Fiscal Aspects Of Evolving Federations

February 1998 Establishing hard rather than soft budget constraints in intergovernmental fiscal relations is perhaps the most important challenge facing developing economies as they decentralize. 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 researchers should identify the institutional structures of stable, mature federations that help sustain satisfactory macro-economic performance. But different policy problems are likely to arise in different settings, especially in the developing world. Among topics that deserve further research attention: * The interplay between intergovernmental grants and government borrowing. * 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? * 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? * 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. This paper-a product of Public Economics, Development Research Group-is part of a larger effort in the group to study fiscal decentralization and the organization of government.

These essays on the economics of fiscal federalism contain original research by experts in North America and Europe on a timely topic. Reform of fiscal relations between central and subnational governments is an urgent priority in many countries since increased economic integration within and among countries means that goods, services, capital, and human resources can flow across political boundaries more easily than before. The structure of intergovernmental transfers, tax competition, and the fiscal implications of labor migration are analyzed for audiences in economics, political science, and public policy.

There appears to be an increasing trend in worldwide fiscal decentralization. In particular, many developing countries are turning to various forms of fiscal decentralization as an escape from inefficient and ineffective governance, macroeconomic stability, and inadequate growth. Fiscal Decentralization in Developing Countries: An Overview edited by Professors Bird and Vaillancourt and featuring important research from leading scholars assesses the progress, problems and potentials of fiscal decentralization in a variety of developing countries around the world. With rich and varied case-study material from countries as diverse as India, China, Colombia, Bosnia-Herzegovina and South Africa this volume complements neatly the collection Fiscal Aspects of Evolving Federations edited by David Wildasin and also published by Cambridge, which presented theoretical advances in the area of research.

Intergovernmental Transfers in Federations presents a synthesis of international experience of large federations in the most recent times in addressing the most fundamental issue of horizontal and vertical imbalances in their countries through the prism of intergovernmental transfers. Contributors delve into the various aspects of policy making as well as policy choices in selecting an efficiency path for a meaningful fiscal devolution aimed at integrating performance and incentives to reach an expenditure mix that facilitates better service delivery.

The growth of interest in fiscal decentralization has meant that there has been something of a rush to enshrine this in policy - The World Bank has reported that about seventy countries see this as a major part of their development strategy. This book critically examines the case for decentralization. This collection of contributions comes from a worldwide team of experts, including Albert Breton, Piero Giarda and Anwar Shah.

Federalism in a Changing Worldcontains the scientific background papers, proceedings, and plenary speeches presented at the International Conference on Federalism 2002 held in St Gallen, Switzerland, In August 2002. The three principal topics of the conference were federalism and foreign relations; federalism, decentralization and conflict management in multicultural societies; and assignment of responsibilities and fiscal federalism. The volume comprises texts by more than seventy authors from twenty countries throughout the world. Contributors include Dauda Abubakar (University of Maiduguri, Nigeria), José Roberto Afonso (Brazilian Bank of Development, Brazil), Giuliano Amato (vice-president of the European Convention, Italy), Nicholas Aroney (University of Queensland, St Lucia, Australia), Lidija Basta-Fleiner (University of Fribourg, Switzerland), Richard Bird (University of Toronto, Canada), Raoul Blindenbacher (executive director, International Conference on Federalism 2002, Switzerland), Jean Chrétien (prime minister of Canada), Richard Crook (University of Sussex, UK), Bernard Dafflon (University of Fribourg, Switzerland), Joseph Deiss (head of the Federal Department of Foreign Affairs, Switzerland), Udo Diedrichs (University of Cologne, Germany), Bernhard Ehrenzeller Bernhard (University of St. Gallen, Switzerland), Lars Feld (University of Marburg, Germany), George Fernandes (minister of Defence of the Republic of India), Sergio Ferreira (Brazilian Bank of Development, Brazil), Thomas Fleiner (University of Fribourg, Switzerland), Xóchitl Gálvez (Presidential Office for Indigenous People, United Mexican States), Beat Habegger (University of St Gallen, Switzerland), Nicholas R.L. Haysom (Wits University and former legal advisor To The President, South Africa), William John Hopkins (University of Hull, UK), Rudolf Hrbek (University of Tübingen, Germany), Thomas O. Hueglin (Wilfrid Laurier University, Waterloo, Canada), Claude Jeanrenaud (University of Neuchatel, Switzerland), Isabelle Joumard (Economics Department of the OECD, France), Wlater Kälin (University of Berne, Switzerland), Jakob Kellenberger (former secretary of state of the Federal Department of Foreign Affairs, Switzerland), Michael J. Kelly (Military Law Centre Department of Defence of Australia, Australia), Rahmatullah Kahn (Raoul Wallenberg Institute, Lund, Sweden/India), John Kincaid (Lafayette College, USA), Gebhard Kirchgässner (University of St Gallen, Switzerland), Arnold Koller (former president of the Swiss Confederation), Vojislav Kostunica (president of the Federal Republic of Yugoslavia), Yves Lejeune (Catholic University of Louvain, Belgium), Wolf Linder (University of Berne, Switzerland), Giorgio Malinverni (University of Geneva, Switzerland), Tim McCormack (University of Melbourne, Australia), Ruth Metzler-Arnold (Federal Department of Justice and Police, Switzerland), Flora Musonda (Economic and Social Research Foundation, Tanzania), Radmila Nakarada (Institute of European Studies, Belgrade, Yugoslavia), Wallace Oates (University of Maryland, College Park, USA), Luigi Pedrazzini (Conference of Cantonal Governments, Switzerland), Martin Polaschek (University of Graz, Austria), Bob Rae (Forum of Federations, Canada), Johannes Rau (President of the Federal Republic of Germany), Ash Narain Roy (Institute of Social Sciences, New Delhi, India), Nafis Sadik (special advisor To The United Nations Secretary General and former UNFPA executive director, Pakistan), Cheryl Saunders (University of Melbourne, Australia), Antonin Scalia (associate justice of the Supreme Court of the United States of America), Benjamin Schindler (Federal Office of Justice, Switzerland), Nicolas Schmitt (University of Fribourg, Switzerland), Wolfgang Schüssel (chancellor of the Republic of Austria), Anwar Shah (lead economist of the World Bank, USA/ Pakistan), Daniel Thürer (University of Zürich, Switzerland), Touré Toumani (president of the Republic of Mali), François Vaillancourt (University of Montreal, Canada), Ricardo Varsano (Institute for Applied Economic Research, Rio de Janeiro, Brazil), Guy Verhofstadt (prime minister of the Kingdom of Belgium), Jürgen von Hagen (University of Bonn, Germany), Ronald Watts (Queen's University Kingston, Canada), Joseph H.H. Weiler (New York University School of Law, USA), and Wolfgang Wessels (University of Cologne, Germany).