Global Experience And Framework For Fiscal Decentralization Roy Bahl Dean, Andrew Young School of Policy Studies Georgia State University The World Bank May 8-10, 2006 1/12/2019 Fiscal Decentralization

Fiscal Decentralization What is it? Why do it? How to do it? 1/12/2019 Fiscal Decentralization

Fiscal Decentralization What It Is Empowering local populations by empowering their elected local government What It Is Not Civil Society Initiatives Deconcentration of government apparatus 1/12/2019 Fiscal Decentralization

Fiscal Decentralization: Why do it? 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Why Decentralization Economic Development Elected Government Inefficient Centralization Uniformity Not Acceptable Local Government Capacity Autonomy vs. Backdoor Approaches Poor Service Delivery Prevent Secession / Civil War 1/12/2019 Fiscal Decentralization

The Arguments for Fiscal Decentralization Moves Government closer to the People Can improve Revenue Mobilization Better Size Distribution of Cities Nation Building 1/12/2019 Fiscal Decentralization

Can Local Governments Capture These Benefits? Elected Councils Chief Local Officers Local Taxing Powers Significant Expenditure Responsibility and Autonomy Adequate Tax Administrative Capacity 1/12/2019 Fiscal Decentralization

The Arguments for Fiscal Centralization Macroeconomic Control, Stabilization Policy Direction of Investment in Social Overhead Equalization Potential Central Competence and Honesty Maintains Central Bureaucratic Control 1/12/2019 Fiscal Decentralization

Do Countries Decentralize? Empirical Evidence Determinants Industrialization Economic Development Size Diversity War 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Indicators Table 1 Fiscal Decentralization Indicators Source: Computed from data in Government Finance Statistics Yearbook. International Monetary Fund (various years). 1/12/2019 Fiscal Decentralization

How To Do Decentralization 12 Rules For Implementation

A Normative Approach To Sequencing Step 6: Monitor, Evaluate, and Retrofit Step 5: Implement the Decentralization Program Step 4: Develop the Implementing Regulations Step 3: Pass the Decentralization Law Step 2: Do the Policy Design and Develop a White Paper Step 1: Carry out a National Debate on the Issues Related to Decentralization Policy The Platform: Deconcentration, Rule of Law, etc. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules 1. Intergovernmental Fiscal Relations (Fiscal Decentralization) is a system, and all of the pieces must fit together. 1/12/2019 Fiscal Decentralization

What Is Fiscal Decentralization? Expenditure Assignment / Autonomy Revenue Raising Powers Borrowing Powers Local Elected Councils Civil Service Rules Fiscal Relations Among Governments 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 2. First, fix the assignment of expenditures, then assign revenues in amount that will correspond to the expenditure needs. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 3. Begin fiscal decentralization with a strong central ability to monitor and evaluate. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 4. One system will not fit the urban and rural sectors. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 5. Accountability of local government officials requires significant local fiscal autonomy. Urban local governments must have some taxing powers. 1/12/2019 Fiscal Decentralization

What Makes A Good Local Tax? Adequate, Significant Revenue Yield Stability of Revenue Yield Correspondence Between Revenue Burden Administrative Feasibility 1/12/2019 Fiscal Decentralization

How Should Revenues Be Assigned? Value Added Tax Foreign Trade Taxes Business Income Tax Individual Income Tax Excises Retail Sales Tax Motor Vehicles Property Tax User Charges Borrowing Commercial Ventures 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 6. The central government must honor its commitment to decentralization by following the rules it makes. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 7. Keep it simple. Precision in tax administration and grant distribution is probably not possible in most cases. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization 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. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rule’s (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. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 9.There is an intraprovince (intrastate) dimension to intergovernmental fiscal relations and this should be taken into account in planning the system. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) Impose a hard budget constraint. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 11. Recognize that intergovernmental systems are always in transition, and plan for this. 1/12/2019 Fiscal Decentralization

Fiscal Decentralization Rules (Cont’d) 12. There must be a champion. 1/12/2019 Fiscal Decentralization

The 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. 1/12/2019 Fiscal Decentralization

The 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 in-country champion. 1/12/2019 Fiscal Decentralization

The 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. 1/12/2019 Fiscal Decentralization

The 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. 1/12/2019 Fiscal Decentralization