Fiscal Decentralization and Accountability. Jean-Paul Faguet London School of Economics and Political Science & IPD Outline Definition/concept of fiscal decentralization Intergovernmental (fiscal) relations How to assign public services to different levels of government
London School of Economics and Political Science & IPD
Financial aspects of devolution to regional and local government.
Also called “fiscal federalism”.
Two interrelated issues:
Decentralization does not eliminate central government responsibility, rather changes it:
Direct provision of public service Cost sharing, regulation, monitoring, etc.
“Decentralized” public services = overlapping responsibilities amongst 2+ levels of government.
Ex: Education – Local provision & regulation, Central finance, Central standards for pricing and provision.
Requires local and central governments to find a way to work together.
This is Intergovernmental Relations (IGR).
Source: Winkler and Gershberg (1999).
Which public services should be devolved?
Broad principle of government design:
Encompassing principle: Assignment of governmental responsibility should encompass relevant externalities.
National externalities and public goods are best dealt with by national governments, local externalities and public goods by local governments.
Local government should be responsible for all forms of spending which do not inflict an externality on other jurisdictions. The level and type of such spending can be tailored to the desires of the local residents.
Arguably few externalities.
But: Actual political jurisdictions will never adequately encompass all the relevant externalities, and hence there will always be the need for intergovernmental cooperation
Five basic guidelines for designing revenue systems.
1) Shares of national taxes distributed either
a) by formula (e.g. per capita), or
b) by origin (i.e. to the local government where they are collected).
2) Grants/subventions which are either
a) targeted to support specific expenditures (e.g. education), or
b) untargeted and used at discretion of LGs (e.g. block grants).
Targeted grants – for expenditures favoured by national government.
Tax sharing and block grants usually have two main purposes, vertical and horizontal equalisation.
Vertical equalisation: closing the gap between the cost of services devolved to local governments and their local revenues.
Horizontal equalisation: closing the gap between rich and poor districts’ revenues (per capita).
Intergovernmental transfer systems in many countries, e.g. Latin America, are far from satisfying such criteria. There are often open channels for “moving money around” fiscal irresponsibility, uncertainty and instability.
But not necessarily any accountability improvements.
Why So Much Centralization?
Why Does Decentralization Fail?
This combination of incentives generates a game in which c offers districts the minimum necessary to ensure cooperation of the largest number. This maximizes its own allocation of resources.
Is this what most of the world’s developing countries look like?
Because it is in the interests of those who live in the capital. They benefit directly from a highly centralized government with weak constitutional guarantees for lower-level districts. And they make the laws of the land.
Why Does Decentralization So Often Fail?
B/c few reforms are seriously pursued. Those charged with implementing reform – CG bureaucrats – have little interest in succeeding. They benefit from the residual power they hold, and do not want to see it, or resources, dispersed.
Instead, decentralization becomes one more policy promise on which the center reneges. And the old pattern of central accumulation continues.
Decentralization decreased centrifugal forces in and helped integrate:
Could decentralization help/have helped in:
Decentralization and Violence in Colombia
Decentralization provided pots of money that guerrillas and para’s could capture. They did so, using these localities as bases of finance and operations.
Did D cause Bolivia’s political party system to collapse?
Drawing on your experience -- Is fiscal decentralization likely to spur peacebuilding or aggravate tensions in Afghanistan?