Framework%20for%20Fiscal%20Decentralization

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Framework for Fiscal Decentralization

• Professor Roy BahlGeorgia State
  University(rbahl_at_gsu.edu)

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Fiscal DecentralizationThree Things to Think
About

• What is it?
• Why do it?
• How to do it?

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What is Fiscal Decentralization

• Empowering People By Empowering Their Local
  Governments

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Why Do It?

• What Is To Be Gained?

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Why Decentralization?

• Economic Development
• Elected Government
• Inefficient Centralization
• Uniformity Not Acceptable
• Local Government Capacity
• Autonomy v. Backdoor Approaches
• Poor Service Delivery

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The Benefits

• Better Local Services
• Citizen Participation
• Increased Revenue
• Develop Local Capacity

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What is Necessary to Capture the Benefits of
Fiscal Decentralization

• Elected councils and chief local officers
• Local taxing powers
• Significant, clear, expenditure responsibility
  and autonomy
• Hard budget constraints and less central
  paternalism
• Central government leadership
• A champion

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The Arguments for Fiscal Centralization

• Macroeconomic Control, Stabilization
• Policy
• Direction of Investment in Social
• Overhead
• Equalization Potential
• Central Competence and Honesty
• Reduces Central Bureaucratic Control

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(No Transcript)
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What Kinds of Countries Choose Decentralization?

• Large
• More developed
• More heterogeneous
• Internal discord and natural resources

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• How To Implement
• Fiscal Decentralization

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The Process for Decentralization (Theory)

• National Debate, White Paper
• Develop A Detailed Plan
• The Law
• Implementing Rules, Regulations
• Implementation
• Monitor/Evaluate

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Rules

• 1. Intergovernmental Fiscal Relations (Fiscal
  Decentralization) is a system, and all of the
  pieces must fit together.

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Rules (contd)

• 2. First, fix the assignment of expenditures,
  then assign revenues in amount that will
  correspond to the expenditure needs.

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Rules (contd)

• 3. Begin fiscal decentralization with a strong
  central ability to monitor.

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Rules (contd)

• 4. One system will not fit the urban and rural
  sectors.

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Rules (contd)

• 5. Accountability of local government
  officials requires significant local fiscal
  autonomy. Urban local governments
  must have some taxing powers.

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Good Local Tax Bases

• Payrolls, Wages
• Property, Land Value
• Motor Vehicles
• Business Activity
• User Charges

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Rules (contd)

• 6. The central government must honor its
  commitment to decentralization by following the
  rules it makes.

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Rules (contd)

• 7. Keep it simple. Precision in tax
  administration and grant distribution is probably
  not possible in most cases.

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Rules (contd)

• 8. Grants and shared taxes must play an important
  role in almost any decentralized fiscal system in
  a developing or transition country. Transfers may
  be designed as more centralized or more
  decentralized.

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Rules (contd)

• 9. There is an intraprovince dimension to
  intergovernmental fiscal relations and this
  should be taken into account in planning the
  system.

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Rules (contd)

• 10. Impose a hard budget constraint on
• local governments.

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Rules (contd)

• 11. Recognize that intergovernmental systems are
  always in transition, and plan for this.

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Rules (contd)

• 12. There must be a champion.

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Champions of Fiscal Decentralization
Potentially Strong Supporters Comments
The People and their elected representatives Demand for more participation in governance at the local level.
The President Decentralization is a popular policy with the electorate. However, the President must also be very mindful of stabilization concerns with the decentralization, since inflation and unemployment are usually the greatest danger to his/her political standing.
The Parliament or Congress Decentralization is a popular policy with the electorate. Parliament would like to identify with specific local projects they could bring home, therefore, they will favor a less transparent and less structured system.
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Champions of Fiscal Decentralization (contd)
Potentially Strong Supporters Comments
Urban Local Governments Give us the autonomy to tax and spend. Urban local governments are often most concerned with how their autonomy is circumscribed, and how their access to their tax base is limited.
External Donors This provides encouragement and some technical assistance to get the process underway, but is no substitute for an in-country champion.
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Champions of Fiscal Decentralization (contd)
Potentially Weak Supporters Comments
Ministry of Finance Would propose strict limits to decentralization in order to hold the main fiscal tools for stabilization policy purposes.
Ministry of Economy Would like to control the type of investment made, as well as the regional distribution of investment. Typically interested in programs with big externalities versus local benefit programs.
Line Ministries Delivery, and often would like to hold an approval or sign-off power.
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Champions of Fiscal Decentralization (contd)
Ambivalent Supporters Comments
Ministry of Local Government Would favor a greater guaranteed share for local governments, but would like to control the distribution of those resources.
Weaker local governments Would like a guaranteed transfer of resources from the urban and wealthier local governments to the rest. More interested in a transfer system than in a local taxing system.