Fiscal Decentralization :A Bird’s Eye View

1. Review of Principles & Framework - Robert Ebel (World Bank Institute)

2. Fiscal Decentralization - Luiz de Mello (Fiscal Affairs Department, IMF)

3. Decentralization in Africa - James Hicks (AFTU1)

December 18, 2000

Why the Emphasis on Decentralization?

From Government Fiscal Localizationto Governance Decentralization

Political Economic GlobalizationImperative Decentralization

Decentralization Framework

Intergovernmental Relations

(Mix of) variants Deconcentration Delegation Devolution

The need for a broad framework

Why Is It Important?

Efficiency AllocationRevenue mobilization

Service Delivery PolicyImplementation

Poverty PeoplePlace

Growth Mixed evidenceDoes it matter?

Nation Building StructureAsymmetry

Constitutional and legal framework

Macro stability

Structure and function

Transfers

Sustainability

Sectoral

Tools and Strategies

Decentralization andPoverty Reduction Strategies

Fostering public participation in policies and programs that affect people’s lives (Benin)

Stressing local government’s role in preparing, executing, and monitoring antipoverty programs (Albania, Benin)

Coordinating foreign assistance and implementation of donor-financed projects (Burkina Faso, Mali)

Improving delivery of public goods and services (Benin, Kenya, Honduras)

Objectives of Decentralization Identified in PRSPs

Strengthening budget preparation and execution (Albania); and bringing the administration closer to the people (Benin, Mali)

Enabling local governments (Burkina Faso)

Enhancing democracy and control over locally elected leaders (Burkina Faso, Mali)

Strengthening consultative processes (Albania, Ghana)

www.decentralization.org 8

Fiscal Decentralization

Luiz de Mello

Fiscal Affairs Department

International Monetary Fund

Decentralization and the Macroeconomy

Deficit bias– revenue sharing and “common pool” problems

Governance– fiscal rules and prudential regulations– financial information systems, monitoring– hard budget constraints

Service delivery– capacity building– incentives and “agency” problems

Budget Balance and Government Size

Central Government Size and Fiscal Position - Full Sample

-12

-10

-8

-6

-4

-2

0

2

0 10 20 30 40 50 60

Central Government Size

Cen

tra

l Go

vern

me

nt

Bala

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Sub-national Government Size and Fiscal Position - Full Sample

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

0 5 10 15 20 25 30 35

Sub-national Gov. SizeS

ub

-na

tio

na

l G

ov

. B

ala

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e

Budget Balance and Government Size

Sub-national Government Size and Central

Government Fiscal Position - Full Sample

-12

-10

-8

-6

-4

-2

0

2

0 5 10 15 20 25 30 35

Sub-national Government Size

Ce

ntr

al

Go

ve

rnm

en

t B

ala

nc

e

Sub-national Government Size and Central Government Fiscal Position -

Developing Country Sample

-8

-7

-6

-5

-4

-3

-2

-1

0

1

0 5 10 15 20

Sub-national Government Size

Ce

ntr

al

Go

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ala

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e

Pre-conditions for Successful Decentralization

Strengthening managerial capacity at local level (Burkina Faso, Honduras, São Tomé and Príncipe, Tanzania)

Establishing sustained partnership within the government and decentralized administrations (Chad)

Avoiding lack of material, financial, and human resources at the local level (Senegal)

Pre-conditions for Successful Decentralization (cont’d)

Encouraging pragmatism and gradualism (Burkina Faso, Honduras)

Fostering citizen participation through civil society organizations (Burkina Faso, Ghana, Mali)

Improving access to economic and social information (Albania, Burkina Faso).

www.decentralization.org 14

Decentralization in Africa

James Hicks (AFTU1)

Africa Region: High Degree of Centralized Power ...

Subnational Expenditures, 1980-97 (Period averages, in percent) 1/

as % of totalas % of GDP Govt. spending

No. Countries

Africa 2.1 7.6 14Asia 3.4 13.8 9Latin America & Caribbean 3.3 14.7 16Middle East 1.0 1.5 2OECD 2/ 14.7 30.8 24Transition economies 9.6 30.3 17Large federations 3/ 13.5 36.5 13World

Sources: Government Finance Statistics, IMF. (Prepared by Luiz de Mello, Fiscal Affairs Department, IMF)

1/ Unweighted averages.2/ Includes Israel3/ Comprises India, Malaysia, Argentina, Brazil, Mexico, Australia,Austria, Belgium, Canada, Germany, Spain, Switzerland, and United States.

… But With Some Degree of Variation Local Government Expenditures as % of GDP in Sample of African

Countries

Country Expenditures in % of GDP

Zambia (l997) 0.5Ghana (l996) 2.6Senegal (l997) 1.7Uganda (l997/98) 4.0Swaziland (l998) 0.6Zimbabwe (l997) 3.0Non-weighted average for the six countries 2.1

Wide Range Expenditure Composition

Composition (%) of Local Government Recurrent Expenditures

Average ofPurpose Six Countries Range

Administration 40 29 - 77

Education 12 0 - 60

Health 12 4 - 21

Housing 5 0 - 18

Community Amenities 11 0 - 40

Culture and Recreation 2 0 - 7

Other 18 5 - 32

Total Recurrent 76 31 - 96

And, A Range at Revenue Utilization ...

Composition (%) of Local Government Revenues

Average ofSource Six Countries Range

Own Taxes 32 15-67

Own Non-Tax 10 0-34

User Fees 16 5-35

Central Transfers 35 3-69

Borrowing 2 0-5

Other Sources 5 0-18

… But, Underutilized Revenue Capacity

SNG Revenue Potential in the Six Countries

% Potential increase with same

tax/fee rate/regulations

Zambia 100Ghana 70Senegal 50Uganda 50Swaziland 30Zimbabwe 28

Based on evidence from the six country reports

Shared Vision: Victoria Falls Declaration

(Delegations from 15 Countries - 9/99)

There is need for a shared vision of the basic principles of decentralization which recognizes the specific needs and conditions of the African Continent.

Decentralization should involve the transfer to local government institutions those powers and functions necessary to enable them to: (i) provide services for the local population efficiently and effectively; (ii) provide a conducive environment for local economic development; and (iii) develop and manage local resources in a sustainable manner.

Decentralization should include the provision of access to the resources needed to execute the above powers and functions efficiently and effectively, including financial and manpower resources.

Financial resources should be available to local authorities in a manner which is reliable, adequate, predictable, transparent, sustainable and equitable.

Some Dangers

Miss-matches between local government mandates and size/capacity viability (South Africa example)

Unfunded mandates (decentralizing the deficit)

Contribution to fiscal instability (Argentina, Brazil)

Confusion about mandates—deconcentration (Prefets/Districts) vs. autonomous LGs

Subnational banks

Stronger local governments may support higher (or lower) ethnic tensions

Tentative Recommendations

Keep agenda simple (beware high recurrent expenditures); clear rules of game

Fiscal transfers (including donor supported) on budget and with hard constraint

Support identification of “champion” in charge of overall policy

Recognize capacity differences and seek reasonable transition strategies

Seek to promote leveling of playing field (e.g., equalization grants)

Learning by doing probably good, but mistakes to be made—good monitoring and high transparency

Move away from special-purpose funds