Richard M. Bird

Fiscal Decentralization in Developing Countries

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.

Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization

Discusses several aspects of fiscal decentralization. Defines the meaning and rationale of fiscal decentralization and reviews the issue of the choice of local revenue sources from the perspective of establishing efficient local governments, including the roles of user charges, property taxes, and income taxes.

Intergovernmental Fiscal Transfers: International Lessons for Developing Countries

Abstract This paper reviews the central issues that arise in designing intergovernmental transfers and surveys the approaches adopted in a number of countries, with special emphasis on developing countries. Since circumstances and objectives differ from country to country, no simple, uniform pattern of transfers is universally appropriate but experience around the world makes it clear that if services are to be efficiently provided, transfers must be designed so that those receiving them have a clear mandate, adequate resources, sufficient flexibility to make decisions and are accountable for results.

Societal Institutions and Tax Effort in Developing Countries

The main theme of this paper is that a more legitimate and responsive state appears to be an essential precondition for a more adequate level of tax effort in developing countries. The most important contribution of this paper is to extend the conventional model of tax effort by showing that not only do supply factors matter, but that societal institutions (demand factors) also determine tax effort to a significant extent.

Tax Effort in Developing Countries and High Income Countries: The Impact of Corruption, Voice and Accountability

In this paper we argue that a more legitimate and responsive state is an essential factor for a more adequate level of tax effort in developing countries and high income countries. While at first glance giving such advice to poor countries seeking to increase their tax ratios may not seem more helpful than telling them to find oil, it is presumably more feasible for people to improve their governing institutions than to rearrange nature’s bounty. Improving corruption, voice and accountability may not take longer nor be necessarily more difficult than changing the opportunities for tax handles and economic structure. The paper also shows that high income countries have also the potential of improving their tax performance through improving their institutions. The key contribution of this paper is to extend the conventional model of tax effort by showing that not only do supply factors matter, but that demand factors such as corruption, voice and accountability also determine tax effort to a significant extent.

China's Fiscal System: A Work in Progress

We argue in this paper that unless China begins to tackle more systematically the serious problems that have emerged in the finances of its various levels of sub-national government the problems to which the present unsatisfactory system give rise will over time increasingly distort resource allocation, increase distributional tensions, and slow down the impressive recent growth of the Chinese economy. Despite the lack of solid and reliable information on the size and nature of China’s real fiscal system, we show that the evidence available is generally consistent with this pessimistic reading. China’s fiscal and – in time – economic future thus rests to some extent on reforms to key aspects of its fiscal system, especially its intergovernmental finances. Moreover, a more consistent and purposive framework to this complex of problems seems needed. Given the scale and scope of China’s underlying public finance problems, the ‘reactive gradualism’ evidenced in recent ad hoc reforms to this or that piece of the fiscal system has, we suggest, run its course.

Rethinking Subnational Taxes: A New Look at Tax Assignment

The assignment of revenues in most developing and transitional countries to the central government has arguably facilitated irresponsible behavior by some subnational governments. One way to relieve this problem is to strengthen subnational tax regimes. The paper proposes two approaches to accomplish such strengthening in developing countries. The first - most applicable to large countries with important regional governments - is to establish subnational value-added taxes (VATs); the second is to replace the various unsatisfactory state and local taxes imposed on business by a low-rate value-added tax levied on the basis of income (production, origin) rather than consumption (destination).

Dual VATs and Cross-Border Trade: Two Problems, One Solution?

In recent years, two distinct but related questions have been raised with respect to value-added taxes (VATs). Concern has been expressed over whether it is desirable or even possible for both national and subnational governments in federal countries such as India, Argentina, and Russia to impose VATs. One reason for thinking that such subnational VATs are unlikely to be workable on a destination basis is the problem of cross-border trade. Of course, this same problem also arises within the European Union, where there is no “EU” VAT. Drawing upon Canadian experience, we argue that not only is it possible to have “two-tier” or “dual” VATs on a destination basis in a single country but that the existence of dual VATs may help deal with some of the problems of cross-border trade.

Closing the Gap: Fiscal Imbalances and Intergovernmental Transfers in Developed Federations

This paper discusses the concepts of vertical fiscal imbalance (the fiscal gap) and horizontal fiscal imbalance (equalization) and uses several statistics to measure these concepts for the eight developed federal countries: Australia, Austria, Belgium, Canada, Germany, Spain, Switzerland, and the United States. Although the periods covered and the detail provided vary from country to country because of limitations in data availability, the overall coverage in this paper seems more complete and comparable than in previous studies. The paper also outlines briefly the types of intergovernmental fiscal transfers used to deal with fiscal imbalances in the eight countries under consideration. Although this account is necessarily highly condensed, given the complexity of transfer systems in most countries, the frequency with which changes are made, and the difficulty of obtaining complete information, it is nonetheless broadly accurate.

Fiscal Decentralization in Developing Countries: Fiscal decentralization in developing countries: an overview

Recent years have seen worldwide interest in fiscal decentralization. Developed countries are reshaping their intergovernmental fiscal structure to be more in tune with the realities of the “post-welfare state” (Bennett, 1990; Wildasin, 1997a).1 The countries in transition in eastern and central Europe are busily setting up new systems of local and intergovernmental finance (Bird, Ebel, and Wallich, 1995). Many developing countries are also turning to various forms of fiscal decentralization as one possible way of escaping from the traps of ineffective and inefficient governance, macroeconomic instability, and inadequate economic growth in which so many of them have become mired in recent years.2 Each country does what it does for its own peculiar reasons, but when so many countries in so many different circumstances do somewhat similar things, there is likely to be more at work than meets the local eye. The principal purpose of this book is to take stock of the progress, problems, and potentials of fiscal decentralization in developing countries by bringing together a set of studies from a variety of countries around the world. Decentralization in developing countries sometimes seems to be viewed as either a panacea or a plague – either a cure for all the ills of such countries or an addition to their already heavy burdens. Some argue for decentralization on grounds of improved economic efficiency, some on grounds of cost efficiency, some in terms of improved accountability, and some in terms of increased resource mobilization.3 On the other hand, others argue that none of these virtuous outcomes is likely to be achieved in countries in which citizen preferences are unlikely to be reflected in budget outcomes and the institutional capacity of existing subnational (state and local) governments is close to nil.4 From this perspective, decentralization seems likely to result in increased costs, lessened efficiency in service delivery, and probably greater inequity and macroeconomic instability (Prud’homme, 1995). In general terms, it is not difficult to defend and elaborate either side of this controversy. With respect to efficiency, for example, the standard