A framework for evaluating alternate institutional arrangements for fiscal equalization transfers

Fiscal equalization programs are fairly common features of intergovernmental fiscal relations in industrial countries. Some developing countries have also recently introduced these programs and still others are contemplating such programs. Institutional arrangements for fiscal equalization vary across countries with wide variations in the form and membership of the relevant decisionmaking bodies. This paper provides a simple neo-institutional economics framework for assessing alternative institutional arrangements for their impacts on simplicity, transparency, and objectivity of the equalization program, as well as transaction costs for various parties involved. Comparing institutional arrangements across different countries is a daunting task. The success of these arrangements depends on a multitude of factors. The success of governance structures for fiscal matters may depend not only on the incentives regime associated with their inner structures but also their interactions with other formal and informal institutions in the country. This paper presents a simple framework to understand these incentives and interactions and draw implications for their impacts on transactions costs for the society as a whole and achievement of societal objectives. An application of these concepts to the specific case of institutional arrangements for fiscal equalization transfers are carried out and the predictions based on the theory are compared with observed experiences in major federal countries. The paper demonstrates that the simple new institutional framework presented here has a significant power for predicting potential impacts. The paper concludes, both in theory and practice, that the case for independent grants commission to enhance the transparency, equity, and accountability of the intergovernmental finance system is vastly exaggerated.Municipal Financial Management,Public Sector Management and Reform,Regional Governance,Urban Governance and Management,Urban Economics

Sponsoring a race to the top : the case for results-based intergovernmental finance for merit goods

Intergovernmental finance is a significant source of sub-national finance in most countries. In both industrial and developing countries, formula based"manna from heaven"general purpose transfers dominate but co-exist with highly intrusive micro-managed"command and control"specific purpose transfers. Both these types of transfers undermine political and fiscal accountability. Reforms to bring in design elements that incorporate incentives for results-based accountability are resisted by both donors and recipients alike. This is because the donors perceive such reforms as attempts at chipping away at their powers and recipients fear such programs will be intrusive. This paper presents conceptual and practical underpinnings of grant designs that could further simplicity, objectivity, and local autonomy objectives while furthering citizen-centric results-based accountability. The paper further highlights a few notable recent initiatives in both industrial and developing countries that embrace such directions for reform. The paper concludes that results-based intergovernmental finance offers significant potential to minimize tradeoffs between local autonomy and accountability while furthering access to merit goods.Banks&Banking Reform,Tertiary Education,Public Sector Economics,Public Sector Expenditure Policy,Access to Finance

A practitioner's guide to intergovernmental fiscal transfers

Intergovernmental fiscal transfers are a dominant feature of subnational finance in most countries. They are used to ensure that revenues roughly match the expenditure needs of various orders (levels) of subnational governments. They are also used to advance national, regional, and local area objectives, such as fairness and equity, and creating a common economic union. The structure of these transfers creates incentives for national, regional, and local governments that have a bearing on fiscal management, macroeconomic stability, distributional equity, allocative efficiency, and public services delivery. This paper reviews the conceptual, empirical, and practice literature to distill lessons of policy interest in designing the fiscal transfers to create the right incentives for prudent fiscal management and competitive and innovative service delivery. It provides practical guidance on the design of performance-oriented transfers that emphasize bottom-up, client-focused, and results-based government accountability. It cites examples of simple but innovative grant designs that can satisfy grantors'objectives while preserving local autonomy and creating an enabling environment for responsive, responsible, equitable, and accountable public governance. The paper further provides guidance on the design and practice of equalizationtransfers for regional fiscal equity as well as the institutional arrangements for implementation of such transfer mechanisms. It concludes with negative (practices to avoid) and positive (practices to emulate) lessons from international practices.Public Sector Economics&Finance,Intergovernmental Fiscal Relations and Local Finance Management,Public Sector Management and Reform,Public&Municipal Finance,Urban Economics

Demanding to be served : holding governments to account for improved access

This paper presents an overview of the constitutional-legal provisions on access to services in developing countries and shows that rights to public services are not justice-able. It further documents the performance record to show that governments'response to such a weak accountability framework has been predictable - poor performance in service delivery with little accountability. The paper also shows that while there has not been a shortage of ideas on how to deal with this problem, most approaches have failed because they could not diagnose and deal with the underlying causes of government dysfunction. The paper presents an analytical perspective on understanding the causes of dysfunctional governance and the incentives and accountability regimes that have the potential to overcome this dysfunction. The paper also documents practices that have shown some promise in improving access. The paper then integrates ideas from successful practices with conceptual underpinnings for good governance and presents a citizen-centric (rights based) governance approach to access. It further explores how such a citizen empowerment and government accountability framework can be implemented in practice, especially in the context of developing countries, where most governments still operate in a command and control environment with little or no orientation to serve their people. It also presents ideas on how to overcome resistance to such reforms.National Governance,Public Sector Corruption&Anticorruption Measures,Governance Indicators,Public Sector Expenditure Analysis&Management,Banks&Banking Reform

Public infrastructure and private sector profitability and productivity in Mexico

This paper specifies a microeconomic model to estimate the impact of investment in public infrastructure on private industrial profitability. Empirical results based on time series data for 34 industries characterize the Mexican industrial structure as having involuntary unemployment, deficient product demand, declining productivity growth, increasing returns to scale, and short run excess capital capacity. Aggregate technological change over the period studied has been capital using and labor saving.Both labor and capital are underused in the short run. This disequilibrium has high efficiency costs that may be undermining Mexico's international competitiveness. Therefore, new capital investment in the public sector is not recommended at this time and should be undertaken only to rectify any identified constraints imposed by the inadequacy of infrastructure in the private employment of private factors.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Public Sector Economics&Finance,Inequality

Corruption and decentralized public governance

This paper examines the conceptual and empirical basis of corruption and governance and concludes that decentralized local governance is conducive to reduced corruption in the long run. This is because localization helps to break the monopoly of power at the national level by bringing decisionmaking closer to people. Localization strengthens government accountability to citizens by involving citizens in monitoring government performance and demanding corrective actions. Localization as a means to making government responsive and accountable to people can help reduce corruption and improve service delivery. Efforts to improve service delivery usually force the authorities to address corruption and its causes. However, one must pay attention to the institutional environment and the risk of local capture by elites. In the institutional environments typical of some developing countries, when in a geographical area, feudal or industrial interests dominate and institutions of participation and accountability are weak or ineffective and political interference in local affairs is rampant, localization may increase opportunities for corruption. This suggests a pecking order of anticorruption policies and programs where the rule of law and citizen empowerment should be the first priority in any reform efforts. Localization in the absence of rule of law may not prove to be a potent remedy for combating corruption.National Governance,Governance Indicators,Corruption&Anitcorruption Law,Public Sector Corruption&Anticorruption Measures,Government Diagnostic Capacity Building

A fiscal needs approach to equalization transfers in a decentralized federation

The author reviews the conceptual basis for fiscal equalization transfers, analyzes the theoretical implications for optimal design of equalization transfers, and suggests quantitative approaches for assessing the fiscal needs of subnational governments and determining their entitlement to transfers. The author illustrates proposed methods using data for local and provincial Canadian governments. The proposed methods could be useful tools, he says, for undertaking systematic objective reviews of aggregate and sectoral public spending in developing countries. The author argues that in a decentralized federation, fiscal inefficiencies and inequities arise because of subnational governments'differing levels of ability to provide comparable public services at comparable tax rates. Fiscal equalization transfers that reduce or eliminate differentials in net fiscal benefits create a rare instance in economics when considerations of equity and efficiency coincide. These transfers must allow for differences in the spending needs and revenues-raising abilities of the various subnational governments. The author argues for a two-tiered approach to equalization. The first tier would be a federal responsibility to equalize the burden of federal taxes. The second tier would be an interprovincial equalization fund to be administered by the Council of Provincial Finance Ministers. It would entail a comprehensive equalization system that takes into account provincial spending needs. The standard of equalization would be negotiated.Public Sector Economics&Finance,Banks&Banking Reform,Municipal Financial Management,National Governance,Environmental Economics&Policies

Citizen-centric governance indicators : measuring and monitoring governance by listening to the people and not the interest groups

Governance indicators are now widely used as tools for conducting development dialogue, allocating external assistance, and influencing foreign direct investment. This paper argues that available governance indicators are not suitable for these purposes as they do not conceptualize governance and fail to capture how citizens perceive the governance environment and outcomes in their countries. The paper attempts to fill this void by conceptualizing governance and implementing a uniform and consistent framework for measuring governance quality across countries and over time based on citizens'evaluations. Using data from the World Values Survey (and other sources) we implement this framework into practice and build citizen-centric governance indicators for 120 countries over the period 1994 to 2005.Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Banks&Banking Reform,Economic Policy, Institutions and Governance

Bridging the economic divide within nations : a scorecard on the performance of regional development policies in reducing regional income disparities

Regional inequalities represent a continuing development challenge in most countries, especially those with large geographic areas. Globalization heightens these challenges because it places a premium on skills: since rich regions typically also have better educated and better skilled labor, the gulf between rich and poor regions widens. While central governments in unitary states are relatively unconstrained in their choice of policies for reducing regional disparities, in a federation the division of powers curtails federal flexibility in policy choice. Thus in federal states large regional disparities can represent serious threats, with the state's inability to deal with such inequities creating potential for disunity and, in extreme cases, for disintegration. Inequalities beyond a threshold may lead to calls for separation by both the richest and the poorest regions. While the poorest regional may consider the inequalities a manifestation of regional injustice, the richest regions may view the union with the poorest regions as holding them back in their drive toward prosperity. Under these circumstances, there is a presumption in development economics that decentralized fiscal arrangements would lead to ever widening regional inequalities. The authors provide an empirical test of this hypothesis. The authors conclude that regional development policies have failed in almost all countries, federal and unitary alike. Among 10 countries with high or substantial regional income inequality, only one (Thailand) has experienced convergence in regional incomes. Still, federal countries do better in restraining regional inequalities, because of the greater political risk these disparities pose for such countries. The authors classify countries by degree of convergence in regional incomes: a) Countries experiencing regional income divergence - Brazil, China, India, Indonesia, the Philippines, Romania, the Russian Federation, Sri Lanka, and Vietnam. b) Countries experiencing no significant change in regional income variation - Canada and Mexico. c) Countries experiencing regional income convergence - Chile, Pakistan, Thailand, the United States, and Uzbekistan. Regional development outcomes observed in these countries provide a revealing look at the impact of regional development policies. While countries experiencing divergence tend to focus on interventionist policies, those experiencing convergence have taken a hands-off approach to regional development and instead focused on promoting an economic union by removing barriers to factor mobility and ensuring minimum standards in basic services across the nation. In Chile, for example, convergence in regional incomes is largely attributable to liberalizing the economy and removing distortions so that regions could discover their own comparative advantage. In Pakistan and the United States convergence is attributable to greater factor mobility. Paradoxically, creating a level playing field helps disadvantaged regions more than do paternalistic protectionist policies.Poverty Impact Evaluation,Economic Conditions and Volatility,Economic Theory&Research,Services&Transfers to Poor,Environmental Economics&Policies,Inequality,Poverty Impact Evaluation,Achieving Shared Growth,Economic Theory&Research,Governance Indicators

Applying a simple measure of good governance to the debate on fiscal decentralization

Debates about the appropriate role, policies, and institutions of the state are often hampered by the lack of a definition for good government. To provide a quantifiable measure of good government, the authors develop an index for the quality of governance for a sample of 80 countries. They apply the index to the debate on the appropriate level of fiscal decentralization. In measuring the quality of governance, the authors develop indices for the government's ability to: a) Ensure political transparency and a voice for all citizens (the citizen participation index measures political freedom and political stability). b) Provide effective public services efficiently (the government orientation index measures judicial and bureaucratic efficiency and the absence of corruption). c) Promote the health and well-being of its citizens (the social development index measures human development and equitable distribution of income). d) Create a favorable climate for stable economic growth (the economic management index measures outward orientation, independence of the central bank, and an inverted debt-to-GDP ratio). In relating the index of governance quality to degree of fiscal decentralization for the 80 countries, the authors are not surprised to find a positive relationship between fiscal decentralization and quality of governance. But the strength of the correlation is surprising.Banks&Banking Reform,Decentralization,Municipal Financial Management,Economic Theory&Research,Health Economics&Finance,Municipal Financial Management,National Governance,Governance Indicators,Economic Theory&Research,Banks&Banking Reform