Framework for Fiscal Decentralization Professor Roy Bahl Georgia

Framework for Fiscal Decentralization Professor Roy Bahl Georgia State University (rbahl@gsu. edu)

Fiscal Decentralization Three Things to Think About n What is it? n Why do it? n How to do it? 2

What is Fiscal Decentralization n Empowering People By Empowering Their Local Governments 3

Why Do It? n What Is To Be Gained? 4

Why Decentralization? n n n n Economic Development Elected Government Inefficient Centralization Uniformity Not Acceptable Local Government Capacity Autonomy v. Backdoor Approaches Poor Service Delivery 5

The Benefits n Better Local Services n Citizen Participation n Increased Revenue n Develop Local Capacity 6

What is Necessary to Capture the Benefits of Fiscal Decentralization n Elected councils and chief local officers n Local taxing powers n Significant, clear, expenditure responsibility and autonomy n Hard budget constraints and less central paternalism n Central government leadership n A champion 7

The Arguments for Fiscal Centralization n Macroeconomic Control, Stabilization n n Policy Direction of Investment in Social Overhead Equalization Potential Central Competence and Honesty Reduces Central Bureaucratic Control 8

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What Kinds of Countries Choose Decentralization? n Large n More developed n More heterogeneous n Internal discord and natural resources 10

How To Implement Fiscal Decentralization 11

The Process for Decentralization (Theory) n National Debate, White Paper n Develop A Detailed Plan n The Law n Implementing Rules, Regulations n Implementation n Monitor/Evaluate 12

Rules 1. Intergovernmental Fiscal Relations (Fiscal Decentralization) is a system, and all of the pieces must fit together. 13

Rules (cont’d) 2. First, fix the assignment of expenditures, then assign revenues in amount that will correspond to the expenditure needs. 14

Rules (cont’d) 3. Begin fiscal decentralization with a strong central ability to monitor. 15

Rules (cont’d) 4. One system will not fit the urban and rural sectors. 16

Rules (cont’d) 5. Accountability of local government officials requires significant local fiscal autonomy. Urban local governments must have some taxing powers. 17

Good Local Tax Bases n Payrolls, Wages n Property, Land Value n Motor Vehicles n Business Activity n User Charges 18

Rules (cont’d) 6. The central government must honor its commitment to decentralization by following the rules it makes. 19

Rules (cont’d) 7. Keep it simple. Precision in tax administration and grant distribution is probably not possible in most cases. 20

Rules (cont’d) 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. 21

Rules (cont’d) 9. There is an intraprovince dimension to intergovernmental fiscal relations and this should be taken into account in planning the system. 22

Rules (cont’d) 10. Impose a hard budget constraint on local governments. 23

Rules (cont’d) 11. Recognize that intergovernmental systems are always in transition, and plan for this. 24

Rules (cont’d) 12. There must be a champion. 25

Champions of Fiscal Decentralization Potentially Strong Supporters Comments The People and their Demand for more participation in governance at elected representatives 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. 26

Champions of Fiscal Decentralization (cont’d) 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 incountry champion. 27

Champions of Fiscal Decentralization (cont’d) 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. 28

Champions of Fiscal Decentralization (cont’d) 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. 29