Table of Contents

The Political Economy of Inter-Regional Fiscal Flows

The Political Economy of Inter-Regional Fiscal Flows

Measurement, Determinants and Effects on Country Stability

Studies in Fiscal Federalism and State–local Finance series

Edited by Núria Bosch, Marta Espasa and Albert Solé Ollé

Struggles over what a region receives, or should receive, from the budget of the central government are common to many countries. Discussions often focus on the measures of ‘net fiscal flows’ or ‘fiscal balances’ provided by the government or other actors. This unique book shows just how these flows are computed then interpreted and clarifies the often misunderstood economic and political motives that explain why some regions receive more monies than others.

Chapter 9: Decentralization by Politicians: Creation of Grants-financed Local Jurisdictions

Stuti Khemani

Subjects: economics and finance, public finance, politics and public policy, public policy


Stuti Khemani INTRODUCTION 1 There is by now an established literature on how political variables influence the distribution of intergovernmental grants across regions.1 With growing political participation and contestation, regional governments in large and diverse countries have increased their political access in determining the distribution of national public resources. In India, for example, regional political parties in opposition to the national ruling party have been able to appeal to a statutory body for greater fiscal resources (Khemani, 2007). In Brazil, regional political leaders have bargained for greater fiscal devolution through successive laws negotiated in the country’s legislative bodies (Mendes et al., 2008). This chapter examines a recent phenomenon of creation of more local jurisdictions within regions by both regional and national governments, where spending is financed almost entirely by grants. Grants-financed decentralization to local jurisdictions appears to be a new political instrument used by regional and national governments to influence the distribution of national fiscal resources. Decentralization by politicians is unlikely to yield the gains described by traditional theory. The theory of the beneficial effects of having multiple local jurisdictions with local tax and expenditure responsibilities is predicated upon these jurisdictions arising naturally as communities with intra-community shared preferences and inter-community heterogeneity (Tiebout, 1956; Oates, 1972). Efficiency and accountability of local governments arise in these models because of inter-jurisdiction competition in attracting residents and winning their vote (Besley and Case, 1995; Weingast, 1995; Breton, 1996). Even in the absence of differences in preferences and mobility of households among jurisdictions, it...

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