Intergovernmental Fiscal Transfers

624 Pages·2006·3.48 MB·English

PUBLIC SECTOR
GOVERNANCE AND
ACCOUNTABILITY SERIES
INTERGOVERNMENTAL
FISCAL TRANSFERS
PRINCIPLES AND PRACTICE
Edited by ROBIN BOADWAY
and ANWAR SHAH

INTERGOVERNMENTAL
FISCAL TRANSFERS
Introduction to the Public Sector Governance and Accountability Series
Anwar Shah,Series Editor
A well-functioning public sector that delivers quality public services consistent with citizen pref-
erences and that fosters private market-led growth while managing fiscal resources prudently is
considered critical to the World Bank’s mission ofpoverty alleviation and the achievement of
the Millennium Development Goals.This important new series aims to advance those objec-
tives by disseminating conceptual guidance and lessons from practices and by facilitating
learning from each others’experiences on ideas and practices that promote responsive(by
matching public services with citizens’preferences),responsible(through efficiency and equity
in service provision without undue fiscal and social risk),and accountable(to citizens for all
actions) public governance in developing countries.
This series represents a response to several independent evaluations in recent years that
have argued that development practitioners and policy makers dealing with public sector
reforms in developing countries and,indeed,anyone with a concern for effective public gov-
ernance could benefit from a synthesis ofnewer perspectives on public sector reforms.This
series distills current wisdom and presents tools of analysis for improving the efficiency,
equity,and efficacy ofthe public sector.Leading public policy experts and practitioners have
contributed to this series.
The first 13 volumes in this series, listed below, are concerned with public sector
accountability for prudent fiscal management;efficiency,equity,and integrity in public ser-
vice provision;safeguards for the protection ofthe poor,women,minorities,and other dis-
advantaged groups;ways ofstrengthening institutional arrangements for voice,choice,and
exit;means ofensuring public financial accountability for integrity and results;methods of
evaluating public sector programs,fiscal federalism,and local finances;international prac-
tices in local governance;and a framework for responsive and accountable governance.
Fiscal Management Participatory Budgeting
Public Services Delivery Budgeting and Budgetary Institutions
Public Expenditure Analysis Local Budgeting and Financial
Management
Local Governance in Industrial Countries
Tools for Public Sector Evaluations
Local Governance in Developing
Countries Accountability for Performance
Intergovernmental Fiscal Transfers: Macrofederalism and Local Finances
Principles and Practice Citizen-Centered Governance
PUBLIC SECTOR
GOVERNANCE AND
ACCOUNTABILITY SERIES
INTERGOVERNMENTAL
FISCAL TRANSFERS
PRINCIPLES PRACTICE
AND
Edited by ROBIN BOADWAY and ANWAR SHAH
THE WORLD BANK
Washington,D.C.
©2007 The International Bank for Reconstruction and Development / The World Bank
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ISBN-10:0-8213-6492-8
ISBN-13:978-0-8213-6492-5
eISBN-10:0-8213-6493-6
eISBN-13:978-0-8213-6493-2
DOI:10.1596/978-0-8213-6492-5
Library ofCongress Cataloging-in-Publication Data
Intergovernmental fiscal transfers:principles and practice / edited by Robin Boadway,
Anwar Shah.
p.cm.– (Public sector governance and accountability series)
Includes bibliographical references and index.
ISBN-13:978-0-8213-6492-5
ISBN-10:0-8213-6492-8
1.Intergovernmental fiscal relations.2.Intergovernmental finance.3.Revenue sharing.
4.Grants-in-aid.I.Boadway,Robin W.,1943- II.Shah,Anwar.III.Series.
HJ197.I58 2007
352.73–dc22
2005057765
Contents
Foreword xv
Preface xvii
Acknowledgments xix
Contributors xxi
Overview xxvii
Robin Boadway and Anwar Shah
CHAPTER
1 A Practitioner’s Guide to Intergovernmental
Fiscal Transfers 1
Anwar Shah
Instruments ofIntergovernmental Finance 2
Achieving Results-Based Accountability through
Performance-Oriented Transfers 9
Designing Fiscal Transfers:Dividing the Spoils or
Creating a Framework for Accountable and
Equitable Governance? 15
Institutional Arrangements for Fiscal Relations 44
Lessons from International Practices 48
References 51
v
vi Contents
Part I The Principles
2 Grants in a Federal Economy: A Conceptual
Perspective 55
Robin Boadway
Three Views ofthe Role ofGrants 57
Designing the System ofFederal-Regional
Fiscal Relations 65
Notes 74
3 Equity and Efficiency Aspects of Interagency
Transfers in a Multigovernment Framework 75
Paul Bernd Spahn
The Case for Interjurisdictional Equity 76
Designing Equalization Schemes 78
The Case for Intragovernmental Efficiency 93
Designing Interagency Relations and Microtransfers 96
Summary 104
Notes 105
References 106
4 Achieving Economic Stabilization by Sharing Risk
within Countries 107
Jürgen von Hagen
Principles ofRegional Risk Sharing 109
Moral Hazard and the Political Economy of
Regional Insurance 114
Empirical Evidence 117
The Macroeconomics ofRegional Risk Sharing
and Stabilization 123
Conclusions 125
Annex:A Model ofRegional Stabilization and
Risk Sharing 126
Notes 129
References 129
Contents vii
5
Grants and Soft Budget Constraints 133
Marianne Vigneault
The Soft Budget Constraint Problem Defined 136
Implications ofSoft Budget Constraints 137
The Soft Budget Constraint Problem in Theory 138
The Soft Budget Constraint Problem in Practice:
Country-Level Evidence 145
Lessons Learned 162
Concluding Comments 167
Notes 168
References 169
6 The Political Economy of Interregional
Grants 173
Motohiro Sato
Political Motive and Political Competition 176
Fragmented Government and Rent Seeking 181
Intergovernmental Relations 185
The Commitment Problem 189
Institutional Reform 193
Notes 196
References 197
7
The Incentive Effects of Grants 203
Michael Smart
The Taxonomy ofGrants 204
Vertical Transfers 205
Horizontal Transfers 211
Concluding Comments 220
Notes 221
References 221
viii Contents
The Impact of Intergovernmental Fiscal Transfers:
8 A Synthesis of the Conceptual and
Empirical Literature 225
Shama Gamkhar and Anwar Shah
Impact ofIntergovernmental Transfers on Local Government
Behavior:Theoretical Hypotheses 226
Empirical Approaches to Measuring the Impact of
Intergovernmental Transfers on Local Fiscal Behavior 231
Concluding Remarks 252
Notes 254
References 255
Part II The Practice
9 The Legal Architecture of Intergovernmental
Transfers: A Comparative Examination 259
Sujit Choudhry and Benjamin Perrin
Law and the Political Economy ofFiscal Federalism 260
Case Studies 262
Conclusions 284
Notes 289
References 290
Institutional Arrangements for
10 Intergovernmental Fiscal Transfers and
a Framework for Evaluation 293
Anwar Shah
Institutional Arrangements for Intergovernmental
Transfers 294
Evaluating Institutional Arrangements for Equalizing Transfers
Using a New Institutional Economics Framework 304
Comparing Alternate Institutional Arrangements Using a New
Institutional Economics Framework 306
From Theory to Practice:How Accurate Are the Predictions ofthe
New Institutional Economics? 310
Concluding Remarks 316
Notes 316
References 317