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Fiscal aspect of evolving federations : issues for policy and research

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  • Wildasin, David E.

Abstract

Recent experience with fiscal decentralization in many developing and transition economies has led many observers to question whether fiscal decentralization undermines macroeconomic stability. In several countries, transfers from central to lower-level governments have increased fiscal deficits at the central level, creating pressures on central banks to monetize additional debt, thus jeopardizing price stability. In other countries, central governments trying to control their deficits have reduced transfers to lower level governments, creating fiscal distress at lower levels. These issues of macroeconomic fiscal stability have not featured prominently in North American policy debates about fiscal federalism, nor has much academic research been devoted to them. In a world where the state's basic political organization is undergoing rapid reform and restructuring, the tensions and opportunities created by fiscal interactions among levels of government are of critical concern. Much of the literature on fiscal federalism has been geared to the situation in such industrial countries as Canada and the United States. Policymakers and researcher should identify the institutional structures of stable, mature federations that help sustain satisfactory macroeconomic performance. But different policy problems are likely to arise in different settings, especially in the developing world. Among topics that deserve further research attention: i) The interplay between intergovernmental grants and government borrowing. ii) What is the difference in effect on lower-level governments between"hard"and"soft"budget constraints? What economic distortions are associated with soft budget constraints? What institutional reforms might help to establish hard budget constraints? iii) Is the"country"still the appropriate unit of analysis for important economic issues? What economic benefits or costs result from including several regions within one jurisdictional structure? What economic considerations determine the optimal size of a"country"and what are the crucial economic functions of"national"governments? iv) Demographic change, changes in communication and transportation technology, and the development of market institutions may alter the optimal or equilibrium boundaries of political units over time. Such change invariably raises questions about the organization of the public sector and the assignment of expenditures and revenues to different levels of government. The patterns of gains and losses from reorganizing factor markets and jurisdictional structures can be complex. To understand them fully requires understanding the economic consequences of changes in both market organization and policy outcomes resulting from reorganization of the public sector.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1884.

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Date of creation: 28 Feb 1998
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Handle: RePEc:wbk:wbrwps:1884

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Keywords: Public Sector Economics&Finance; Banks&Banking Reform; National Governance; Municipal Financial Management; Public&Municipal Finance; Public Sector Economics&Finance; Municipal Financial Management; Urban Economics; National Governance; Banks&Banking Reform;

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Cited by:
  1. Sebastian Eckardt, 2007. "Political Accountability, Fiscal Conditions, and Local Government Performance – Cross-Sectional Evidence from Indonesia," Working Papers 02-2007, Institute of Local Public Finance.
  2. Dillinger, William & Webb, Steven B., 1999. "Decentralization and fiscal management in Colombia," Policy Research Working Paper Series 2122, The World Bank.
  3. Jean-Paul Faguet, 2011. "Decentralization And Governance," STICERD - Economic Organisation and Public Policy Discussion Papers Series 027, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  4. Lavrov, Aleksei & Litwack, John & Sutherland, Douglas, 2001. "Fiscal federalist relations in Russia: a case for subnational autonomy," MPRA Paper 26537, University Library of Munich, Germany.
  5. Charbit, Claire & Michalun, Varinia, 2009. "E-Government Partnerships Across Levels of Government," MPRA Paper 16564, University Library of Munich, Germany.
  6. Jürgen Von Hagen & Massimo Bordignon & Bhajan S. Grewal & Per Peterson & Helmut Seitz & Matz Dahlberg, 2000. "Subnational Government Bailouts in OECD Countries: Four Case Studies," Research Department Publications 3100, Inter-American Development Bank, Research Department.
  7. Guiseppe Pisauro, 2001. "Intergovernmental Relations and Fiscal Discipline," IMF Working Papers 01/65, International Monetary Fund.
  8. World Bank, 2001. "Brazil - Public Expenditures for Poverty Alleviation in Northeast Brazil : Promoting Growth and Improving Services," World Bank Other Operational Studies 15510, The World Bank.
  9. Freinkman, Lev & Yossifov, Plamen, 1999. "Decentralization in regional fiscal systems in Russia - trends and links to economic performance," Policy Research Working Paper Series 2100, The World Bank.
  10. Laurent Bouton & Marjorie Gassner & Vincenzo Verardi, 2005. "The Tragedy of the Commons or the Curse of Federalism," Public Economics 0511013, EconWPA.
  11. Dillinger, William & Webb, Steven B., 1999. "Fiscal management in federal democracies : Argentina and Brazil," Policy Research Working Paper Series 2121, The World Bank.

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