Summary by Matt Davies

The IMF Fiscal Affairs Department hosted a conference on fiscal decentralization on November 2021, 2000, to discuss prerequisites for effective service delivery, macroeconomic management, and good governance in an increasingly decentralized world. The agenda and a brief summary of the conference proceedings follow.

On Fiscal Federalism: Issues to Worry About

Vito Tanzi (IMF)

An Introduction to Decentralization Failure

Albert Breton (University of Toronto)

Decentralization and the Quality of Government

Daniel Treisman (University of California at Los Angeles)

Localization and Corruption: Panacea or Pandora’s Box?

Tugrul Gurgur and Anwar Shah (World Bank)

Does Decentralization Serve the Poor?

Joachim von Braun and Ulrike Grote (University of Bonn)

Fiscal Decentralization in East and Southern Africa: A Selective Review of Experience and Thoughts on Moving Forward

Paul Smoke (New York University and MIT)

Decentralization in Africa

Giorgio Brosio (University of Turin)

Fiscal Decentralization in Indian Federalism

Govinda Rao (Institute for Social and Economic Change, Bangalore)

Indonesia: Managing Decentralization

Ehtisham Ahmad and Ali Mansoor (IMF)

Recent Developments on Federalism and Decentralization: Lessons from the Argentine Experience

Ernest Rezk (University of Cordoba and Ministry of Finance, Argentina)

Subnational Borrowing in Argentina

Juàn Pablo Jimenez (Ministry of Economy, Argentina)

Brazil: An Evolving Federation

José Afonso (Brazilian National Development Bank) and Luiz de Mello (IMF)

Making Decentralization Work: The Case of Russia, Ukraine, and Kazakhstan

Jorge Martinez-Vazquez (Georgia State University), Era Dabla-Norris (IMF), and John Norregaard (IMF)

Fiscal Federalist Relations in Russia: A Case for Subnational Autonomy

Aleksei Lavrov (Ministry of Finance, Russian Federation), John Litwack (OECD), and Douglas Sutherland (OECD)

The Effectiveness of Decentralization in Hungary and Slovakia

Jean-Jacques Dethier (World Bank)

Recentralization in China?

Ehtisham Ahmad (IMF), Li Keping (Macroeconomic Division, State Council, Beijing), and Thomas Richardson (IMF)

Consensus Democracy and Interjurisdictional Fiscal Solidarity in Germany

Bernd Spahn and Oliver Franz (University of Frankfurt)

Decentralization in a Supranationality: The Case of the European Union

Pierre Salmon (Université de Bourgogne)

Intergovernmental Fiscal Relations in Italy

Piero Giarda (Ministry of Treasury, Rome)

Fiscal Decentralization in Spain

Julio Vinuela (IMF)

Round Table Discussion

Chair: Vito Tanzi (IMF)

Discussants: Ehtisham Ahmad (IMF), Ismail Momoniat (Ministry of Finance, South Africa), Piero Giarda (Ministry of Treasury, Italy), and Robert Ebel (World Bank)

Horst Köhler’s opening remarks asked whether decentralization would enhance transparency and accountability at the local government level and whether it would lead to poverty reduction and better macroeconomic management. Vito Tanzi followed this by outlining the risks involved in decentralization programs; he emphasized the appropriate sequencing of measures so as to minimize risks.

Albert Breton argued that intergovernmental competition must be the primary economic rationale for decentralization. Daniel Treisman’s empirical analysis, however, did not find that competition between decentralized jurisdictions either creates greater efficiency in governance or reduces corruption. Joachim von Braun found that fiscal decentralization, in itself, is unlikely to benefit the poor without prior, and effective, political and administrative decentralization. In contrast, Tugrul Gurgur and Anwar Shah found that decentralization supports greater accountability and reduced corruption. Michael Keen pointed out that increased corruption may not be a deciding factor against decentralization.

Paul Smoke and Giorgio Brosio separately identified preconditions for successful fiscal decentralization from diverse African experiences. Viable local political mechanisms, sufficient local capacity, and access to financial resources, including local tax revenues, are required. These conditions are only weakly met in many African countries. Ismail Momoniat stressed that effective budget management is also critical for success.

In Asia, Ehtisham Ahmad and Ali Mansoor argued that the absence of effective sequencing in the current, politically motivated decentralization process in Indonesia poses risks not just to the decentralization process, but to macroeconomic stability and interregional equity. Govinda Rao showed that the more gradual decentralization in India has had dangerous implications for the fiscal deficit. Ke-Young Chu pointed to the importance of a proper evaluation of subnational finances in order to understand macroeconomic prospects.

In Latin America, Jose Afonso and Luiz de Mello described the most recent fiscal decentralization reforms in Brazil, which have concentrated on strengthening the role of municipalities in service delivery. A Fiscal Responsibility Act has been instrumental in restoring subnational fiscal discipline by limiting expenditures and borrowing. Ernesto Rezk reviewed the Argentinean experience of decentralization which was damaged by inappropriate borrowing by provincial governments. Juan-Pablo Jimenez focused on the recent efforts in Argentina to implement a subnational Fiscal Responsibility Law and a Program of Fiscal Adjustment and Financial Restructuring. Teresa Ter-Minassian described some of the decentralization issues that were featured in the IMF’s recent policy discussions with both Brazil and Argentina.

Martinez-Vasquez, John Norregaard, and Era Dabla-Norris focused on Russia, Ukraine and Kazakhstan, and Jean-Jacques Dethier described the decentralization process in Hungary and Slovakia. These countries tend to show unclear assignments of tax and expenditure responsibilities. Problems include unfunded expenditure mandates and soft budget constraints at the subnational level. Alexei Lavrov, John Litwack, and Douglas Sutherland examined the necessary conditions to make decentralization work in Russia. This assessment had clear parallels with the Chinese case examined by Ehtisham Ahmad, Li Keping, and Tom Richardson. Both papers argued for a centralization of social responsibilities, redefinition of tax assignments, and a proper system of equalization transfers, with lower administrations addressing truly local functions, such as education and health care. Christine Wallich argued that the success of reforms depends on three conditions—an effective central tax administration, adequate fiscal resources, and local hard budget constraints. Nicholas Stern, chief economist of the World Bank, agreed with this assessment.

The European session included papers by Piero Giarda on Italy, Julio Vinuela on Spain, and Bernd Spahn on Germany. They showed that the extent of regional equalization is strongly influenced by national characteristics, politics, and history. Pierre Salmon addressed the scope of decentralization in the EU and suggested issues that might be relevant in country and regional surveillance by the IMF. Pierre Pestieau considered national redistribution policies.

The concluding roundtable discussion among Vito Tanzi, Ehtisham Ahmad, Ismail Momoniat, Piero Giardia, and Robert Ebel identified points that would guide countries undertaking decentralization processes. Successful systems need to foster transparency and accountability and have genuine electoral competition. Wherever possible, the implementation of reform programs should be gradual and carefully sequenced. The assignment of function should follow the existence of capacity, and should precede the assignment of revenues. Strong central government is needed to coordinate, regulate, and monitor intergovernmental competition and to take responsibility for equalization. Technical assistance from the IMF, World Bank, and other donors is likely to be important for developing countries.

Proceedings of IMF conferences and seminars, including agendas and papers, can be obtained at http://www.imf.org/external/np/exr/seminars/index.htm.