1. 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
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Fiscal Decentralization

2. Fiscal Decentralization
What is it?
Why do it?
How to do it?
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3. 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
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4. Fiscal Decentralization:
Why do it?
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Fiscal Decentralization

5. 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
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6. The Arguments for Fiscal Decentralization
Moves Government closer to the People
Can improve Revenue Mobilization
Better Size Distribution of Cities
Nation Building
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7. Can Local Governments Capture These Benefits?
Elected Councils
Chief Local Officers
Local Taxing Powers
Significant Expenditure Responsibility
and Autonomy
Adequate Tax Administrative Capacity
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8. 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
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9. Do Countries Decentralize?
Empirical Evidence
Determinants
Industrialization
Economic Development
Size
Diversity
War
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10. Fiscal Decentralization Indicators
Table 1
Fiscal Decentralization Indicators
Source: Computed from data in Government Finance Statistics Yearbook. International Monetary Fund (various years).
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11. How To Do Decentralization
12 Rules For Implementation

12. 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.
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13. Fiscal Decentralization
Rules
1. Intergovernmental Fiscal Relations (Fiscal Decentralization) is a system, and all of the pieces must fit together.
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14. What Is Fiscal Decentralization?
Expenditure Assignment / Autonomy
Revenue Raising Powers
Borrowing Powers
Local Elected Councils
Civil Service Rules
Fiscal Relations Among Governments
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15. Fiscal Decentralization
Rules (Cont’d)
2. First, fix the assignment of expenditures, then assign revenues in amount that will correspond to the expenditure needs.
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16. Fiscal Decentralization
Rules (Cont’d)
3. Begin fiscal decentralization with a strong central ability to monitor and evaluate.
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17. Fiscal Decentralization
Rules (Cont’d)
4. One system will not fit the urban and rural sectors.
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18. Fiscal Decentralization
Rules (Cont’d)
5. Accountability of local government officials requires significant local fiscal autonomy. Urban local governments must have some taxing powers.
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19. What Makes A Good Local Tax?
Adequate, Significant Revenue Yield
Stability of Revenue Yield
Correspondence Between Revenue Burden
Administrative Feasibility
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20. 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
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21. Fiscal Decentralization
Rules (Cont’d)
6. The central government must honor its commitment to decentralization by following the rules it makes.
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22. Fiscal Decentralization
Rules (Cont’d)
7. Keep it simple. Precision in tax administration and grant distribution is probably not possible in most cases.
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23. 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.
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24. 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.
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25. 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.
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26. Fiscal Decentralization
Rules (Cont’d)
Impose a hard budget constraint.
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27. Fiscal Decentralization
Rules (Cont’d)
11. Recognize that intergovernmental systems are always in transition, and plan for this.
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28. Fiscal Decentralization
Rules (Cont’d)
12. There must be a champion.
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29. 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.
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30. 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.
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31. 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.
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32. 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.
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