Fiscal Decentralization, its Political Economy Determinants and Issues in Effective Measurement
Posted: 30 Jun 2009
Date Written: June 30, 2009
The recent global financial crisis has highlighted the limitations of monetary policy as a macroeconomic stabilization tool in open economies exposed to external trade and financial shocks. Fiscal policy is now again at the forefront of macroeconomic stabilization and to address the fact that there exist large regional disparities within countries, fiscal decentralization is a major policy issue. According to the fiscal decentralization theorem, lower levels of government can better address the unique needs of their region, but this needs to be balanced against the higher taxable capacity of central government. However, fiscal decentralization remains a rather elusive concept to define in practice. Crude measures of fiscal decentralization based on the shares of sub-national government taxation and expenditure in total national tax revenue and spending often mask a large variation in terms of the actual degree of autonomy over fiscal decisions. Therefore, one of the objectives of this paper is to identify the key legal and institutional characteristics for the effective measurement of the degree of sub-national fiscal autonomy. By going beyond the mainstream normative perspective on the optimal degree of fiscal decentralization, the paper also aims to contribute to the literature by incorporating political economy considerations into the analysis of the determinants of fiscal decentralization. The positive political economy perspective thus sheds light on the feasibility of fiscal decentralization in different political and legal systems.
Keywords: fiscal decentralization, intergovernmental relations, taxation and spending
JEL Classification: H11, H20, H70, P16
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