \n charges, property taxes, income and value-added taxes, \n natural resource taxes, and local business taxes. \n Throughout, the authors draw on experience both in Canada \n and in other decentralized countries and consider to varying \n extents the special problems facing Russia and other large \n transitional economies.
China's reform to decentralization conduced to the competition in the locals, which helped the marketization of the economy. It also can induce to the government reform, through the locals' need to absorb the economic resources. But this result is restricted by other conditions, especially to the naturally backward areas, it's difficult for them to attract investment, so there are no reform incentives in such locals. Use the public finance transfer to build such areas' infrastructure can mitigate these difficulties and result in the government reform.
Division of responsibility and authority for local government debt is an important part of decentralized public finance management system.It has become a precondition to legitimize local government debt in order to solve the current problems in our country.Legitimizing is to identify not only debt-financing rights,but also debt management responsibilities.Local governments have made some explorations about it in recent years.Central government should grant legal borrowing right to local governments,but the debt amount and its using should be strictly controlled.The uniform management agencies should also be set up in Ministry of Finance and public finance departments at province,city and county.
During the reform of fiscal decentralization in our country,local governments turn to relatively independent public sector gradually.In our existing institutional arrangements,as the implicit guarantees taken by central government suffer from the problem of incentive incompatibility,the resulting moral hazards will lead to even higher fiscal risks.On the precaution of moral hazards in local governments,we should set up risk-control mechanism and perfect the existing fiscal system.
To build a sound fiscal relation among the governments is the goal of the reform of the tax decentralization system. The reform was carried out in 1994, yet a lot of problems have not been solved. In a market-oriented economy, it is a shortcut to construct a sound fiscal relationship among governments by reinspecting the fiscal administrative system of China from the angles of affairs right, property right and transfer payment, and learning the experience from foreign countries.
As China and other countries seek to decentralize the financial practices of their subânational governments, designing relevant institutions and rules looms as a major policy issue. The purpose of this paper is to clarify the capital market behaviour of Canadian provincial and municipal governments (PMGs), given their financing choices, and to draw relevant comparisons to American state and local government (SLG) debt financing practices. After identifying relevant elements of the federalism structure in the two countries, the paper compares the institutional rules and roles that comprise the capital acquisition behaviour of subânational borrowers. The paper concludes by highlighting key points of difference in this important area of fiscal federalism. Both Canada and the United States can present their marketâoriented approaches to subnational financing as a positive foreign policy force.
Historically, infrastructure funds have been strongly debated for infrastructure policies in developing countries. With fiscal austerity and tighter budgets, off government budget cost recovery mechanisms raise interest for the infrastructure policies of rich countries as well. The paper will explore the economic and political rational for infrastructure funds. It will argue that infrastructure funds may be considered to be a mechanism to avoid failures to coordinate between different interests in transport infrastructure policies, leading to distorted infrastructure policies and a waste of resources by political players. Infrastructure policy without politics. In a first part the paper will set the classical public finance arguments on optimal capacity choice and finance of indivisible but congestible goods like infrastructure facilities. It will be shown that in this idealized world, where governments perfectly aggregate the preferences of the infrastructure users and taxpayers, a centralized budget process and a decentralized quasi-market for infrastructure services (like an infrastructure fund) lead to identical outcomes. It will be shown that this outcome depends on assumptions on the feasibility of counterfactual tax and transfer policies. In practice, substantial differences are observed between planned expenditure levels for transport infrastructure, for new investment and particular for maintenance. A dominant explanation of this gap is the weakness of transport policy relative to other portfolios in the policy decision making process. Lobbying and infrastructure policies. Isolating the influence of special interest groups in the political process, the paper will show that, if governments seek campaign contributions and a high share of votes of the population, the lobbying activities lead to a political outcome that is identical to the infrastructure policy in the absence of lobbying activities. That is, the lobbying parties are caught in a prisoners' dilemma from which they would want to withdraw could they do so unilaterally. Wasteful but inconsequential lobbying continues, however, as the lobbying parties fail to coordinate to withdraw from influencing the outcomes of the budget process. The existence of infrastructure funds would enable the society to save the resources wasted in rent seeking activities. Lobbying and the entry of citizen-candidates. In the context of a mobile party structure, where citizen-candidates with own policy profiles might enter party politics, lobbying might lead to a reaction of candidatures for political offices that lead even to a worse outcome for the lobbying contenders than in the case of an agreed abstention from lobbying. In this case, a coordination not to lobby between special interest groups would lead to the avoidance of resources spent in rent seeking activities, a distortion of infrastructure investment and maintenance levels from inducing countervailing party positions and a loss of income of the lobbying parties. Benefits transport infrastructure funds. The paper will argue that establishing transport infrastructure funds can be considered a solution to the distorting influences resulting from lobbying and induced reactions in the party system on infrastructure policy. An initiative to establish infrastructure funds could enable lobbying parties to escape the prisoners' dilemma of being unable to coordinate. For the covering abstract see ITRD E135582.
Contracting out is the practice of public sector or private firms of employing and financing an outside agent to perform some specific task rather than managing it themselves.The rationale for contracting is that public providers lack the incentive to use resources efficiently, and that private (or autonomous) providers are more efficient than public providers.Contracting out clearly separates the roles of purchaser and provider, and tightly links payment to performance of the provider.According to classical economic theory, contracting stimulates competition among providers in managed markets, induces cost awareness among providers and purchasers, and enhances transparency in negotiations.Providers are forced to minimize production cost and adjust the prices to meet the demand and requirements of purchasers.All these factors contribute to efficiency.In addition, contracting would promote decentralization managerial responsibility, a shift that would translate in efficiency gains in contrast to the old highly-centralized, bureaucratic structure, considered insensitive of the cost implications of allocative decisions.As is the case with any model, contracting out approach is not a panacea to all health problems.But in light of the limited absorptive capacity of the public sector, it is an alternative strategy worth considering for increasing the coverage and the quality of services in developing countries such as Indonesia.Monitoring and evaluation is an indispensible instrument for contracting out to exhibit its relative advantages.
The growth of Africaâs towns and cities has outpaced local authority capacity in terms of management, infrastructure, and financing. Many African towns and cities are now facing a governance crisis. Accordingly, the capability and capacity of urban local government to provide basic services to a growing population have entered the core of the development debate. In particular, fiscal decentralization â the devolution of revenue mobilization and spending powers to lower levels of government â has become a main theme of urban governance in recent years.\nThis paper explores the opportunities and constraints facing local revenue mobilization in urban settings in Africa. The study examines various revenue instruments available, including property taxes, business licences, and user fees, and their effect on economic efficiency and income distribution. Moreover, political and administrative constraints facing various revenue instruments and factors impacting on citizensâ compliance behaviour are discussed. The analysis is exemplified by cases from across Africa and other regions. Local governments need to be given access to adequate resources to do the job with which they are entrusted. However, a general conclusion emerging from this study is that local revenues mobilized in most urban authorities in Africa are necessary but not sufficient to develop and supply adequate services for the fast-growing urban population.
This chapter deals with the evolution of tax administration in Spain from the initial stages of the democratic process, way back in the second half of the seventies, up to the present time. Given the relevance of the classical interrelation between the tax reform processes and tax administration reforms, we review the main events and milestones in the last three decades. We analyze the influence that institutional, economic, and political factors have had on both the architecture of the tax administration and its organizational behavior. Nevertheless, based on what we have just said, the performance of the Spanish tax administration cannot be satisfactorily assessed without explicit reference to the deep decentralization experienced by the Spanish tax system from the early eighties, and especially since 1994. That is why a considerable part of the chapter is devoted to analyze the role played by the successive reforms of the Autonomous Communities' financing system, and the decisions of the regional governments themselves, in shaping Spain 's tax administration.
We show that federalism will lead to higher economic growth. We present a model of endogenous growth where government services, funded by income and capital taxes, are a component of production. In this model a decentralized government will choose tax policy to maximize economic growth, while a centralized government will not do so. Furthermore, these conclusions hold regardless of whether the government is beholden to a median voter or is a rent-maximizing Leviathan. However, a decentralized government will under- provide a consumptive public good. Finally, we show our results are robust to imperfect capital mobility between districts and in such a model that districts with a lower total factor productivity will choose a more growth-enhancing tax policy.
Summarizing twenty five years of Spanish local public finance is not an easy task. In 1978, the new democratic Constitution completely changed the face of public administration in Spain . Until then, and apart from some minor, unsuccessful attempts at decentralization during the Second Republic in the early thirties of the last century, the model of governance was based on a pure version of Napoleonic centralism. Nevertheless, the decentralization process initiated by the Constitution gave the regional governments (that is, created ex novo) a leading role. The aim of this process was to provide the regions with growing competences and responsibilities in relation to expenditure assignments, and to a lesser extent, in revenue assignments. This new tier of government received major political and administrative support while local jurisdictions remained in the background from which they are, however, presently showing signs of emerging.
There is increasing interest in fiscal decentralization in Peru as a mechanism to generate more involved decision-making at the subnational level. This is tempered with a continuing emphasis on overall fiscal stability. However, considerable work needs to be undertaken to define more clearly expenditure responsibilities and financing mechanisms that increase local accountability. In addition, a more transparent fiscal transfer system is needed, together with clarity in expenditure management at all levels of government. The paper suggests that a substantial work agenda is needed to extend the decentralization process with greater transparency.
In this local self-government era, in order to achieve real local decentralization, it is guaranteed to establish self-finances of certain administration level. Nowadays Local equalization scheme is carried out for insuring regional equal development and efficiency and effectiveness of administration and for solving vertical horizontal problem of unequal finance in local government. Local equalization scheme is the system to guarantee the financial source so that all local self-governing organizations can obtain national minimum standard while correcting the unbalance of finance and maldistribution of tax revenue source between regions. This paper presents the directions of improvement so that national subsidy and local tax can contribute to the finance balance of local self-governing organization in the uncertainties of future finance with weak financial ability. Consequently, it is required to operate the system according to balance principle by adjusting the operation form and distribution type such as national subsidy and local tax.