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Fiscal aspect of evolving federations : issues for policy and research (English)

Recent experience with fiscal decentralization in many developing and transition economies has led many observers to question whether fiscal decentralization undermines macroeconomic stability. In several countries, transfers from central to lower-level governments have increased fiscal deficits at the central level, creating pressures on central banks to monetize additional debt, thus jeopardizing price stability. In other countries, central governments trying to control their deficits have reduced transfers to lower level governments, creating fiscal distress at lower levels. These issues of macroeconomic fiscal stability have not featured prominently in North American policy debates about fiscal federalism, nor has much academic research been devoted to them. In a world where the state's basic political organization is undergoing rapid reform and restructuring, the tensions and opportunities created by fiscal interactions among levels of government are of critical concern. Much of the literature on fiscal federalism has been geared to the situation in such industrial countries as Canada and the United States. Policymakers and researcher should identify the institutional structures of stable, mature federations that help sustain satisfactory macroeconomic performance. But different policy problems are likely to arise in different settings, especially in the developing world. Among topics that deserve further research attention: i) The interplay between intergovernmental grants and government borrowing. ii) What is the difference in effect on lower-level governments between "hard" and "soft" budget constraints? What economic distortions are associated with soft budget constraints? What institutional reforms might help to establish hard budget constraints? iii) Is the "country" still the appropriate unit of analysis for important economic issues? What economic benefits or costs result from including several regions within one jurisdictional structure? What economic considerations determine the optimal size of a "country" and what are the crucial economic functions of "national" governments? iv) Demographic change, changes in communication and transportation technology, and the development of market institutions may alter the optimal or equilibrium boundaries of political units over time. Such change invariably raises questions about the organization of the public sector and the assignment of expenditures and revenues to different levels of government. The patterns of gains and losses from reorganizing factor markets and jurisdictional structures can be complex. To understand them fully requires understanding the economic consequences of changes in both market organization and policy outcomes resulting from reorganization of the public sector.


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    Wildasin, David E.

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    Policy Research Working Paper

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    Russian Federation,





    United States,

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    South Asia, Europe and Central Asia, Latin America & Caribbean, East Asia and Pacific, OTH

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    Fiscal aspect of evolving federations : issues for policy and research

  • Keywords

    intergovernmental fiscal relation;fiscal aspects;local own-source revenue;local government own-revenue;Fiscal Federalism;fiscal decentralization;development research group;Primary and Secondary Education;burden of debt service;high rates of inflation;free movement of factors;privatization of public enterprise;assignment of expenditure responsibility;Fiscal policies;fiscal policy;hard budget constraint;total public spending;public service provision;gains and losses;local school authority;factor of production;internal population movements;central government revenue;central government transfer;central government fiscal;government policy interventions;local government revenue;public pension system;soft budget constraint;public sector borrowing;central government tax;central government expenditure;total government spending;Local Government Finance;real interest rate;centrally planned economy;total tax revenue;intergovernmental fiscal transfer;total external debt;central government spending;assignment of revenue;cost of debt;central government investment;state government expenditure;central government deficit;trade in goods;public capital investment;financial regulatory system;public good provision;division of revenue;fiscal convergence criterion;social welfare policy;special economic zone;Demand For Education;Finance of Education;provision of education;intergovernmental revenue sharing;factor market integration;development of market;government fiscal policy;role of state;public expenditure;fiscal authority;government borrowing;fiscal issue;redistributive policy;fiscal institution;transition economy;intergovernmental grant;Transition economies;fiscal discipline;constitutional reform;fiscal resource;intergovernmental transfer;Financial Sector;economic reform;fiscal responsibility;economic integration;fiscal centralization;federal government;public finance;deficit financing;Macroeconomic Stability;redistributive program;fiscal problem;central authority;local spending;Economic Inequality;fiscal crisis;expenditure function;fiscal incentive;inflationary finance;Macroeconomic Policy;tax share;fiscal imbalance;conventional wisdom;optimal size;Monetary Stability;political change;fiscal distress;economic distortion;implicit liability;demographic change;redistributive function;political development;fiscal structure;state debt;allocative efficiency;deficit finance;property right;fiscal restructuring;fiscal role;financial crisis;state bank;keynesian view;borrowing authority;ethnic characteristics;fiscal system;price stability;public borrowing;business cycle;resource endowments;macroeconomic effect;spatial disparities;cold war;traditional keynesian;Property tax;government response;negotiated settlement;government function;national boundary;reform process;full employment;fiscal difficulties;Fiscal Equalization;commuting distance;core city;public education;federal system;program effectiveness;political control;macroeconomic consequence;high debt;fiscal criterion;fiscal affair;capital mobility;institutional change;national market;financial intermediaries;legal protection;fiscal consequence;fiscal change;clear delineation;public-sector activity;Immigration policy;labor mobility;social integration;incomplete market;ethnic population;political structure;subnational fiscal;local access;evolutionary process;local borrowing;policy problems;regional inequality;tax burden;collect tax;fiscal autonomy;political decentralization;fund expenditure;fiscal decision;capital flow;market reform;redistributive transfer;macroeconomic stabilization;monetary aggregate;socialist system;fiscal control;provincial bank;fiscal coordination;fiscal stress;fiscal frontier;statistical appendix;inflation rate;banking sector;capital return;monetary reform;external market;monetary crisis;fiscal externality;international boundary;central transfer;equity objective;agricultural subsidy;future research;provincial spending;curriculum design;Macroeconomic Management;increased spending



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Wildasin, David E.

Fiscal aspect of evolving federations : issues for policy and research (English). Policy, Research working paper ; no. WPS 1884 Washington, D.C. : World Bank Group.