Fiscal Decentralization : A Bird’s Eye View

1. 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

2. Why the Emphasis on Decentralization? Political Economic Globalization Imperative Decentralization From Government Fiscal Localization to Governance Decentralization

3. Intergovernmental Relations (Mix of) variants Deconcentration Delegation Devolution The need for a broad framework Decentralization Framework

4. Efficiency Allocation Revenue mobilization Service Delivery Policy Implementation Poverty People Place Growth Mixed evidence Does it matter? Nation Building Structure Asymmetry Why Is It Important?

5. Tools and Strategies • Constitutional and legal framework • Macro stability • Structure and function • Transfers • Sustainability • Sectoral

6. Decentralization andPoverty 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)

7. 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)

8. Fiscal Decentralization Luiz de Mello Fiscal Affairs Department International Monetary Fund www.decentralization.org

9. 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

10. Budget Balance and Government Size Central Government Size and Fiscal Position - Sub-national Government Size and Fiscal Position - Full Sample Full Sample 1 2 0.5 0 0 10 20 30 40 50 60 0 -2 0 5 10 15 20 25 30 35 Sub-national Gov. Balance -0.5 -4 -1 Central Government Balance -6 -1.5 -8 -2 -10 -2.5 -12 -3 Central Government Size Sub-national Gov. Size

11. Budget Balance and Government Size Sub-national Government Size and Central Sub-national Government Size and Central Government Fiscal Position - Full Sample Government Fiscal Position - Developing Country Sample 2 1 0 0 0 5 10 15 20 25 30 35 0 5 10 15 20 -1 -2 -2 Central Government Balance -4 Central Government Balance -3 -6 -4 -5 -8 -6 -10 -7 -8 -12 Sub-national Government Size Sub-national Government Size

12. 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)

13. 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).

14. Decentralization in Africa James Hicks (AFTU1) www.decentralization.org

15. Africa Region: High Degree of Centralized Power ... Subnational Expenditures, 1980-97 (Period averages, in percent) 1/ as % of total as % of GDPGovt. spendingNo. Countries Africa 2.1 7.6 14 Asia 3.4 13.8 9 Latin America & Caribbean 3.3 14.7 16 Middle East 1.0 1.5 2 OECD 2/ 14.7 30.8 24 Transition economies 9.6 30.3 17 Large federations 3/ 13.5 36.5 13 World 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.

16. … But With Some Degree of Variation Local Government Expenditures as % of GDP in Sample of African Countries CountryExpenditures in % of GDP Zambia (l997) 0.5 Ghana (l996) 2.6 Senegal (l997) 1.7 Uganda (l997/98) 4.0 Swaziland (l998) 0.6 Zimbabwe (l997) 3.0 Non-weighted average for the six countries 2.1

17. Wide Range Expenditure Composition Composition (%) of Local Government Recurrent Expenditures Average of PurposeSix CountriesRange Administration 40 29 - 77 Education 12 0 - 60 Health 12 4 - 21 Housing 5 0 - 18 Community Amenities 11 0 - 40 Culture and Recreation 2 0 - 7 Other 18 5 - 32 Total Recurrent 76 31 - 96

18. And, A Range at Revenue Utilization ... Composition (%) of Local Government Revenues Average of Source Six CountriesRange 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

19. … But, Underutilized Revenue Capacity SNG Revenue Potential in the Six Countries % Potential increase with same tax/fee rate/regulations Zambia 100 Ghana 70 Senegal 50 Uganda 50 Swaziland 30 Zimbabwe 28 Based on evidence from the six country reports

20. 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.

21. 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

22. 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