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A practitioner's guide to intergovernmental fiscal transfers


  • Shah, Anwar


Intergovernmental fiscal transfers are a dominant feature of subnational finance in most countries. They are used to ensure that revenues roughly match the expenditure needs of various orders (levels) of subnational governments. They are also used to advance national, regional, and local area objectives, such as fairness and equity, and creating a common economic union. The structure of these transfers creates incentives for national, regional, and local governments that have a bearing on fiscal management, macroeconomic stability, distributional equity, allocative efficiency, and public services delivery. This paper reviews the conceptual, empirical, and practice literature to distill lessons of policy interest in designing the fiscal transfers to create the right incentives for prudent fiscal management and competitive and innovative service delivery. It provides practical guidance on the design of performance-oriented transfers that emphasize bottom-up, client-focused, and results-based government accountability. It cites examples of simple but innovative grant designs that can satisfy grantors'objectives while preserving local autonomy and creating an enabling environment for responsive, responsible, equitable, and accountable public governance. The paper further provides guidance on the design and practice of equalizationtransfers for regional fiscal equity as well as the institutional arrangements for implementation of such transfer mechanisms. It concludes with negative (practices to avoid) and positive (practices to emulate) lessons from international practices.

Suggested Citation

  • Shah, Anwar, 2006. "A practitioner's guide to intergovernmental fiscal transfers," Policy Research Working Paper Series 4039, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4039

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    References listed on IDEAS

    1. Anwar Shah, 1996. "A Fiscal Need Approach to Equalization," Canadian Public Policy, University of Toronto Press, vol. 22(2), pages 99-115, June.
    2. Robin Boadway, 2004. "The Theory and Practice of Equalization," CESifo Economic Studies, CESifo, vol. 50(1), pages 211-254.
    3. Huther, J. & Roberts, S. & Shah, A., 1997. "Public Expenditure Reform under Adjustment Lending. Lessons from World Bank Experiences," World Bank - Discussion Papers 382, World Bank.
    4. Shah, Anwar, 2005. "A framework for evaluating alternate institutional arrangements for fiscal equalization transfers," Policy Research Working Paper Series 3785, The World Bank.
    5. Chaudry-Shah, Anwar, 1988. " Capitalization and the Theory of Local Public Finance: An Interpretive Essay," Journal of Economic Surveys, Wiley Blackwell, vol. 2(3), pages 209-243.
    6. Shankar, Raja & Shah, Anwar, 2003. "Bridging the Economic Divide Within Countries: A Scorecard on the Performance of Regional Policies in Reducing Regional Income Disparities," World Development, Elsevier, vol. 31(8), pages 1421-1441, August.
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    Cited by:

    1. Lavado, Rouselle F. & Layug, Allan S. & Pantig, Ida Marie T. & Bolong, Leilani E., 2010. "Do Barangays Really Matter in Local Services Delivery? Some Issues and Policy Options," Discussion Papers DP 2010-03, Philippine Institute for Development Studies.
    2. Linda Veiga & Francisco Veiga, 2013. "Intergovernmental fiscal transfers as pork barrel," Public Choice, Springer, vol. 155(3), pages 335-353, June.
    3. Sharma, Chanchal Kumar, 2010. "Beyond Gaps and Imbalances: Re-Structuring the Debate on Intergovernmental Fiscal Relations," MPRA Paper 32145, University Library of Munich, Germany.
    4. Sengupta, Bodhisattva, 2016. "Endogenous Leadership in a Federal Transfer Game," MPRA Paper 71882, University Library of Munich, Germany.
    5. Schakel, Arjan H., 2008. "Validation of the Regional Authority Index," MPRA Paper 8972, University Library of Munich, Germany.
    6. Freinkman, Lev, 2007. "Intergovernmental relations in Nigeria: improving service delivery in core sectors," MPRA Paper 10032, University Library of Munich, Germany.
    7. Neyapti, Bilin, 2013. "Fiscal decentralization, fiscal rules and fiscal discipline," Economics Letters, Elsevier, vol. 121(3), pages 528-532.
    8. Kumar, Surender & Managi, Shunsuke, 2009. "Compensation for environmental services and intergovernmental fiscal transfers: The case of India," Ecological Economics, Elsevier, vol. 68(12), pages 3052-3059, October.
    9. Bodhisattva Sengupta, 2016. "Endogenous Leadership in a Federal Transfer Game," Working Papers id:11473, eSocialSciences.
    10. Aragon, Fernando, 2009. "The flypaper effect revisited," LSE Research Online Documents on Economics 58199, London School of Economics and Political Science, LSE Library.
    11. World Bank, 2013. "Impact and Implications of Recent and Potential Changes to Brazil's Subnational Fiscal Framework," World Bank Other Operational Studies 20773, The World Bank.
    12. Bischoff, Ivo, 2008. "Conditional Grants, Grant-Seeking and Welfare when there is Government Failure on the Subordinate Level," ZEW Discussion Papers 08-031, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    13. Llanto, Gilberto M., 2009. "Fiscal Decentralization and Local Finance Reforms in the Philippines," Discussion Papers DP 2009-10, Philippine Institute for Development Studies.

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    Public Sector Economics&Finance; Intergovernmental Fiscal Relations and Local Finance Management; Public Sector Management and Reform; Public&Municipal Finance; Urban Economics;

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