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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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4039.

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Date of creation: 01 Oct 2006
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Handle: RePEc:wbk:wbrwps:4039
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  1. Shah, Anwar, 2005. "A framework for evaluating alternate institutional arrangements for fiscal equalization transfers," Policy Research Working Paper Series 3785, The World Bank.
  2. 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.
  3. repec:cup:cbooks:9780521518215 is not listed on IDEAS
  4. Anwar Shah, 1996. "A Fiscal Need Approach to Equalization," Canadian Public Policy, University of Toronto Press, vol. 22(2), pages 99-115, June.
  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 209-43.
  6. 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.
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