Subnational Government Structure and Intergovernmental Fiscal Relations: An Overlooked Dimension of Decentralization

The purpose of this paper is to explore what guidance economic theory and international practices offer policy makers in considering the issue of subnational government structure in the context of fiscal decentralization reforms, particularly in developing and transition economies. To this effect, the remaineder of this paper is structured as follows. First, Section 2 reviews the conceptual and theoretical foundations that guide the economic determination fo an optimal size of local governments, while Section 3 considers the application of these concepts and theories to subnational government structure in the real world. Next, Section 4 addresses the second dimension of subnational government structure: what factors determine the optimal number of subnational government levels? Section 5 addresses the vertical and horizontal relations between different government levels. Finally, we consider the applicability of the conveptual framework by making a number of onvservations about international practices and experiences in structuring subnational government relations. Working Paper Number 04-01