A Framework For Evaluating Alternate Institutional Arrangements For Fiscal Equalization Transfers

Fiscal equalization programs are fairly common features of intergovernmental fiscal relations in industrial countries. Some developing countries have also recently introduced these programs and still others are contemplating such programs. Institutional arrangements for fiscal equalization vary across countries with wide variations in the form and membership of the relevant decisionmaking bodies. This paper provides a simple neo-institutional economics framework for assessing alternative institutional arrangements for their impacts on simplicity, transparency, and objectivity of the equalization program, as well as transaction costs for various parties involved. Comparing institutional arrangements across different countries is a daunting task. The success of these arrangements depends on a multitude of factors. The success of governance structures for fiscal matters may depend not only on the incentives regime associated with their inner structures but also their interactions with other formal and informal institutions in the country. This paper presents a simple framework to understand these incentives and interactions and draw implications for their impacts on transactions costs for the society as a whole and achievement of societal objectives. An application of these concepts to the specific case of institutional arrangements for fiscal equalization transfers are carried out and the predictions based on the theory are compared with observed experiences in major federal countries. The paper demonstrates that the simple new institutional framework presented here has a significant power for predicting potential impacts. The paper concludes, both in theory and practice, that the case for independent grants commission to enhance the transparency, equity, and accountability of the intergovernmental finance system is vastly exaggerated.

In this book, experts from across the globe highlight the state of knowledge in intergovernmental transfer design. The essays collected in the volume represent creative new thinking about challenging policy issues and offer useful options for policy makers. The book offers academics and practitioners a thorough, thematic assessment of unresolved issues in the design of equalization grants.

Intergovernmental fiscal transfers are a dominant feature of subnational finance in most countries. They are used to ensure that revenues roughly match the expenditure needs of various orders (levels) of subnational governments. They are also used to advance national, regional, and local area objectives, such as fairness and equity, and creating a common economic union. The structure of these transfers creates incentives for national, regional, and local governments that have a bearing on fiscal management, macroeconomic stability, distributional equity, allocative efficiency, and public services delivery. This paper reviews the conceptual, empirical, and practice literature to distill lessons of policy interest in designing the fiscal transfers to create the right incentives for prudent fiscal management and competitive and innovative service delivery. It provides practical guidance on the design of performance-oriented transfers that emphasize bottom-up, client-focused, and results-based government accountability. It cites examples of simple but innovative grant designs that can satisfy grantors' objectives while preserving local autonomy and creating an enabling environment for responsive, responsible, equitable, and accountable public governance. The paper further provides guidance on the design and practice of equalization transfers for regional fiscal equity as well as the institutional arrangements for implementation of such transfer mechanisms. It concludes with negative (practices to avoid) and positive (practices to emulate) lessons from international practices.

The design of intergovernmental fiscal transfers has a strong bearing on efficiency and equity of public service provision and accountable local governance. This book provides a comprehensive one-stop window/source of materials to guide practitioners and scholars on design and worldwide practices in intergovernmental fiscal transfers and their implications for efficiency, and equity in public services provision as well as accountable governance.

In China, most of the service delivery responsibilities are assigned to the subnational governments. Yet for reasons of efficiency in tax collection and administration, the central government collects revenues far in excess of its expenditure needs. In 2003 the central government collected 70 percent of consolidated revenues but accounted for only 30 percent of consolidated expenditures. The initial fiscal surplus of the central government enables it to use its spending power to provide financing to subnational jurisdictions for the achievement of national objectives and to influence local priorities. This paper examines the incentives associated with the design of such transfers and their implications for the efficiency and equity of public service provision and accountable local governance in China. The paper argues that the existing design of such transfers is not consistent with efficiency and equity considerations. It further undermines local autonomy without enhancing local accountability while creating incentives for imprudent fiscal management. Its main limitations include a complex and opaque system, a piecemeal approach to gap filling, lack of consistency of design with objectives, focus on input controls without regard for output accountability, incentives to support an antiquated management paradigm, a one-size-fits-all approach to local financing, and lack of transparency and regulatory framework for the intergovernmental transfer system. The paper makes specific suggestions on a reform of this system to overcome these limitations and on better use of fiscal transfers to create responsive, responsible, equitable, and accountable local governance in China.

Struggles over what a region receives, or should receive, from the budget of the central government are common to many countries. Discussions often focus on the measures of net fiscal flows or fiscal balances provided by the government or other actors. This unique book shows just how these flows are computed then interpreted and clarifies the often misunderstood economic and political motives that explain why some regions receive more monies than others. The Political Economy of Inter-Regional Fiscal Flows provides an overview of the main methods currently being used to measure fiscal flows , highlighting the advantages of the different approaches and interpreting their results. The book reviews the political economy literature that analyses the determinants of inter-regional fiscal flows . Particular attention is devoted to the relationship between fiscal flows and country stability, with methodological contributions and country studies both focusing on this issue. The contributing economists and political scientists provide a state-of-the-art study that will prove to be of great use to academics and practitioners in public sector economics and finance.

This paper discusses trends in fiscal adjustment in Brazil since the 1990s, with particular emphasis on the strengthening of institutions for fiscal policymaking, and its effect on local government finances and their ability to invest in infrastructure building and upgrading. Although fiscal adjustment, which is ongoing, has taken a toll on the government's ability to finance much-needed infrastructure investment, it is not the only culprit. A lack of budget flexibility, against a backdrop of increasing downward rigidities in current spending, also constrains the government's ability to invest. The paper argues that regulatory uncertainty in many sectors, particularly water and sanitation, in which the municipalities play a leading role, has discouraged private sector investment and that the financing of infrastructure building and upgrading goes beyond the municipal level of government. Higher-level jurisdictions are responsible for financing investment in energy and transport infrastructure, for example.

Contributors provide a fascinating account of how federal countries are confronting the traditional challenges of conflicts over division of fiscal powers while also coping with emerging challenges of globalization and citizen empowerment arising from the information revolution. They analyze how relationships and roles in different orders of government are being reshaped and show how local solutions inspired by global principles help strengthen government accountability and improve the quality of life for citizens.