IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The reform of fiscal systems in developing and emerging market economies : a federalism perspective

Listed author(s):
  • Boadway, Robin
  • Roberts, Sandra
  • Shah, Anwar

The authors review experiences with fiscal federalism in industrial countries and present a framework for a reform of fiscal systems in developing and transition economies. They indicate how the benefits of decentralized decisionmaking in a federal system can be achieved in a manner consistent with the objectives of national efficiency and equity. The following are their suggestions. Decentralization can be made compatible with national objectives through conditional grants, regulation, or coordinated decisionmaking. The federal government should assume primary responsibility for providing national public goods and services, for efficiency of the internal common market, for redistributive equity, for external relations, and for macroeconomic policy. State governments should be responsible for subnational public goods and services, for the delivery of quasi-private goods and services, (such as education, health, and social insurance), for fiscal equity among municipalities, and for overseeing local government decisionmaking. Local governments should be responsible for purely local services. Where jurisdiction for a public service is shared, the roles of the various levels of government should be clarified. Accountability should be hierarchical, with the federal government responsible for overall policy and standards, and lower levels of government with the actual delivery of services and infrastructure. In some cases, asymmetric decentralization may be the preferred option, especially where jurisdictions differ greatly in size and population. Efficiency and equity must be considered in assigning taxes. Efficiency considerations suggest centralizing taxes applied on more mobile bases (such as taxes on capital income and on trade). Equity considerations suggest centralizing progressive income taxes and transfers to persons as well as taxes on wealth and wealth transfer and on resource rents. States could use excise taxes or general sales taxes if levied on a single-stage basis; if a multistage sales tax is used, it is best administered centrally. States could also obtain revenues from piggy-backing on the federal income tax provided a harmonized system is maintained. Municipalities should use property taxes, user fees, and licenses. Tax and expenditures assignment must be supplemented by a system of fiscal transfers, both because the desirability of greater decentralization of expenditures than of taxes will give rise to fiscal imbalances and because transfers are a necessary instrument for achieving efficiency and equity in a decentralized federation. In a decentralized federation, fiscal inefficiencies and fiscal inequities will occur because states will not deliver comparable sets of services at comparable tax rates. Eliminating these differential net fiscal benefits requires a set of equalizing unconditional transfers, possibly combined with a more general revenue-sharing scheme. Matching conditional grants are useful for internalizing the spillover of benefits from state public spending to residents of neighboring states. More important is the use of federal-state conditional grants as a means for the federal government to achieve national efficiency and equity objectives while allowing public service delivery to be decentralized. In transition economies, framework laws on property rights, corporate legal ownership and control bankruptcy, and financial accounting and control are not fully developed. This should be a high priority. The lack of local administrative experience, institutions, and competence should not be used as an excuse for not decentralizing responsibilities. If necessary, transitional funding and training should be provided.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1259.

in new window

Date of creation: 28 Feb 1994
Handle: RePEc:wbk:wbrwps:1259
Contact details of provider: Postal:
1818 H Street, N.W., Washington, DC 20433

Phone: (202) 477-1234
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. William Fox & Heng-fu Zou, 1992. "Local Government Finance in South Africa," CEMA Working Papers 526, China Economics and Management Academy, Central University of Finance and Economics.
  2. Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
  3. Buchanan, James M. & Goetz, Charles J., 1972. "Efficiency limits of fiscal mobility: An assessment of the tiebout model," Journal of Public Economics, Elsevier, vol. 1(1), pages 25-43, April.
  4. Shah, Anwar, 1991. "Perspectives on the design of intergovernmental fiscal relations," Policy Research Working Paper Series 726, The World Bank.
  5. A. E. Fernández Jilberto, 1991. "Introduction," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 21(1), pages 3-9, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1259. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.