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.

Comment VII

Santiago Lago

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


Santiago Lago Politics determines intergovernmental grants at different levels and times. Fiscal equalization grants are a good example. Equalization financial flows tend to be stronger in countries with societies greatly committed to equality. But this political foundation is qualified by another political variable: the strength of local or regional political cleavages and their translation into the degree of nationalization of party systems.1 In countries with poorly nationalized party systems, fiscal equalization becomes a multiplayer game with multiple potential equilibria. In particular, in a political situation where seats from regional parties in rich regions become a key for attaining majorities in national parliament, equilibria with a lower degree of equalization will be more probable: even rich regional political communities seriously concerned with equality might be more prone to concentrate efforts inside their own territory (Lago-Peñas, 2008). Regardless of the volume of grants, they must be allocated to granted governments. And politics plays again. Empirical evidence on many countries, both unitary and federal, shows that this distribution is affected by political variables.2 Different mechanisms, sometimes with opposite implications, are at stake: central government may target jurisdictions with a higher proportion of swing voters, but also may reward their supporters, who are more likely to engage in political patronage. Jurisdiction size may also exert an uncertain effect: the larger the population of a jurisdiction, the more seats in the national parliament to be gained, but also a lower per capita grant benefits if the ratio between votes and seats increases with the...

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