Fiscal Decentralization and Fiscal Performance
A resurgence of recent interest in fiscal federalism has been a source of concern among macroeconomic stabilization experts. They argue that a decentralized fiscal system poses a threat to macroeconomic stability as it is incompatible with prudent monetary and fiscal management. The author addresses...
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| Format: | Policy Research Working Paper |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2005/12/6451997/fiscal-decentralization-fiscal-performance http://hdl.handle.net/10986/8582 |
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okr-10986-8582 |
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oai_dc |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English |
| topic |
ACCOUNTABILITY ADJUSTMENT PROGRAMS ADVERSE IMPACTS BANK BRANCHES BANK LOANS BANK OF CANADA BANK OF ENGLAND BANKING SECTOR BANKING SYSTEM BANKS BONDS BORROWING BUDGET DEFICIT BUDGETARY INSTITUTIONS BUDGETARY PROCESS CAPITAL MARKETS CAPITAL PROJECTS CENTRAL BANK INDEPENDENCE CENTRAL BANKS CENTRAL GOVERNMENTS CLOSED ECONOMY COMMERCIAL BANKS CONTRACT ENFORCEMENT DEBT DEBT MANAGEMENT DEBT SERVICING DECISION MAKING DEFICITS DEVELOPMENT AGENCIES ECONOMETRIC ANALYSIS ECONOMIC EQUILIBRIUM ECONOMICS EQUALIZATION EUROPEAN CENTRAL BANK EXCHANGE RATE EXPENDITURE RESPONSIBILITIES EXTERNAL SOURCES FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PLANNING FINANCIAL SECTOR FISCAL ADJUSTMENT FISCAL DECENTRALIZATION FISCAL DEFICITS FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL MANAGEMENT FISCAL PERFORMANCE FISCAL POLICIES FISCAL POLICY FISCAL RESPONSIBILITY FISCAL RULES FIXED EXCHANGE RATE FOREIGN EXCHANGE FOREIGN EXCHANGE RESERVES GDP GNP GOVERNMENT BONDS GOVERNMENT BUDGET GOVERNMENT DEBT GROWTH RATES INCOMPLETE MARKETS INDEPENDENT BANKS INDEXATION INFLATION INFLATION RATE INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERGOVERNMENTAL RELATIONS INTERNATIONAL COMPETITION LABOR COSTS LATIN AMERICAN LEGISLATION LENDER OF LAST RESORT LIQUIDATION LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL SPENDING MACROECONOMIC MANAGEMENT MACROECONOMIC PROBLEMS MANDATES MARKET DISCIPLINE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY AUTHORITY MONETARY MANAGEMENT MONETARY POLICIES MONETARY POLICY MONETARY STABILITY MONETARY UNION MONEY SUPPLY MORAL HAZARD NATIONAL ECONOMIES NATIONALIZED BANKS OPEN ECONOMIES PENALTIES PRICE INFLATION PRICE STABILITY PRIVATE BANKING PRIVATE SECTOR PRIVATIZATION PROFITABILITY PROPERTY RIGHTS PROPERTY VALUES PROVINCIAL GOVERNMENTS PROVISIONS PUBLIC PUBLIC DEBT PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC POLICY PUBLIC REVENUES PUBLIC SECTOR PUBLIC SECTOR BORROWING PUBLIC SECTOR DEFICITS PUBLIC SPENDING RATING AGENCIES REGRESSION ANALYSIS RENT SEEKING REVENUE SOURCES SPECIALIZED BANKS STABILIZATION POLICIES STABILIZATION POLICY STATE BANKS STATE OWNED ENTERPRISES STRUCTURE OF GOVERNANCE SUBNATIONAL GOVERNMENTS TAX TAX COLLECTION TAX EXPENDITURES TAX RATES TAXATION TRANSACTIONS COSTS TRANSPARENCY TREASURY UNEMPLOYMENT WORKING CAPITAL |
| spellingShingle |
ACCOUNTABILITY ADJUSTMENT PROGRAMS ADVERSE IMPACTS BANK BRANCHES BANK LOANS BANK OF CANADA BANK OF ENGLAND BANKING SECTOR BANKING SYSTEM BANKS BONDS BORROWING BUDGET DEFICIT BUDGETARY INSTITUTIONS BUDGETARY PROCESS CAPITAL MARKETS CAPITAL PROJECTS CENTRAL BANK INDEPENDENCE CENTRAL BANKS CENTRAL GOVERNMENTS CLOSED ECONOMY COMMERCIAL BANKS CONTRACT ENFORCEMENT DEBT DEBT MANAGEMENT DEBT SERVICING DECISION MAKING DEFICITS DEVELOPMENT AGENCIES ECONOMETRIC ANALYSIS ECONOMIC EQUILIBRIUM ECONOMICS EQUALIZATION EUROPEAN CENTRAL BANK EXCHANGE RATE EXPENDITURE RESPONSIBILITIES EXTERNAL SOURCES FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PLANNING FINANCIAL SECTOR FISCAL ADJUSTMENT FISCAL DECENTRALIZATION FISCAL DEFICITS FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL MANAGEMENT FISCAL PERFORMANCE FISCAL POLICIES FISCAL POLICY FISCAL RESPONSIBILITY FISCAL RULES FIXED EXCHANGE RATE FOREIGN EXCHANGE FOREIGN EXCHANGE RESERVES GDP GNP GOVERNMENT BONDS GOVERNMENT BUDGET GOVERNMENT DEBT GROWTH RATES INCOMPLETE MARKETS INDEPENDENT BANKS INDEXATION INFLATION INFLATION RATE INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERGOVERNMENTAL RELATIONS INTERNATIONAL COMPETITION LABOR COSTS LATIN AMERICAN LEGISLATION LENDER OF LAST RESORT LIQUIDATION LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL SPENDING MACROECONOMIC MANAGEMENT MACROECONOMIC PROBLEMS MANDATES MARKET DISCIPLINE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY AUTHORITY MONETARY MANAGEMENT MONETARY POLICIES MONETARY POLICY MONETARY STABILITY MONETARY UNION MONEY SUPPLY MORAL HAZARD NATIONAL ECONOMIES NATIONALIZED BANKS OPEN ECONOMIES PENALTIES PRICE INFLATION PRICE STABILITY PRIVATE BANKING PRIVATE SECTOR PRIVATIZATION PROFITABILITY PROPERTY RIGHTS PROPERTY VALUES PROVINCIAL GOVERNMENTS PROVISIONS PUBLIC PUBLIC DEBT PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC POLICY PUBLIC REVENUES PUBLIC SECTOR PUBLIC SECTOR BORROWING PUBLIC SECTOR DEFICITS PUBLIC SPENDING RATING AGENCIES REGRESSION ANALYSIS RENT SEEKING REVENUE SOURCES SPECIALIZED BANKS STABILIZATION POLICIES STABILIZATION POLICY STATE BANKS STATE OWNED ENTERPRISES STRUCTURE OF GOVERNANCE SUBNATIONAL GOVERNMENTS TAX TAX COLLECTION TAX EXPENDITURES TAX RATES TAXATION TRANSACTIONS COSTS TRANSPARENCY TREASURY UNEMPLOYMENT WORKING CAPITAL Shah, Anwar Fiscal Decentralization and Fiscal Performance |
| relation |
Policy Research Working Paper; No. 3786 |
| description |
A resurgence of recent interest in fiscal federalism has been a source of concern among macroeconomic stabilization experts. They argue that a decentralized fiscal system poses a threat to macroeconomic stability as it is incompatible with prudent monetary and fiscal management. The author addresses these concerns by taking a simple neo-institutional economics with an econometric analysis perspective. His analysis concludes that, contrary to a common misconception, fiscal decentralization is associated with improved fiscal performance and better functioning of internal common markets. Fiscal policy coordination represents an important challenge for federal systems. In this context, fiscal rules and institutions provide a useful framework but not necessarily a solution to this challenge. Fiscal rules binding on all levels can help sustain political commitment in countries having coalitions or fragmented regimes in power. Coordinating institutions help in the use of moral suasion to encourage a coordinated response. Industrial countries' experiences also show that unilaterally imposed federal controls and constraints on subnational governments typically do not work. Instead, societal norms based on fiscal conservatism such as the Swiss referenda and political activism of the electorate play important roles. Ultimately capital markets and bond-rating agencies provide more effective discipline on fiscal policy. In this context, it is important not to backstop state and local debt and not to allow ownership of the banks by any level of government. Transparency of the budgetary process and institutions, accountability to the electorate, and general availability of comparative data encourages fiscal discipline. Fiscal decentralization poses significant challenges for macroeconomic management. These challenges require careful design of monetary and fiscal institutions to overcome adverse incentives associated with the "common property" resource management problems or with rent seeking behavior. Experiences of federal countries indicate significant learning and adaptation of fiscal systems to create incentives compatible with fair play and to overcome incomplete contracts. This explains why that decentralized fiscal systems appear to do better than centralized fiscal systems on most aspects of monetary and fiscal policy management and transparent and accountable governance. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Shah, Anwar |
| author_facet |
Shah, Anwar |
| author_sort |
Shah, Anwar |
| title |
Fiscal Decentralization and Fiscal Performance |
| title_short |
Fiscal Decentralization and Fiscal Performance |
| title_full |
Fiscal Decentralization and Fiscal Performance |
| title_fullStr |
Fiscal Decentralization and Fiscal Performance |
| title_full_unstemmed |
Fiscal Decentralization and Fiscal Performance |
| title_sort |
fiscal decentralization and fiscal performance |
| publisher |
World Bank, Washington, DC |
| publishDate |
2012 |
| url |
http://documents.worldbank.org/curated/en/2005/12/6451997/fiscal-decentralization-fiscal-performance http://hdl.handle.net/10986/8582 |
| _version_ |
1764408076168855552 |
| spelling |
okr-10986-85822021-04-23T14:02:43Z Fiscal Decentralization and Fiscal Performance Shah, Anwar ACCOUNTABILITY ADJUSTMENT PROGRAMS ADVERSE IMPACTS BANK BRANCHES BANK LOANS BANK OF CANADA BANK OF ENGLAND BANKING SECTOR BANKING SYSTEM BANKS BONDS BORROWING BUDGET DEFICIT BUDGETARY INSTITUTIONS BUDGETARY PROCESS CAPITAL MARKETS CAPITAL PROJECTS CENTRAL BANK INDEPENDENCE CENTRAL BANKS CENTRAL GOVERNMENTS CLOSED ECONOMY COMMERCIAL BANKS CONTRACT ENFORCEMENT DEBT DEBT MANAGEMENT DEBT SERVICING DECISION MAKING DEFICITS DEVELOPMENT AGENCIES ECONOMETRIC ANALYSIS ECONOMIC EQUILIBRIUM ECONOMICS EQUALIZATION EUROPEAN CENTRAL BANK EXCHANGE RATE EXPENDITURE RESPONSIBILITIES EXTERNAL SOURCES FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PLANNING FINANCIAL SECTOR FISCAL ADJUSTMENT FISCAL DECENTRALIZATION FISCAL DEFICITS FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL MANAGEMENT FISCAL PERFORMANCE FISCAL POLICIES FISCAL POLICY FISCAL RESPONSIBILITY FISCAL RULES FIXED EXCHANGE RATE FOREIGN EXCHANGE FOREIGN EXCHANGE RESERVES GDP GNP GOVERNMENT BONDS GOVERNMENT BUDGET GOVERNMENT DEBT GROWTH RATES INCOMPLETE MARKETS INDEPENDENT BANKS INDEXATION INFLATION INFLATION RATE INFLATION RATES INSURANCE INTEREST RATE INTEREST RATES INTERGOVERNMENTAL RELATIONS INTERNATIONAL COMPETITION LABOR COSTS LATIN AMERICAN LEGISLATION LENDER OF LAST RESORT LIQUIDATION LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL SPENDING MACROECONOMIC MANAGEMENT MACROECONOMIC PROBLEMS MANDATES MARKET DISCIPLINE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY AUTHORITY MONETARY MANAGEMENT MONETARY POLICIES MONETARY POLICY MONETARY STABILITY MONETARY UNION MONEY SUPPLY MORAL HAZARD NATIONAL ECONOMIES NATIONALIZED BANKS OPEN ECONOMIES PENALTIES PRICE INFLATION PRICE STABILITY PRIVATE BANKING PRIVATE SECTOR PRIVATIZATION PROFITABILITY PROPERTY RIGHTS PROPERTY VALUES PROVINCIAL GOVERNMENTS PROVISIONS PUBLIC PUBLIC DEBT PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC POLICY PUBLIC REVENUES PUBLIC SECTOR PUBLIC SECTOR BORROWING PUBLIC SECTOR DEFICITS PUBLIC SPENDING RATING AGENCIES REGRESSION ANALYSIS RENT SEEKING REVENUE SOURCES SPECIALIZED BANKS STABILIZATION POLICIES STABILIZATION POLICY STATE BANKS STATE OWNED ENTERPRISES STRUCTURE OF GOVERNANCE SUBNATIONAL GOVERNMENTS TAX TAX COLLECTION TAX EXPENDITURES TAX RATES TAXATION TRANSACTIONS COSTS TRANSPARENCY TREASURY UNEMPLOYMENT WORKING CAPITAL A resurgence of recent interest in fiscal federalism has been a source of concern among macroeconomic stabilization experts. They argue that a decentralized fiscal system poses a threat to macroeconomic stability as it is incompatible with prudent monetary and fiscal management. The author addresses these concerns by taking a simple neo-institutional economics with an econometric analysis perspective. His analysis concludes that, contrary to a common misconception, fiscal decentralization is associated with improved fiscal performance and better functioning of internal common markets. Fiscal policy coordination represents an important challenge for federal systems. In this context, fiscal rules and institutions provide a useful framework but not necessarily a solution to this challenge. Fiscal rules binding on all levels can help sustain political commitment in countries having coalitions or fragmented regimes in power. Coordinating institutions help in the use of moral suasion to encourage a coordinated response. Industrial countries' experiences also show that unilaterally imposed federal controls and constraints on subnational governments typically do not work. Instead, societal norms based on fiscal conservatism such as the Swiss referenda and political activism of the electorate play important roles. Ultimately capital markets and bond-rating agencies provide more effective discipline on fiscal policy. In this context, it is important not to backstop state and local debt and not to allow ownership of the banks by any level of government. Transparency of the budgetary process and institutions, accountability to the electorate, and general availability of comparative data encourages fiscal discipline. Fiscal decentralization poses significant challenges for macroeconomic management. These challenges require careful design of monetary and fiscal institutions to overcome adverse incentives associated with the "common property" resource management problems or with rent seeking behavior. Experiences of federal countries indicate significant learning and adaptation of fiscal systems to create incentives compatible with fair play and to overcome incomplete contracts. This explains why that decentralized fiscal systems appear to do better than centralized fiscal systems on most aspects of monetary and fiscal policy management and transparent and accountable governance. 2012-06-20T20:33:28Z 2012-06-20T20:33:28Z 2005-12 http://documents.worldbank.org/curated/en/2005/12/6451997/fiscal-decentralization-fiscal-performance http://hdl.handle.net/10986/8582 English Policy Research Working Paper; No. 3786 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |