1. Roles and Expenditure across Levels of Government
PREM/HD/INF Network Course on
PUBLIC EXPENDITURE ANALYSIS AND MANAGEMENT
Monday, March 21st, 2005, 1:00-2:30 pm
Kai Kaiser Economist, PREM Public Sector Group (PRMPS)
Recommended Background Readings
Burki, Shahid Javed, Guillermo E. Perry, William R. Dillinger, 1999, Beyond the Center: Decentralizing the State, World Bank: Latin America & Caribbean Studies
McClure, Charles E. & Martinez-Vasquez, Jorge, (2000), The Assignment of Revenues and Expenditures in Intergovernmental Fiscal Relations." (PDF 307K) Paper prepared for the core course on Intergovernmental Relations and Local Financial Management, World Bank Institute, Washington, DC: World Bank
De Mello, L. (2004). Fiscal Decentralization and Subnational Expenditure Policy.
OECD, (1997), Managing Across Levels of Government. Paris: Directorate for Public Governance and Territorial Development
Shah, A. (1994). The Reform of Intergovernmental Fiscal Relations in Developing and Emerging Market Economies. Washington, DC, World Bank: 90.

2. Overview Intergovernmental Fiscal Systems
Levels of Government
Sub-National Expenditure Assignments
Principles & Issues
Empirical Evidence
Intergovernmental Transfer Systems
Vertical Imbalances and Own Source Revenue Mobilization
Decentralization Challenges
Design, Implementation, Diagnosis
PEM versus Sectoral Lenses
Top-down versus Bottom Up Accountabilities i

3. Decentralization: A World-Wide Phenomenon
Underway in over 85 countries
Political and economic rationales
Varieties
Deconcentration
Delegation
Devolution
Privatization
Spans political/legal, fiscal, administrative…

4. Four Pillars of Intergovernmental Fiscal System
Expenditures
Revenues
Intergovernmental transfers
Subnational borrowing/debt

5. Expenditure Assignments
Macroeconomic stability
Public Service Delivery
Effectiveness/Efficiency
Public Management Innovation
Poverty Reduction
Responsiveness
Equalization

6. State Architectures Federal versus Unitary Tiers of Government
Legal/Constitutional Status of Sub-Nationals?
Tiers of Government
# Levels
Scale
Devolved versus Deconcentrated Structures
Territorial Organization
Functional Agencies

7. Expenditure Assignment Issues
Design
Public goods, externalities, economies of scale, public sector competition
Ideally, services should be provided at lowest level of government where benefits lie (subsidiarity)
Revenue & Expenditure Assignment Design Will Differ
Practice
Ultimately, no single best assignment
Provision “Technologies” May Change Over Time
Preferences/Needs May Evolve
Clarity in expenditure assignment often lacking
dejure versus defacto
Significant expenditure responsibility needed for autonomy
Public provision doesn’t imply public production
Contracting Out

8. Macroeconomic Stability
Key factor is “hard budget constraint”
Hierarchical versus Market Based
Creates incentives for subnational fiscal discipline
Limits risk of central government
Can be “softened” through several channels (intergovernmental fiscal system, financial system, SOEs, borrowing, etc.)
One often hears about the potential (and sometimes realized) risk of macroeconomic stability in decentralized countries. The critical factor influencing subnational fiscal behavior and central government liabilities is the presence of “hard budget constraints”.
A hard budget cosntraint exists when the central government can and does refuse to provide additional resource to a sub-national government beyond a pre-agreed resource envelope. The problem often in decentralized countries is that despite local governments being”autonomous”, they will tend to overspend, under tax or overborrow if they believe that the central governent will provide additional resources to them (or “bail them out”) If central governments do bail out local governments, their discipline is compromised, national fiscal deficits can grow and this can ultiamtely be destabilizing.
A budget constraint can be softened by a number of channels:

9. Allocative Efficiency (Subsidiarity)
Matching local needs and preferences with local public expenditure patterns
Assumes
Substantial fiscal autonomy/budgeting
Political decentralization
Are elections held?
How are candidates selected?
Intra-party hierarchical control mechanisms?
What do elections mean?
“Bottom-up” Accountability

10. Decentralized Assignments
Amount: Which Level of Government Decides Amount?
Structure: Which Level of Government Defines Structure?
Recurrent/Capital?
Execution: Which Level of Government Executes the Expenditure?
Supervision: Which Level of Government Supervises and Sets Standards?
Country and Sectoral Contexts Provide for Significant Diversity in Arrangements

11. Decentralization Trends
Subnational Expenditure Shares
Subnational Tax Shares
Developing Countries
1970s
13.0% (48)
10.4% (43)
1980s
13.2% (43)
7.7% (35)
1990s
13.8% (54)
9.3% (28)
Transition Countries
26.1% (23)
16.6% (14)
OECD Countries
33.8% (22)
18.7% (22)
32.3% (23)
32.4% (23)
19.1% (23)
Source: International Monetary Fund. Government Finance Statistics Year Book , various years, Country Tables

12. Differences Across Regions
Subnational Share of Expenditures
Subnational Share of Revenues
Note: Simple average of most recent observations in available countries. Numbers in parenthesis indicate number of countries represented. Figure do not typically include deconcentrated spending.
Source: International Monetary Fund. Government Finance Statistics Year Book 1998, Country Tables.

13. International Diversity

14. Decentralized Social Sector Expenditures
Source: IMF GFS

15. Comparative Assignments

16. Rationales for Intergovernmental Transfers
Vertical imbalances
Horizontal imbalances
Inter-jurisdictional spillovers (externalities)
Enhancing national objectives at the subnational level
Paying for national programs implemented by subnational governments

17. Local Revenue Issues
Own resources typically inadequate to carry out assigned functions
Striking variations in size and capacity – one size doesn’t fit all
Local revenues often inelastic, and not adequately responsive to changing needs
Local revenue mobilization strengthens accountability
Link taxes with benefits derived from local government services
Simplest and most effective form of tax autonomy: discretion to set tax rates

18. A “Good” Transfer System
Transfers should be transparent and predictable (formula-based)
Equalization transfers should include
A measure of “need”
A measure of “capacity”
Adequate sub-national revenue autonomy
Stable but flexible financing
Avoid a proliferation of conditional grants

19. Equity Extent of fiscal equalization
Expenditure Needs
Fiscal Capacity
Ways and means for targeting poor places and poor people
Add comment that experience with local solidarity will depend, amongst other things, on social capital and homogeniety of local populations.

20. Decentralization Challenges
Balance responsibilities with resources, capacity and accountability
Subsidiarity
Finance follows function
Responsibility with capacity (learn by doing)
Accountability through political channels, own source revenues, participation and transparency
Create incentives for implementation to match formal arrangements

21. Positive or Negative Outcomes?
If designed well, decentralization can
Move decision making closer to people (subsidiarity principle)
Enhance efficiency and responsiveness of service delivery
Enhance State Legitimacy/Accountability
Improve economic growth
Potentially alleviate poverty

22. But, good design is complicated
Decentralization spans
Political/Legal
Fiscal
Administrative
policies and institutions…

23. Overarching Considerations
Strategies
Objectives?
Champions
Early design has long-run implications
Sequencing/Priorities (esp. w/ low starting capacity)
Monitoring & Evaluation / Base-lining
Managing Change/Long Run Process
New modes of operating
Expectations
Credibility that LGs can deliver services?
Capacity, Accountability, & Resources?
Post-Conflict Context
Phasing

24. Common Dangers Elite capture (by ethnic/racial/social groups)
Opaque or arbitrary decision-making
Constituents, villagers, communities unable to hold representatives accountable due to incomplete information
Corruption
Patronage politics
Excessive discretion to reward friends, punish rivals
Central civil servants over-rule local representatives

25. Public Expenditure Management Lens
Clarity in expenditure assignment?
Adequacy of resources?
Formula-based transfer system?
Hard budget constraint?
Budgeting and reporting systems
Uniformity vs. flexibility
Carrots vs. sticks
Procurement
E.g., Contracting Out

26. Service Delivery Lens Decentralization “Technology”
Allocative efficiency effects
Intergovernmental fiscal framework
Sufficient capacity
“Technology”
School autonomy/community participation
Purchaser/provider split in health
Incentives for service providers
Institutional structures
Civil service, budgeting and financial management processes, performance incentives
Resources reach front-line service providers (PETs)
Accountability

27. Decentralized Accountability Mechanisms
Top Down
Central Supervision
Reporting
“Minimum Standards”
Bottom Up Accountabilities
Electoral Insufficient
Proximity versus Scale/Capacity

28. Leveraging Transparency
Sectoral Differences
Health versus Education
Public LG meetings, citizen fora
Participatory Budgeting
Publicize voting records
Mobilize own source revenues
Financial disclosure (improved budgeting)
E.g., Annual Review Reports
Freedom of Information Acts and/or other public disclosure laws (assets, affiliations)
Monitoring by vigilance committees, NGOs, CBOs, media
Media

29. Further Resources Decentralization Thematic Group Website
Sign-up for Decentralization TG
Decentralization & Local Financial Management Course
March 29-30, 2005
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