This chapter reviews the dominance of intergovernmental fiscal transfers in financing local governments in developing countries. The rationales and objectives of such transfers are explored and the variations found in practice around the world analyzed. The architecture of transfer systems across countries is diverse, with each mixing shared taxes, conditional transfers and unconditional transfers in its own way. We discuss the evidence of the extent to which transfers appear to achieve their intended goals, and reforms that may improve these results. The evidence is decidedly mixed on whether transfers stimulate local revenue effort; but it does suggest that in most low- and middle-income countries they do little to equalize fiscal disparities. Most developing countries do not monitor their transfer systems regularly or in any depth, although a few have begun to do so in recent years.
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