Skip to main content
SpringerLink
Log in

Fiscal decentralization and macroeconomic management

  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

Abstract

The purpose of this paper is to address a central question in fiscal federalism - whether or not fiscal decentralization implies serious risks for fiscal discipline and macroeconomic management for the nation as a whole. This paper addresses this important issue by drawing upon the existing evidence regarding macro management and fiscal institutions in federal and unitary countries. This is supplemented by cross country regression analysis plus the analysis of two case studies: the Brazilian federation and the unitary regime in China. The main conclusion of the paper is that decentralized fiscal systems offer a greater potential for improved macroeconomic governance than centralized fiscal regimes. This is because the challenges posed by fiscal decentralization are recognized and they shape the design of countervailing institutions in federal countries to overcome adverse incentives associated with incomplete contracts or the “common property” resource management problems or with rent seeking behaviors.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Afonso, J. R., & de Mello, L. (2002). Brazil: An evolving federation. In E. Ahmad & V. Tanzi (Eds.), Managing fiscal decentralization (pp. 265–285). London, Routledge.

    Google Scholar 

  • Barro, R. J. (1996). Getting it right: markets and choices in a free society. Cambridge, MA: MIT Press.

    Google Scholar 

  • Beck, T., Crivelli, J. M., & Summerhill, W. (2003). State bank transformation in Brazil: Choices and consequences. Paper Presented at the World Bank Conference on Bank Privatization and International Society for New Institutional Economics (ISNIE). World Bank. Washington, D.C. November 23, 2003.

  • Biehl, D. (1994). Intergovernmental fiscal relations and macroeconomic management—possible lessons from a federal case: Germany. In S. P. Gupta, P. Knight, R. Waxman, & Yin-Kann Wen (Eds.), Intergovernmental Fiscal Relations and Macroeconomic Management in Large Countries. New Delhi: Allied Publishers.

    Google Scholar 

  • Bernstein, T. P., & Lü, X. (2000). Taxation without representation: peasants, the central and the local states in reform China. China Quarterly No. 161. September 2000. 742–763.

  • Bomfim, A., & Shah, A. (1994). Macroeconomic management and the division of powers in Brazil: perspectives for the 1990s. World Development, 22(4), 535–542.

    Article  Google Scholar 

  • Brennan, G., & Buchanan, J. (1980). The power to tax: Analytical foundations of a fiscal constitution. New York: Cambridge University Press.

    Google Scholar 

  • Buchanan, J. M. (1997). Post-socialist political economy: selected essays. Cheltenham, UK; Lyme, N.H., US: E. Elgar.

    Google Scholar 

  • Buti, M., von Hagen, J., & Martinez-Mongay, C. (Eds.). (2002) The behaviour of fiscal authorities: stabilization, growth and institutions. New York: Palgrave.

    Google Scholar 

  • Centre for Economic Policy Research (CEPR) (1993). Making sense of subsidiarity: how much centralization for Europe. Great Britain.

  • Chung, Wee-Wee Connie, & Tongzon, J. L. (2004). A paradigm shift for China’s central bank system. Journal of Post Keynesian Economics, 27(1), 87–103.

    Google Scholar 

  • Cremer, J. (1986). Cooperation in ongoing organizations. Quarterly Journal of Economics (U.S.) 101(February 1986): 33–49

    Article  Google Scholar 

  • Cukierman, A., Webb, S. B., & Neyapti, B. (1992). Measuring the independence of central banks and its effect on policy outcomes. World Bank Economic Review (International) 6. World Bank, Washington D.C. September 1992. 353–98.

  • Cull, R., & Lixin-Colin Xu. (2003). Who get credit? The behavior of bureaucrats and state banks in allocating credit to Chinese state-owned enterprises. Journal of Development Economics, 712, 533–559.

    Article  Google Scholar 

  • Dafflon, B. (1977). Federal finance in theory and practice: with special reference to Switzerland. Bern; Stuttgart: Paul Haupt.

    Google Scholar 

  • Dillinger, W. (1997). Brazil’s state debt crisis: lessons learned. Economic Notes No. 14, Washington, D.C.: World Bank.

    Google Scholar 

  • Eckaus, R. S. (2003). Some consequences of fiscal reliance on extrabudgetary revenues in China. China Economic Review (U.K.), 14, 72–88.

    Article  Google Scholar 

  • Eichengreen, B. J., Hausman, R., & von Hagen, J. (1996). Reforming budgetary institutions in Latin America: The case for a national fiscal council. Paper Prepared For The Seminar On Fiscal Institutions To Overcome Volatility In Latin America. Inter-American Development Bank. Washington, D.C.

  • Finance Canada, Fiscal Policy Division (2004). The role of fiscal rules in determining fiscal performance: The Canadian case. International Journal of Public Budget. 32(56), 51–100.

    Google Scholar 

  • Goldfajn, I., & Guardia, E. R. (2003). Fiscal rules and debt sustainability in Brazil. Banco Central do Brasil Technical Note. 39. ISSN 1677-4205.

  • Gramlich, E. M. (1987). Federalism and federal deficit reduction. National Tax Journal (U.S.); (40) September 1987, 299–313.

    Google Scholar 

  • Gygi, U. (1991). Maintaining a coherent macroeconomic policy in a highly decentralized federal state: The Experience of Switzerland. OECD, processed.

  • Huther, J., & Shah, A. (1998). Applying a simple measure of good governnace to the debate on fiscal decentralization. Policy Research Working Paper 1894, Washington, D.C.: World Bank.

    Google Scholar 

  • Huther, J., & Shah, A. (2005). A Simple Measure of Good Governance. In A. Shah (Ed.), Public Services Delivery, Public Sector Governance and Accountability Series (pp. 39–62). Washington, DC: World Bank.

    Google Scholar 

  • Huther, J., Sandra, R., & Shah, A. (1996). Public expenditure reform in developing countries: Lessons from the World Bank adjustment lending experience. Working Paper/Operations Evaluation Department. World Bank. Washington, D.C.

    Google Scholar 

  • Iaryckzower, M., Saiegh, S., & Tommasi, M. (2000). Coming together: The industrial organization of federalism. Paper Presented at the 2000 Meeting of the Latin American Studies Association. Miami. March 16–18.

  • Ingberman, D., & Yao, D. (1991). Presidential commitment and the veto. American Journal of Political Science, 35, 357–389.

    Google Scholar 

  • Inman, R., & Fitts, M. (1990). Political Institutions and Fiscal Policy: Evidence from the US Historical Record. Journal of Law, Economics and Organization, 6(special issue), 79–132.

    Google Scholar 

  • Inman, R. P., & Rubinfeld, D. L. (1991). Fiscal federalism in Europe: Lessons from the United States experience. National Bureau of Economic Research Working Paper Series (U.S.); No. 3941. December 1991. 1–12.

  • International Monetary Fund. (2001). Brazil: Report on observance standards and codes (ROSC)- fiscal transparency. IMF Country Report 01/217. International Monetary Fund. Washington D.C.

  • Jones, M., Sanguinetti, P., & Tommasi, M. (1998). Politics institutions, and fiscal performance in federal system: An análisis of the Argentine provinces. Mimeo, Universidad de San Andrés.

    Google Scholar 

  • Kennedy, S., & Robins, J. (2001). The role of fiscal rules in determining fiscal performance. Canadian Dept. of Finance Working Paper 2001-16.

  • Kopits, G. (Ed.) (2004). Rules-based fiscal policy in emerging markets. New York: Palgrave

    Google Scholar 

  • Krug, B., Ze, Zhu, & Hendrischke, H. (2005). China’s emerging tax regime: devolution, fiscal federalism or tax farming? Paper Presented at the Annual Meeting of the European Public Choice Society. Durham, UK. March 2005.

  • Lane, T. D. (1993). Market discipline. International Monetary Fund Staff Papers, 40, 53–88.

    Google Scholar 

  • Levy, J. V. (2005). Fiscal rules and fiscal performance. Unpublished.

  • Lin, J. Y., & Zhiqiang Lou (2000). Fiscal decentralization and economic growth in China. Economic Development and Cultural Exchange, 49(1), 1–21.

    Article  Google Scholar 

  • Longo, C. A. (1994). Federal problems with VAT in Brazil. Revista Brasileira De Economia (Brazil), 48 (January–March 1994) 85–105.

    Google Scholar 

  • Ma, J. (1995). Macroeconomic management and intergovernmental relations in China. Policy Research Working Paper No. 1408. Washington, D.C.: World Bank.

  • Mihaljek, D. (1995). Hong Kong’s economy two years before 1997: steady sailing, prosperous voyage. International Monetary Fund (International) Survey 25. Washington DC. April 3, 1995. 109–12.

  • Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science (29). November 1963, 475–485.

    Article  Google Scholar 

  • Mundell, R. A. (1968). International economics. New York : Macmillan.

    Google Scholar 

  • Musgrave, R. (1983). Public finance, now and then. Finanzarchiv. Neue Folge (Germany); N.F. 41, 1, 1–13.

    Google Scholar 

  • Niskanen, W. A. (1992). Case for a new fiscal constitution. Journal Of Economic Perspectives (U.S.) 6, (Spring 1992). 13–24.

    Google Scholar 

  • Oates, W. (1985). Searching for the Leviathan: an empirical study. The American Economic Review, 75(4), 748–753.

    Google Scholar 

  • Oates, W. (1972). Fiscal federalism. New York: Harcourt Brace Jovanovich.

    Google Scholar 

  • Poterba, J., & von Hagen, J. (Eds.) (1999). Fiscal institutions and fiscal performance. Chicago: University of Chicago Press.

    Google Scholar 

  • Prudhomme, R. (1995). Dangers of decentralization. World Bank Research Observer (International), 10 (August 1995). 210–26.

    Google Scholar 

  • Qian, Yingyi (2000). The institutional foundations of market transition in the People’s Republic of China. Tokyo: ADB Institute Working Paper 9. May 2000.

  • Qian, Yingyi (2000). The process of China’s market transition (1978–1998): The evolutionary, historical, and comparative perspectives. Journal of Institutional and Theoretical Economics 156(1). 151–79.

    Google Scholar 

  • Qian, Y., & Wu, J. (2003). China’s Transition to a Market Economy: How Far Across the River. In N. C. Hope, D. Y. Yang, & Y. M. Li (Eds.), How Far Across the River? (pp. 31–64). Stanford, California: Stanford University Press.

    Google Scholar 

  • Saiegh, S. & Tommasi, M. (1998). Argentina’s federal fiscal institutions: a case study in the transaction-cost theory of politics. Conference Modernization and Institutional Development in Argentina. PNUD Buenos Aires. May 20–21, 1998.

  • Saiegh, S., & Tommasi, M. (1999). Why is Argentina’s fiscal federalism so inefficient? entering the labyrinth. Journal of Applied Economics II (1), 169–209.

    Google Scholar 

  • Saknini, H., James, S., & Sheikh, M. (1996). Stabilization, insurance and risk sharing in federal fiscal policy. Processed, Department of Finance, Ottawa.

  • Seabright, P. 1996. Accountability and decentralization in government: an incomplete contract model, European Economic Review, 40(1), 61–89.

    Article  Google Scholar 

  • Shah, A. (1991). The new fiscal federalism in Brazil. Washington, D.C.: World Bank, 1991.

    Google Scholar 

  • Shah, A. (1994). The reform of intergovernmental fiscal relations in developing and emerging market economies. Washington, DC: World Bank

    Google Scholar 

  • Shah, A. (1998). Fostering fiscally responsive and accountable governance: lessons from decentralization. In R. Picciotto, and E. Wiesner (Eds.) Evaluation and Development: The Institutional Dimension. pp. 83–96 New Brunswick and London.

  • Shah, A. (2004). Fiscal decentralization in developing and transition economies: progress, problems and the promise. Policy Research Working Paper Series No. 3282. Washington, DC.: World Bank.

  • Sheikh, M. A., & Winer, S. L. (1977). Stabilization and nonfederal behavior in an open federal state: An econometric study of the fixed exchange rate, Canadian Case. Empirical Economics, 2(3), 195–211.

    Article  Google Scholar 

  • Shirai, S. (2001) Banking sector reforms in the People’s Republic of China, progress and constraints. ADB Institute Research Papers Series, N. 43.

  • Spahn, H.-P. (1997). Schulden, defizite und die maastricht-kriterien. Konjunkturpolitik: Zeitschrift Fur Angewandte Wirtschaftsforschung (Germany), 43(1), 1–15.

    Google Scholar 

  • Stein, E. (1999). Fiscal decentralization and government size in Latin America. Journal of Applied Economics, II(2), 357–391.

    Google Scholar 

  • Tanzi, V. (1995). Fiscal federalism and decentralization: a review of some efficiency and macroeconomic aspects. Paper prepared for the World Bank’s Annual Bank Conference on Development Economics, May 1 and 2 1995. Washington D.C.: World Bank.

  • Von Hagen, J., & Eichengreen, B. (1996). Fedealism, fiscal restraints, and European Monetary Union. The American Economic Review, Papers and Proceedings. 86(2), 134–138.

    Google Scholar 

  • Von Hagen, J. (2002). Fiscal rules, fiscal institutions and fiscal performance. The Economic and Social Review, 33(3), 263–284.

    Google Scholar 

  • Von Hagen, J., Hughes-Hallet, A., & Strauch, R. (2002). Budgetary Institituions for Sustainable Public Finances. In M. Buti, C. Martinez-Mongay J. Von Hagen (Eds.), In B. Marco, J. von Hagen and C. Martinez-Mongay, (Eds.) (2002), The behaviour of fiscal authorities: stabilization, growth and institutions. (pp. 94–114), New York: Palgrave.

    Google Scholar 

  • Von Hagen, J. (2005). Fiscal rules and fiscal institutions—European experiences. Presented at the 61st Congress of the International Institute of Public Finance on Macro-fiscal Policies: New Perspectives and Challenges, August 22–25, 2005, Jeju Islands, Korea.

  • Von Hagen, J. (2005). Risk sharing and stabilization. Working Paper, University of Bonn. April, 2005.

  • Walsh, C. (1992). Infrastructure Funding And Federal-State Financial Relations. Federalism Research Centre Discussion Papers. 1036-8655; no. 21. Austalian National University.

  • Weingast, B. R. (1995). The economic role of political institutions: market preserving federalism and economic growth. Journal of Law, Economics, and Organization, 11(1), 1–31.

    Google Scholar 

  • Weingast, B., & Marshall, W. (1988). The industrial organization of congress: why legislatures, like firms, are not organized like markets. Journal of Political Economy, 96, 132–163.

    Article  Google Scholar 

  • Wierts, P. (2005). Federalism and the EU: fiscal policy coordination within and between EU Member States. International Conference on Federalism, Brussels, March 1–5, 2005.

  • World Bank. (2000). China: managing public expenditures for better results Report No. 20342-CHA.

  • World Bank. (2002). Brazil: issues in fiscal federalism. Brazil country management unit, PREM Sector Management Unit, Latin American and Caribbean Region. Report No. 22523-BR.

  • World Bank. (2005). China quarterly update. Beijing: World Bank Office. February 2005.

    Google Scholar 

  • Yep, R. (2004). Can ‘tax-for-fee’ reform reduce Rural tension in China? The process, progress and limitations. China Quarterly, 177, 42–71.

    Article  Google Scholar 

  • Yusuf. S. (1997). China’s state enterprise sector: problems and reform prospects. Working Paper. Washington D.C.: World Bank.

Download references

Author information

Authors and Affiliations

  1. World Bank, 1818 H Street, Washington, DC, 20433, USA

    Anwar Shah

Authors
  1. Anwar Shah
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Anwar Shah.

Additional information

JEL Code E6 · H7 · H1

Rights and permissions

Reprints and permissions

About this article

Cite this article

Shah, A. Fiscal decentralization and macroeconomic management. Int Tax Public Finan 13, 437–462 (2006). https://doi.org/10.1007/s10797-006-8948-1

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-006-8948-1

Keywords

Search

Navigation