Transcript 2. Fiscal Decentralization

Fiscal Decentralization :
A Bird’s Eye View
1. Review of Principles & Framework
- Robert Ebel (World Bank Institute)
2. Fiscal Decentralization
- Luiz de Mello (Fiscal Affairs Department, IMF)
3. Decentralization in Africa
- James Hicks (AFTU1)
December 18, 2000
Why the Emphasis on Decentralization?
Political
Imperative
Economic
Decentralization
Globalization
From Government
to Governance
Fiscal
Decentralization
Localization
Decentralization Framework
Intergovernmental Relations
(Mix of) variants
 Deconcentration
 Delegation
 Devolution
The need for a broad framework
Why Is It Important?

Efficiency

Service Delivery

Poverty

Growth

Nation Building
Allocation
Revenue mobilization
Policy
Implementation
People
Place
Mixed evidence
Does it matter?
Structure
Asymmetry
Tools and Strategies

Constitutional and legal framework

Macro stability

Structure and function

Transfers

Sustainability

Sectoral
Decentralization and
Poverty Reduction Strategies

Fostering public participation in policies and programs
that affect people’s lives (Benin)

Stressing local government’s role in preparing,
executing, and monitoring antipoverty programs
(Albania, Benin)

Coordinating foreign assistance and implementation of
donor-financed projects (Burkina Faso, Mali)

Improving delivery of public goods and services (Benin,
Kenya, Honduras)
Objectives of Decentralization
Identified in PRSPs

Strengthening budget preparation and execution
(Albania); and bringing the administration closer to the
people (Benin, Mali)

Enabling local governments (Burkina Faso)

Enhancing democracy and control over locally elected
leaders (Burkina Faso, Mali)

Strengthening consultative processes (Albania, Ghana)
Fiscal Decentralization
Luiz de Mello
Fiscal Affairs Department
International Monetary Fund
www.decentralization.org
8
Decentralization and the Macroeconomy

Deficit bias
– revenue sharing and “common pool” problems

Governance
– fiscal rules and prudential regulations
– financial information systems, monitoring
– hard budget constraints

Service delivery
– capacity building
– incentives and “agency” problems
Budget Balance and Government Size
Central Government Balance
2
0
0
10
20
30
40
-2
50
60
Sub-national Government Size and Fiscal Position Full Sample
Sub-national Gov. Balance
Central Government Size and Fiscal Position Full Sample
1
0.5
0
0
5
10
15
20
25
-0.5
-4
-6
-1
-1.5
-8
-2
-10
-2.5
-12
-3
Central Government Size
Sub-national Gov. Size
30
35
Budget Balance and Government Size
2
0
0
5
10
15
20
25
-2
-4
-6
-8
-10
30
35
Central Government Balance
Central Government Balance
Sub-national Government Size and Central
Government Fiscal Position - Full Sample
Sub-national Government Size and Central
Government Fiscal Position Developing Country Sample
1
0
-1 0
5
10
15
-2
-3
-4
-5
-6
-7
-8
-12
Sub-national Government Size
Sub-national Government Size
20
Pre-conditions for Successful
Decentralization

Strengthening managerial capacity at local level
(Burkina Faso, Honduras, São Tomé and Príncipe,
Tanzania)

Establishing sustained partnership within the
government and decentralized administrations (Chad)

Avoiding lack of material, financial, and human
resources at the local level (Senegal)
Pre-conditions for Successful
Decentralization (cont’d)

Encouraging pragmatism and gradualism (Burkina
Faso, Honduras)

Fostering citizen participation through civil society
organizations (Burkina Faso, Ghana, Mali)

Improving access to economic and social information
(Albania, Burkina Faso).
Decentralization in Africa
James Hicks (AFTU1)
www.decentralization.org
14
Africa Region: High Degree of
Centralized Power ...
Subnational Expenditures, 1980-97
(Period averages, in percent) 1/
as % of GDP
Africa
2.1
Asia
3.4
Latin America & Caribbean 3.3
Middle East
1.0
OECD 2/
14.7
Transition economies
9.6
Large federations 3/
13.5
World
as % of total
Govt. spending
7.6
13.8
14.7
1.5
30.8
30.3
36.5
Sources: Government Finance Statistics, IMF. (Prepared by Luiz de Mello, Fiscal Affairs Department, IMF)
1/ Unweighted averages.
2/ Includes Israel
3/ Comprises India, Malaysia, Argentina, Brazil, Mexico, Australia,Austria, Belgium,
Canada, Germany, Spain, Switzerland, and United States.
No. Countries
14
9
16
2
24
17
13
… But With Some Degree of Variation
Local Government Expenditures as % of GDP in Sample of African Countries
Country
Zambia (l997)
Ghana (l996)
Senegal (l997)
Uganda (l997/98)
Swaziland (l998)
Zimbabwe (l997)
Non-weighted average
for the six countries
Expenditures in % of GDP
0.5
2.6
1.7
4.0
0.6
3.0
2.1
Wide Range Expenditure Composition
Composition (%) of Local Government Recurrent Expenditures
Purpose
Average of
Six Countries
Range
Administration
40
29 - 77
Education
12
0 - 60
Health
12
4 - 21
5
0 - 18
Community Amenities
11
0 - 40
Culture and Recreation
2
0-7
18
5 - 32
76
31 - 96
Housing
Other
Total Recurrent
And, A Range at Revenue Utilization ...
Composition (%) of Local Government Revenues
Average of
Six Countries
Range
Own Taxes
32
15-67
Own Non-Tax
10
0-34
User Fees
16
5-35
Central Transfers
35
3-69
Borrowing
2
0-5
Other Sources
5
0-18
Source
… But, Underutilized Revenue Capacity
SNG Revenue Potential in the Six Countries
% Potential increase with same
tax/fee rate/regulations
Zambia
Ghana
Senegal
Uganda
Swaziland
Zimbabwe
100
70
50
50
30
28
Based on evidence from the six country reports
Shared Vision: Victoria Falls Declaration
(Delegations from 15 Countries - 9/99)

There is need for a shared vision of the basic principles of
decentralization which recognizes the specific needs and conditions of
the African Continent.

Decentralization should involve the transfer to local government
institutions those powers and functions necessary to enable them to:
(i) provide services for the local population efficiently and effectively;
(ii) provide a conducive environment for local economic development;
and (iii) develop and manage local resources in a sustainable manner.

Decentralization should include the provision of access to the resources
needed to execute the above powers and functions efficiently and
effectively, including financial and manpower resources.

Financial resources should be available to local authorities in a manner
which is reliable, adequate, predictable, transparent, sustainable and
equitable.
Some Dangers

Miss-matches between local government mandates and size/capacity
viability (South Africa example)

Unfunded mandates (decentralizing the deficit)

Contribution to fiscal instability (Argentina, Brazil)

Confusion about mandates—deconcentration (Prefets/Districts) vs.
autonomous LGs

Subnational banks

Stronger local governments may support higher (or lower) ethnic
tensions
Tentative Recommendations

Keep agenda simple (beware high recurrent expenditures); clear rules
of game

Fiscal transfers (including donor supported) on budget and with hard
constraint

Support identification of “champion” in charge of overall policy

Recognize capacity differences and seek reasonable transition
strategies

Seek to promote leveling of playing field (e.g., equalization grants)

Learning by doing probably good, but mistakes to be made—good
monitoring and high transparency

Move away from special-purpose funds