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

Tax policy options to promote private capital formation in Pakistan

The authors developed a simple two-period general equilibrium model to analyze the macroeconomic impact of tax policies in Pakistan. They analyze two scenarios. In scenario 1, the investment tax credit rate is increased from 15 percent to 30 percent. The new fiscal regime increases investment but also significantly increases inflation. In scenario 2, the original investment tax credit rate is retained but the statutory corporate tax rate is reduced. Welfare improves more than under scenario 1. The authors conclude that in Pakistan, at least, changes in corporate tax rates are probably better instruments for promoting capital formation than are increased investment tax credits. In particular, cuts in corporate taxes improve welfare more than do increases in investment tax credits. Increasing the investment tax credit stimulates more capital formation than does decreasing corporate taxes, but the tax credits also have significant macroeconomic consequences.Environmental Economics&Policies,Public Sector Economics&Finance,Banks&Banking Reform,International Terrorism&Counterterrorism,Economic Theory&Research

Carbon taxes, the greenhouse effect, and developing countries

The authors evaluate the case for carbon taxes in terms of national interests. They reach the following conclusions. (A) A global carbon tax involves issues of international resource transfers and would be difficult to administer and enforce. It is thus unlikely to be implemented in the near future. (b) National carbon taxes can raise significant revenues cost-effectively in developing countries and are not likely to be as regressive in their impact as commonly perceived. Such taxes can also enhance economic efficiency if introduced as a revenue-neutral partial replacement for corporate income taxes or in cases where subsidies are prevalent. The welfare costs of carbon taxes generally vary directly with the existing level of energy taxes, so a carbon tax should be an instrument of choice for countries such as India and Indonesia, which have few or no energy taxes. A carbon tax can significantly reduce local pollution and carbon dioxide emissions. Cost-benefit analysis shows countries with few or no energy taxes substantially gaining from carbon taxes in terms of an improved local environment. A carbon tax of $10 a ton produces very small output losses for Pakistani industries analyzed in this paper, and the output losses are fully offset by health benefits from reduced emissions of local pollutants - even ignoring the global implications of a reduced greenhouse effect. Tradable permits are preferable to carbon taxes where the critical threshold of the stock of carbon emission beyond which temperatures would rise exponentially is known. Given our current ignorance on the costs of reducing carbon emissions and the threshold effect, a carbon tax appears to be a better and more flexible instrument for avoiding large unexpected costs.Environmental Economics&Policies,Energy and Environment,Montreal Protocol,Carbon Policy and Trading,Public Sector Economics&Finance