The Challenge of Fiscal Decentralisation in Transition Countries

Abstract

This paper examines key aspects of the ongoing decentralisation process in transition economies and identifies areas where the present systems can have potentially adverse impacts on both service delivery and macroeconomic performance. We discuss three critical principles of a sound and efficient decentralised fiscal system – which are then contrasted with actual trends and policies in these countries. Comparative Economic Studies (2006) 48, 100–131. doi:10.1057/palgrave.ces.8100063

Fiscal Decentralization and Economic Growth in Central and Eastern Europe

“…In Bulgaria, 90 percent of actual local expenditure in 1999 was not under the control of local authorities (McCullough et al, 2000). This is in contrast to the situation in Hungary, Poland, Estonia, Latvia, and the Czech Republic, where the law grant subnational governments greater flexibility in service delivery (Dabla-Norris, 2006).…”

“…In a number of countries, such as Albania, Moldova, Romania, and Russia the distribution of spending responsibilities remains unclear (Dabla-Norris, 2006). In Russia, for instance, the ambiguity in the assignment of the authority to regulate spending assignments has compromised subnational budgetary positions (Rodden et al, 2003) and constrained the authority of subnational governments to adjust current expenditures.…”

“…Moreover, if the central government is a source of policy inefficiency, decentralization may improve resource allocation, foster market development, and, in turn, promote economic growth (Martínez-Vázquez and McNab, 2003). Finally, fiscal decentralization is frequently seen as a means of increasing democratic participation in the decision-making process (Dabla-Norris, 2006), allowing for greater transparency and accountability (Putnam, 1993;Azfar et al, 1999;Ebel and Yilmaz, 2002).…”

“…This rise has not only been significant, but often also very rapid. Local Source: : IMF country economists; Dunn and Wetzel, 2000;Dabla-Norris, 2006 Similarly, the size and greater diversity of Russia is partially reflected in a more decentralized system of government. However, the level of fiscal decentralization does not always match expectations, with Belarus -a relatively small and homogeneous country -having, at least on paper, the highest level of fiscal decentralization and Poland -the most homogeneous country in the samplefollowing suit.…”

“…Piriou-Sall even concludes that "while decentralization is no panacea, it has many virtues and is worth pursuing" (1998: 3). Many studies even indicate that the success of decentralization processes is a consequence of not only the design of the decentralization model but, perhaps more importantly, of country characteristics, and especially of the existence of strong effective institutions at all government tiers (Dabla-Norris, 2006). This could be one explanation why fiscal decentralization seems to have better outcomes in developed countries and less success in developing ones.…”