Official PDF , 362 pages

362 Pages·2008·2.33 MB·English

by  World Bank Group

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MACRO FEDERALISM
AND
LOCAL FINANCE
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
preferences and that fosters private market-led growth while managing fiscal resources pru-
dently is considered critical to the World Bank’s mission of poverty alleviation and the
achievement of the Millennium Development Goals. This important new series aims to
advance those objectives by disseminating conceptual guidance and lessons from practices
and by facilitating learning from each others’ experiences on ideas and practices that pro-
mote responsive(by matching public services with citizens’ preferences), responsible(through
efficiency and equity in service provision without undue fiscal and social risk), and account-
able(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 of newer perspectives on public sector reforms. This
series distills current wisdom and presents tools of analysis for improving the efficiency,
equity, and efficacy of the public sector. Leading public policy experts and practitioners have
contributed to this series.
The first 14 volumes in this series, listed below, are concerned with public sector account-
ability for prudent fiscal management; efficiency, equity, and integrity in public service pro-
vision; safeguards for the protection of the poor, women, minorities, and other disadvantaged
groups; ways of strengthening institutional arrangements for voice, choice, and exit; means
of ensuring public financial accountability for integrity and results; methods of evaluating
public sector programs, fiscal federalism, and local finances; international practices in local
governance; and a framework for responsive and accountable governance.
Fiscal Management Budgeting and Budgetary Institutions
Public Services Delivery Local Budgeting
Public Expenditure Analysis Local Public Financial Management
Local Governance in Industrial Countries Performance Accountability and
Combating Corruption
Local Governance in Developing
Countries Tools for Public Sector Evaluations
Intergovernmental Fiscal Transfers: Macro Federalism and Local Finance
Principles and Practice
Managing Natural Resources and the
Participatory Budgeting Environment
PUBLIC SECTOR
GOVERNANCE AND
ACCOUNTABILITY SERIES
MACRO FEDERALISM
AND
LOCAL FINANCE
Edited by ANWAR SHAH
THE WORLD BANK
Washington, D.C.
©2008 The International Bank for Reconstruction and Development / The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: [phone]
Internet: www.worldbank.org
E-mail: [email protected]
All rights reserved
1 2 3 4 11 10 09 08
This volume is a product of the staff of the International Bank for Reconstruction and
Development / The World Bank. The findings, interpretations, and conclusions expressed
in this volume do not necessarily reflect the views of the Executive Directors of The World
Bank or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work.
The boundaries, colors, denominations, and other information shown on any map in this
work do not imply any judgement on the part of The World Bank concerning the legal
status of any territory or the endorsement or acceptance of such boundaries.
Rights and Permissions
The material in this publication is copyrighted. Copying and/or transmitting portions
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For permission to photocopy or reprint any part of this work, please send a request
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All other queries on rights and licenses, including subsidiary rights, should be
addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washing-
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ISBN: 978-0-8213-6326-3
eISBN: 978-0-8213-6327-0
DOI: 10.1596/978-0-8213-6326-3
Library of Congress Cataloging-in-Publication Data
Macro federalism and local finance / Anwar Shah, editor.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-8213-6326-3 — ISBN 978-0-8213-6327-0 (electronic)
1. Intergovernmental fiscal relations—Case studies. 2. Federal government—Case
studies. 3. Local finance—Case studies. 4. Decentralization in government—Case studies.
5. Finance, Public—Case studies. I. Shah, Anwar.
HJ197.M33 2008
336—dc22
2008006103
Contents
Foreword xi
Preface xiii
Acknowledgments xv
Contributors xvii
Abbreviations xxi
Overview 1
Anwar Shah
Part I Macro Federalism
CHAPTER
Macro Federalism: An Introduction with
1 Principal Reference to the Canadian
Experience 9
Thomas J. Courchene
Globalization, Confederalism, and the
Information-Knowledge Revolution 11
Defining Macro Federalism 18
Outline of the Analysis 19
Internal Economic Integration 20
Transfer Dependency: A Macro Federalism Approach
to Regional Policy and Fiscal Federalism 34
Monetary Policy and Central Banking 47
v
vi Contents
Fiscal Policy 53
Miscellaneous Macro Federalism Issues 57
Overall Conclusions 68
Notes 74
References 75
Globalization, the Information Revolution,
2 and Emerging Imperatives for Rethinking
Fiscal Federalism 77
Anwar Shah
Governance Implications of Globalization and the
Information Revolution 78
Localization 84
Emerging Jurisdictional Realignments: Glocalization 85
Emerging Imperatives for Rethinking Fiscal Federalism 86
Federalism and Regional Equity: Reflections on Alternative
Approaches to Reducing Regional Disparities 93
Conclusions: The New Vision of Multicentered
Governance 103
Notes 104
References 104
3
Federalism and Macroeconomic Performance 107
Anwar Shah
Institutional Environment for Macroeconomic
Management 109
Fiscal Decentralization and Fiscal Performance:
Some Conclusions 136
Notes 137
References 137
4 Regional Income Disparities and Convergence:
Measurement and Policy Impact Evaluation 143
Raja Shankar and Anwar Shah
Measures of Regional Inequality 144
Contents vii
Regional Disparities: A Cross-Country Snapshot 149
Regional Income Disparities and Convergence 157
Regional Inequalities and Convergence: A Scorecard
on National Policies for Regional Development 169
Annex 4A: Regional Disparity Trends 171
Annex 4B: Data Sources 188
Notes 189
References 189
Harmonizing Taxation of Interstate Trade
5 under a Subnational VAT: Lessons from
International Experience 193
Mahesh C. Purohit
Brazil 194
Canada 196
European Union 198
The Little Boat Model 200
India 202
The Recommended Options 208
Conclusion 210
Notes 210
References 212
6 Subnational Borrowing, Insolvency, and
Regulation 215
Lili Liu and Michael Waibel
Benefits and Risks of Subnational Borrowing 217
Rationales for Regulating Subnational
Borrowing 221
Frameworks for Subnational Borrowing:
Ex ante Regulation 223
Regulatory Frameworks for Subnational Borrowing:
Insolvency Mechanisms 226
Conclusions 231
Notes 234
References 239
viii Contents
Part II Local Finance
A Local Perspective on Fiscal Federalism:
7 Practices, Experiences, and Lessons from
Industrial Countries 245
Melville L. McMillan
Expenditure Responsibilities of Local Government 246
Local Government Revenue 263
Summary, Conclusions, and Lessons 283
Notes 287
References 288
8 Decentralized Governance in Developing and
Transition Countries: A Comparative Review 291
Sebastian Eckardt and Anwar Shah
The Building Blocks of Citizen-Centered Governance
in Decentralized Systems 292
A Simple Scorecard to Measure Decentralized
Citizen-Centered Governance 301
Conclusion 314
Annex: Country Sample 316
Note 318
References 318
Index 323
BOXES
2.1 Emerging Rearrangements of Government Assignments:
Glocalization 85
3.1 Legislated Fiscal Rules: Do They Matter for
Fiscal Outcomes? 124
FIGURES
1.1 The Economic Integration Continuum 24
1.2 A Geometry of Regional Dependence 37
4.1 Regional Disparities in Industrial Countries 151
4.2 Regional Disparities in Nonindustrial Countries 155
4.3 Regional Disparity Trends in Federal Countries 158
4.4 Regional Disparity Trends in Unitary Countries 162
4A.1 Regional Disparity Trends in Canada 171
Contents ix
4A.2 Regional Disparity Trends in the United States 172
4A.3 Regional Disparity Trends in Brazil 173
4A.4 Regional Disparity Trends in India 174
4A.5 Regional Disparity Trends in Mexico 175
4A.6 Regional Disparity Trends in Pakistan 176
4A.7 Regional Disparity Trends in the Russian Federation 177
4A.8 Regional Disparity Trends in Chile 178
4A.9 Regional Disparity Trends in China 180
4A.10 Regional Disparity Trends in Indonesia 181
4A.11 Regional Disparity Trends in the Philippines 182
4A.12 Regional Disparity Trends in Romania 183
4A.13 Regional Disparity Trends in Sri Lanka 184
4A.14 Regional Disparity Trends in Thailand 185
4A.15 Regional Disparity Trends in Uzbekistan 186
4A.16 Regional Disparity Trends in Vietnam 187
8.1 Political Freedom and Bureaucratic Quality: Partial
Correlation Controlling for Per Capita GDP Log 293
8.2 Accountability 303
8.3 Fiscal Responsibility 310
TABLES
1.1 Globalization and the Information-Knowledge Revolution:
Variations on the New Technoeconomic Paradigm 12
1.2 Selected Institutional Features of Mature Federations 21
1.3 Comparison of Constitutional Provisions 22
1.4 Central Bank Structure 48
2.1 Governance Structure: 20th versus 21st Century 87
3.1 Fiscal Decentralization and Fiscal Performance:
Selected Regressions 114
3.2 Fiscal Rules at a Glance 123
3.3 Fiscal Decentralization and Fiscal Performance:
A Summary of Empirical Results 136
4.1 Regional Disparities in Industrial Countries 150
4.2 Regional Disparities in Nonindustrial Countries 153
4.3 Regression Results 156
4.4 Spearman Rank Correlation 157
4.5 Beta Convergence Results in Federal Countries 159
4.6 Beta Convergence Results in Unitary Countries 164
4.7 Regional Inequalities and Convergence: A Summary View 170
4A.1 Regional Disparity Trends in Canada 171