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Fiscal Decentralization

Fiscal Decentralization. 29 January 2009. Outline. What and Why Decentralization & Fiscal Decentralization What is assumed and what to measure Fiscal Decentralization Components Measurement in Fiscal Decentralization How in practice Cross-Countries Studies vs Country Case Study

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Fiscal Decentralization

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  1. Fiscal Decentralization 29 January 2009

  2. Outline What and Why • Decentralization & Fiscal Decentralization What is assumed and what to measure • Fiscal Decentralization Components • Measurement in Fiscal Decentralization How in practice • Cross-Countries Studies vs Country Case Study • Case study of Indonesia

  3. What is decentralization? Transfer of authority from central to local … on what aspects?

  4. Fiscal Decentralization Fiscal Decentralization is one aspect …. of decentralization Scope of Decentralization Political Administrative Fiscal Decentralization ….between layers of government

  5. Political Decentralization Aims to give citizens or their elected representatives more power in public decision-making. Decisions made with greater participation will be better informed and more relevant to diverse interests in society than those made only by national political authorities.

  6. Administrative Decentralization Transfer of authority among different levels of government. …. as a consequences of devolution is transferring CG administration to LG Administrative decentralization is devolution…IT IS not deconcentration or delegation per se

  7. Fiscal Decentralization Assigning to which level of governments in the provision of public goods that best internalized benefits and costs (expenditure assignment), and on the assigning revenue sources that mostly efficient among level of governments (revenue assignments) Common revenue sources: - local taxes, - intergovernmental transfer, - borrowing

  8. Notes Fiscal decentralization is not… on revenue assignments - higher intergovernmental transfer …. as it creates trade off for limited tax autonomy… … transfers only to mean that there is funded mandates for local governments….

  9. Notes Fiscal decentralization is not… on expenditure assignments • higher number of (bureaucratic) functions that LG engaged ….rather it is a clear assignments across level of government ….OR less clear assignments but adapted to capacity of conducting functions

  10. Why Decentralize? • Economic Development • Elected Government • Inefficient Centralization • Uniformity Not Acceptable • Local Government Capacity • Autonomy vs. Backdoor Approaches • Poor Service Delivery • Prevent Secession / Civil War Source: Bahl 1999

  11. Advantages of Decentralization • The ability to alter the mix of public services to local preference --- Oates (1970) theorem on allocative efficiency from decentralization • The beneficial effect of competition among local governments --- yardstick competition which is driven by the Tiebout’s (1956) postulate of “voting with their feet”. • The potential low costs experimentation at the lower level government ---distributive policy scheme benefits ASSUMING: THERE IS NO EXTERNALITIES, SCALE ECONOMIES, AND MOBILE RESOURCES

  12. IF THE ASSUMPTIONS AREN’T HOLD LG empowerment would have not resolved inefficiency in service provision and revenue collections due to: • Inter-community externalities • Forgone scale economies in the provision of public goods • Inefficient taxation • Lack of ability to distribute income WHEN ASSUMPTIONS AREN’T HOLD …decentralization may not worked best

  13. Advantages of Fiscal Decentralization On more autonomy in local taxes • Broaden the tax net given that LG have better informed on the base and can effectively assessed the taxpayer. On adequate and good scheme of transfers • As it prevents unfunded mandates • Discretion of LG to experiments to tailor and deliver better services On local borrowing with hard budget constraint scheme • Improve local fiscal space to make investment

  14. Arguments of (De)centralization

  15. Empirical Literature • Makes stabilization policies more difficult to implement, or even destabilization of public expenditures and debt • Offloading of fiscal imbalances by central governments to local governments. Strong association between decentralization and fiscal imbalances at lower levels • Possibility that decentralization retards economic growth

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