Unconditional Intergovernmental Transfers to Finance Decentralization in Albania

The Government of Albania embarked on a comprehensive program to decentralize decision‐making powers with the passage of the Law on Organization and Functioning of Local Governments in 2000. A centerpiece of the policies undertaken to implement that legislation was an unconditional transfer program which, using a formula‐based allocation mechanism, transferred substantial financial resources to the local communes and municipalities beginning in 2002. This paper describes that system and its evolution. It illustrates how the transfer was designed to take into account the transition from a centralized system to a decentralized arrangement for provision of local public services and how the formula has undergone some “fine‐tuning” while retaining its simplicity. Analysis of the outcomes reveals how it has achieved its mandated objective of equalizing resources across local governments; however, it does so while running the risk of substantially discouraging local governments from mobilizing resources of their own.     

The Informal Sector in Developed and Less Developed Countries: A Literature Survey

The main goal of this study is two-fold: (1) to provide ageneral overview of the contributions to the literature on theinformal sector, with a special focus on the public choiceapproach; and (2) to compare these contributions across twoinstitutionally different types of countries: developed andless developed (developing and transition) countries. Thepaper focuses on the criteria used to define the informalsector, the relationship between the formal and informaleconomy, tax evasion, and public choice analysis. It isstressed throughout this paper that the distinction betweenthe two types of countries is of key importance.     

Fiscal Decentralization in Comparative Perspective: Analysis of the Intergovernmental Grant Systems in Indonesia and Thailand

Decentralization can inadvertently lead to local fiscal disparity. One type of intergovernmental fiscal transfers, the general-purpose grant, can help equalize local fiscal imbalances. This article examines the extent to which the general-purpose grant systems in Indonesia and Thailand help mitigate local fiscal disparity. The findings show that the general-purpose grant system in Thailand does not effectively address disparities in local fiscal conditions. Localities with more own-source revenues and higher per capita income receive more general-purpose grants than those with weak fiscal capacity. In contrast, Indonesia’s general-purpose grant allocation system provides more resources for economically disadvantaged and conflict-ridden provinces.     

Intergovernmental Fiscal Relations: Coordination Failures and Fiscal Outcomes

This article estimates the fiscal impact of coordination failures in intergovernmental fiscal relations. The coordination failures considered here are due to agency problems arising from the delegation of fiscal powers to sub-national governments, and "common pool" problems associated with funding decentralised government spending through intergovernmental transfers. Particular attention is focused on the trade-off between coordination and fiscal decentralisation. Evidence provided for a sample of thirty countries suggests that coordination failures are likely to result in a deficit bias in decentralized policy making, particularly in the case of developing countries, for which the benefits of decentralization may be over-stressed. Developed countries were found to be less adversely affected by coordination failures and have therefore managed to pursue fiscal consolidation in a decentralized setup.     

Fiscal Decentralization and Federalism in Latin America

In contrast to years of centralization when the national governmentdominated the states and municipalities, fiscal decentralizationis now taking place throughout Latin America. This study considersthe reasons for this change. Fiscal decentralization meritsseparate attention because the financial independence of subnationalgovernments ultimately determines their success and power. Competingpolitical and economic explanations are tested on a sample of17 countries between 1985 and 1995. While federalism is a significantpredictor of greater fiscal decentralization, other factorssuch as presidential power, structural adjustment, level ofdevelopment, and country size also determine the level of fiscaldecentralization.     

Public Expenditure Management Reform in India via Intergovernmental Transfers

This paper explores the possibility of using the channel of intergovernmental transfers for Public Expenditure Management reform in India. It seeks to introduce a quantifiable measure of expenditure quality which would influence intergovernmental transfers. The central message of this study is that a Quality Control Fund should be created by the Finance Commission. Inter‐se distribution from this would be in the nature of a reward to the states for their performance in the context of expenditure quality. The funds received from this incentive fund could be tied to spending on education and health. It would be a major change of approach if the Finance Commission mandated the States to set out some realistic output targets which could be monitored (would be reviewed by the next Finance Commission). This would be a big stride toward results‐based output‐oriented transfers and could herald a sea change in the very approach of budgeting and intergovernmental relations in India!     

Fiscal Decentralization as Development Policy

Fiscal Decentralization is a popular economic development strategy among transition and developing countries. This article reviews the advantages of fiscal decentralization in a theoretical context, but critiques the relevance of the standard theory of federalism as it applies to emerging economies. It is argued that the macroeconomic benefits of fiscal centralization, the absence of good instruments of local government finance, and the centralist politics that characterize most low income countries have been strong enough to hold back increased emphasis on local government finance.     

Incentivizing Fiscal Transfers in the Indian Federation

The sharp deterioration in the fiscal health of the states hasbeen a matter of concern for policymakers. The remedial measuresrecently taken include the institution of the Medium Term FiscalRestructuring Policy (MTFRP), stipulating performance requirementsfor borrowing from the World Bank and the Asian DevelopmentBank (ADB), and the Accelerated Power Development and ReformProgram (APDRP). This article evaluates these schemes. The importantconclusions are that (1) incentive-linked transfers are toosmall to make any difference to fiscal performances, (2) multipleschemes create segmented incentives, (3) there are serious problemsof design, and (4) the schemes do not address the basic causesof deterioration in the states 'fiscal performance.     

Decentralization,Fiscal Independence,and Poverty in the Philippines

Decentralization is a common public sector reform in developing countries. Its basic rationale is that local governments have an informational advantage regarding the needs and preferences of consumers. However, decentralization also has drawbacks. Foremost is the efficiency advantage of the central government in providing public services because of economies of scale and better access to resources. This study looked at the relationship between decentralization and poverty using data from Philippine cities and municipalities. Results suggest that decentralization, as represented by fiscal independence and measured by the share of locally sourced revenues to total local government revenues, is indeed associated with lower poverty. However, this effect is not linear—the marginal effect of decentralization on poverty diminishes as decentralization increases. Moreover, decentralization moderates the positive effect of good governance on poverty reduction and the magnitude of the relationship between poverty and decentralization is stronger in poorer municipalities than in richer ones.     

Intergovernmental Structure and Fiscal Management Strategies: A Crossnational Analysis

Does intergovernmental structure have a systematic effect on the impacts of local governments' fiscal policy responses? Using empirical data from more than 800 local governments in five countries, the article concludes that intergovernmental structure is associated with the impact attributed to various fiscal management strategies. Such strategies have generally had greater impact in local governments in federal systems than those in unitary state systems. There are similarities between federal and unitary local governments regarding the fiscal management strategies that have least impact, and both types stress the importance of productivity gains via technology. But the differences in relative importance and level of impact are more striking than the similarities. In particular, fiscal management strategies involving the relations of the local government with other governments, such as obtaining intergovernmental revenue and shifting service provision to other governments, have greater impact in significantly more federal systems than in unitary state systems. These federal local governments also experience greater impacts from increasing user charges and raising local taxes. In contrast, local governments in unitary state systems place greater reliance on the more politically expeditious strategy of across–the–board expenditure reductions and on reductions of capital spending. These findings suggest that local governments in more decentralized systems have greater flexibility to manipulate relations with other governments in order to enhance their own fiscal situation. The data also suggest that the government's level of fiscal stress is not systematically associated with the level of impact from most fiscal management strategies, especially in the unitary state systems.     

Fiscal Decentralization and Provincial-Level Fiscal Disparities in China: A Sino-U.S. Comparative Perspective

Since China's 1994 fiscal reform, increasing concerns have been voiced about fiscal disparities across the country. Can local governments fairly and effectively fulfill basic public services such as primary education, public health, and social welfare? This essay traces the evolution of intergovernmental relations in China since 1978. The fluctuation of provincial level fiscal distribution over time and the underlying factors behind fiscal inequality, as compared to a decentralized American revenue system, are analyzed. The author, Zhirong Jerry Zhao of the University of Minnesota, argues for additional research on alternative measures of local fiscal capacity.     

Fiscal Decentralization and Economic Growth: Evidence from Spanish Regions

The degree of fiscal decentralization in Spain is similar to main federal countries and greater than unitary ones. The demand of public sector decentralization is based on a supposed efficiency gains that is far from being obvious. Using a data set for the Spanish regions, we reject the null hypothesis of a significant relationship between growth in per capita gross domestic product (GDP) and expenditure distribution among fiscal administrations. Nonetheless, we find empirical support for a relationship between revenue decentralization, far less advanced than the expenditure one, and growth. In both cases we do reject the null hypothesis of a nonlinear linkage between fiscal decentralization and growth in per capita GDP.     

Adjusting Fiscal Decentralization Programs to Improve Service Results in Bulgaria and Romania

Fiscal decentralization programs are works in progress, and expenditure roles often need to be adjusted to improve service delivery. The Balkan countries of Romania and Bulgaria, both needed for accession to the European Union in 2007, must demonstrate positive results from their fiscal decentralization programs in the social services area. Focusing on social service delivery, this paper explores how the design of fiscal decentralization programs, in the form of assigning intergovernmental expenditure roles and responsibilities, affects service performance. The authors conclude that fiscal decentralization requires the proper assignment of authority to match expenditure responsibilities and the policy and administrative capacity to carry them out.     

Political Power, Fiscal Crises, and Decentralization in Latin America: Federal Countries in Comparative Perspective (and some Contrasts with Unitary Cases)

What factors shape decentralization processes in Latin Americanfederations? This work reviews and statistically analyzes currentapproaches on the topic, questions some claims of generalityin their theoretical frameworks, and presents an argument toexplain variation in decentralization processes across thesefederations. The main hypothesis is that the degree of decentralization(in fiscal and administrative terms) in Latin American federationshas been shaped by the political power of the national executiveand sub-national actors and the fiscal context in which theyinteract. The article presents statistical evidence (for federaland unitary countries between 1979 and 1998) to sustain someof the expectations in the argument and discusses some of itslimitations.     

The Impact of Decentralization on Subnational Government Fiscal Slack in Indonesia

Since Indonesia began implementing its decentralization program in 2001, subnational unspent balances have grown rapidly and have reached levels that many officials find unreasonably high. But the extent to which subnational government reserves are excessive, in general, is not obvious. A not implausible decrease in the price of oil would reduce transfers to subnationals significantly and, if sustained, could possibly eliminate reserves in a relatively short time. Central government should not take any immediate action to reduce subnational slack resources directly but should instead focus on removing the underlying causes of such.