Intergovernmental fiscal transfer in nine countries : lessons for developingcountries

The author presents an overview of intergovernmental fiscal transfer systems used in nine developing and industrial countries, and draws implications for other developing countries. On the basis of a comparison of these countries, the author classifies equalization transfer formulas into four categories, analyzes the data requirements of each type of formula, discusses the applicability of these formulas in developing countries, and uses illustrative examples to show how the calculations should be carried out. The author also discusses implementation issues, including the transition from an old to a new transfer system. Finally, he presents an illustrative equalization transfer model for China. He concludes that the formula-based equalization transfer system has at least three advantages over the discretionary system prevailing in many countries: 1) It provides the single most important means to address regional disparities; 2) It bases the evaluation of a subnational government's entitlement on objective variables, thus minimizing bargaining and lobbying, and keeping distribution fair; 3) If properly designed, the formula-based system eliminates the disincentive inherent in many discretionary systems that encourages overspending and weak tax collection efforts.