Fiscal decentralization policies and sub-national government debt in evolving federations

As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments bydevolving fiscal responsibility and authority to newly empowered regionaland local governments. Although decentralization in each country proceedsdifferently, a common element tends to be an initially heavy relianceon central government grants to fund regional spending. We develop atheoretical model of regional borrowing decisions in which the incentivesfor regional borrowing depend crucially on how the regions expect thefederal system of finance to evolve. We examine the implications of themodel using data on Spanish regions for the period 1984-1995 and findevidence that regions may be borrowing inefficiently in response toincentives imbedded in the Spanish system of fiscal decentralization.

Fiscal decentralization in Spain: An asymmetric transition to democracy

Asymmetric fiscal decentralization, by which we mean different fiscal arrangements between the central government and different groups of, or individual, lower-level governments, may be justified from an economic efficiency perspective. As argued by Tiebout (1956), Oates (1972) and others, a decentralized system of regional and local governments is better able to accommodate differences in tastes for public goods and services. This efficiency argument calls for decentralization of fiscal authority to regional and local governments, but not necessarily asymmetric decentralization. However, when the differences in tastes for public goods and services arise out of differences in history, culture and language across regions of a country, asymmetric treatment may be justified. History, culture and language may influence how a group of people (a region) views autonomy, independence and fiscal authority. Some regions may have had experience with autonomous government in the past, they may have a culture that is strongly reliant upon (or leery of) the central government, or they may be fearful of losing their separate languages if they do not have special arrangements. To accommodate differences in taste for independence, autonomy, and fiscal authority, it may be necessary to have different fiscal arrangements between the central government and the different regions comprising the country.

Why do differences in the degree of fiscal decentralization endure?

A notable difference between the U.S. and many countries in Europe is in the degree of fiscal decentralization. Regional (and local) governments in the U.S. have significant autonomy in setting their own taxes and determining how to spend their revenues. This is not true of their counterparts in Spain, France, the United Kingdom, Czech Republic and many other European countries. In recent years, many countries formerly subject to dictatorshipsor communism have been considering decentralizing fiscal responsibility to sub-national governments as part of the process of democratization (see Bird and Ebel, forthcoming). Yet, much of Europe remains immune to adopting effective decentralization in which sub-national units have true taxing authority.

Do Fiscal and Political Decentralization Raise Students’ Performance? A Cross-Country Analysis

The low quality of education is a persistent problem in many developed countries. Parallel to in the last decades exists a tendency towards decentralization in many developed and developing countries. Using micro data from the Programme for International Student Assessment (PISA) referred to 22 countries, we test whether there exists an impact of fiscal and political decentralization on student performance in the areas of mathematics, reading skills and science. We observe that fiscal decentralization exerts an unequivocal positive effect on students’ outcomes in all areas, while the effect of political decentralization is more ambiguous. On the one hand, the capacity of the subnational governments to rule on its region has a positive effect on students’ performance in mathematics. On the other hand, the capacity to influence the country as a whole has a negative impact on mathematics achievement. As a general result, we observe that students’ performance in Mathematics is more sensible to these exogenous variations than in Sciences and reading skills. Keywords: School outcomes, PISA, fiscal decentralization, political decentralization JEL codes: H11, H77, I21

Decentralization, happiness and the perception of institutions

This paper analyses whether the different powers and resources at the disposal of local and regional governments across Europe deliver greater satisfaction with political institutions and lead to greater personal happiness. The analysis uses microdata from the four available waves of the European social survey (2002, 2004, 2006 and 2008), including more than 160,000 observations of individuals living in 29 European countries. Our results reveal that political and fiscal decentralization have a positive and significant effect on individuals’ overall happiness. Fiscal decentralization also exerts a significant effect on the level of satisfaction with political and economic institutions and with the education and health systems, whereas the effect of political decentralization on these variables is more limited. The results show that citizens seem to be happier with the actual capacity of their local governments to deliver than with the general principle that they can have a say on their daily politics and policies. Keywords: Happiness, well-being, satisfaction, fiscal and political decentralization, Europe. JEL codes: H11, H77

Decentralization in Croatia: problems and possible solutions

El 2001 Croàcia va posar en marxa la iniciativa destinada a afluixar un alt grau de centralització mitjançant l'ampliació dels mandats de les unitats locals i el canvi de les fonts de finançament de les funcions públiques. No obstant això, els passos inicials en el procés de descentralització no ha estat seguida per altres mesures de descentralització fiscal, i en conseqüència, el seu nivell s'ha mantingut pràcticament sense canvis. El treball es proposa elaborar els principals problemes i obstacles en relació amb l'aplicació efectiva del procés de descentralització i donar tres grups de propostes per a la descentralització: (i) la divisió dels poders obligatoris entre les diferents unitats locals, (ii) el canvi en el finançament i (Iii) modificar la divisió territorial del país.

Tobin meets Oates: Solidarity and the optimal fiscal federal structure

We explore the implications for the optimal degree of fiscal decentralization when people spreferences for goods and services, which classic treatments of fiscal federalism (Oates, 1972)place in the purview of local governments, exhibit specific egalitarianism (Tobin, 1970), orsolidarity. We find that a system in which the central government provides a common minimumlevel of the publicly provided good, and local governments are allowed to use their ownresources to provide an even higher local level, performs better from an efficiency perspectiverelative to all other systems analyzed for a relevant range of preferences over solidarity.

Decentralization and the Welfare State: What Do Citizens Perceive?

Trust in public institutions and public policies are generally perceived as a precondition for economic recovery in times of recession. Recent empirical evidence tends to find a positive link between decentralization and trust. But our knowledge about whether decentralization – through increased trust – improves the perception of the delivery and effectiveness of public policies is still limited. In this paper we estimate the impact of fiscal and political decentralization on the perception of the state of the education system and of health services, by using the 2002, 2004, 2006 and 2008 waves of the European social survey. The analysis of the views of 160,000 individuals in 31 European countries indicates that while the effect of fiscal decentralization on the perception of the state of the health and education system is limited, political decentralization clearly affects citizen’s satisfaction with education and health delivery. The influence of political decentralization, however, is highly contingent on whether we consider the capacity of the local or regional government to exercise authority over its citizens (self-rule) or to influence policy at the national level (shared-rule). Keywords: Education, health, satisfaction, fiscal and political decentralization, Europe. JEL codes: H11, H77

Theorizing institutional changes: understanding decentralization and federalization in Brazil, Spain and South Africa

In light of the existing theories about institutional change, this paper seeks to advance a common framework to understand the unfolding of decentralization and federalization in three countries: Brazil, Spain, and South Africa. Although in different continents, these three countries witnessed processes after their respective transitions to democracy that transferred administrative and fiscal authority to their regions (decentralization) and vertically distributed political and institutional capacity (federalization). This paper attempts to explain how institutional changes prompted a shift of power and authority towards regional governments by looking at internal sources of change within the intergovernmental arena in the three countries. This analysis is organized around two propositions: that once countries transit to democracy under all-encompassing constitutions there are high incentives for institutional change, and that under a bargained intergovernmental interaction among political actors subnational political elites are able to advance their interests incrementally. In short, through a common framework this paper will explain the evolving dynamics of intergovernmental dynamics in three countries.

Evaluating the effects of decentralization on educational outcomes in Spain

[cat] Diversos arguments derivats de la teoria del federalisme fiscal suggereixen que la descentralització pot portar a majors nivells d’eficiència en la provisió de béns i serveis publics. L’objectiu d’aquest estudi és contrastar aquesta hipòtesi mitjançant l’avaluació dels efectes de la descentralització sobre els resultats educatius a Espanya. Els resultats educatius es mesuren d’acord amb la taxa de supervivència, que es defineix com el nombre d’estudiants que es matricula en educació secundària no obligatòria en relació als alumnes matriculats a l’últim curs d’educació obligatòria durant l’any acadèmic anterior.

Evaluating the effects of decentralization on educational outcomes in Spain

[cat] Diversos arguments derivats de la teoria del federalisme fiscal suggereixen que la descentralització pot portar a majors nivells d’eficiència en la provisió de béns i serveis publics. L’objectiu d’aquest estudi és contrastar aquesta hipòtesi mitjançant l’avaluació dels efectes de la descentralització sobre els resultats educatius a Espanya. Els resultats educatius es mesuren d’acord amb la taxa de supervivència, que es defineix com el nombre d’estudiants que es matricula en educació secundària no obligatòria en relació als alumnes matriculats a l’últim curs d’educació obligatòria durant l’any acadèmic anterior.

Should fiscal authorities cooperate in a monetary union with public deficit targets?

In this paper we analyse the setting of optimal policies in a monetary union with one monetary authority and various fiscal authorities that have a public deficit target. We will show that fiscal cooperation among the fiscal authorities, in the presence of positive supply shocks, ends up producing higher public deficits than in a non-cooperative regime. JEL No. E61, E63, F33, H0. Keywords: monetary union, fiscal policy coordination.

The private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU

This paper develops a comprehensive framework for the quantitative analysis of the private and fiscal returns to schooling and of the effect of public policies on private incentives to invest in education. This framework is applied to 14 member states of the European Union. For each of these countries, we construct estimates of the private return to an additional year of schooling for an individual of average attainment, taking into account the effects of education on wages and employment probabilities after allowing for academic failure rates, the direct and opportunity costs of schooling, and the impact of personal taxes, social security contributions and unemployment and pension benefits on net incomes. We also construct a set of effective tax and subsidy rates that measure the effects of different public policies on the private returns to education, and measures of the fiscal returns to schooling that capture the long-term effects of a marginal increase in attainment on public finances under c

Unemployment, growth and fiscal policy: new insights on the hysteresis hypothesis

We develop a growth model with unemployment due to imperfections in the labor market. In this model, wage inertia and balanced budget rules cause a complementarity between capital and employment capable of explaining the existence of multiple equilibrium paths. Hysteresis is viewed as the result of a selection between these diferent equilibrium paths. We use this model to argue that, in contrast to the US, those fiscal policies followed by most of the European countries after the shocks of the 1970’s may have played a central role in generating hysteresis.

Would Fiscal Authorities in the EMU prefer to coordinate?

This article studies whether fiscal authorities would prefer to operate like in the current EMU or to coordinate according to the theoretical literature. The EMU approach will lead to higher volatility of interest rates, output, inflation and average budget deficits, but the SGP deficit target will be breached less often. Keywords: fiscal policy coordination, monetary union, Stability and Growth Pact. JEL No. E61, E63, F33, H0