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Fiscal decentralization 101

Development from Below

Roy Bahl and Richard M. Bird

Fiscal decentralization is about how central governments empower subnational governments to service their populations and to pay for these services. This chapter provides an introductory overview of the main arguments of the book. We discuss why fiscal decentralization is often part of a country’s development policy, as well as the risks involved in giving local and regional governments more fiscal discretion. Here and throughout the book the discussion is based on theoretical arguments; our reading of the by now extensive research findings on many aspects of these issues; and our many years of observing how middle- and lower-income countries in all regions of the world operate. We conclude that while a few developing countries have turned theory into practice with good results, most have been proved unable to reap the potential benefits in practice so that, on balance, there is not much evidence of effective fiscal decentralization on the ground in most countries.

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Evaluating Privatisation, Regulation and Liberalisation in the EU

Edited by Massimo Florio

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Massimo Florio

Some regulatory reforms cannot be simply described by the change of a microeconomic signal, or macroeconomic instrument, leading to a specific marginal effect on social welfare. Rather, they should be represented by packages shifting a policy framework. The aim of this chapter is to discuss the theoretical foundations of the evaluation of policy framework reforms in network industries. Some potential interpretational pitfalls are identified and some guidance on carrying out econometric analyses is provided. Since the use of categorical variables has become widespread in the empirical evaluation of such reforms, methodological issues and conceptual errors that might be introduced when building numerical proxies of reforms are discussed. Some of these issues are key for the correct assessment of reforms and hence for formulating coherent policy recommendations.

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Benton E. Gup

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Edited by Benton E. Gup

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A Comparative Perspective

Christoph Scherrer

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Infrastructure provision

Evaluating Public–Private Partnerships and Other Procurement Options

Darrin Grimsey and Mervyn K. Lewis

This introductory chapter begins by considering the infrastructure challenge posed by what former US Treasury Secretary Larry Summers calls the ‘Age of Secular Stagnation’ and International Monetary Fund managing director Christine Lagarde terms the ‘new mediocre of growth’. Both advocate increased infrastructure spending as the solution, but there are considerable differences between infrastructure policies in three of the largest economies. After decades of neglect, the United States and even Germany are saddled with once advanced, but increasingly outmoded infrastructure assets, while China keeps on building and has become an exemplar of modern urban transit, with ports, expressways, railways, subways, airports, and by far the world’s largest high-speed rail network. Nevertheless, a 2016 Oxford study challenges the efficacy of China’s infrastructure-led growth strategy. Upon examination, however, their study has serious defects and, contrary to their arguments, China’s infrastructure megaprojects appear less wasteful than those authors claim, and they have laid the foundations for Chinese growth, supported by a later case study.

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Ana Rosa Ribeiro de Mendonça and Simone Deos

The authors emphasize an overlooked raison d’être for public banks. They argue that limiting public banks to filling the gaps left by private banks, the standard argument in economics, neglects a very important dimension of public banks, that is, their capacity to act countercyclically and thereby stabilize access to credit during economic downturns. Taking a cue from Hyman Minsky, they point to the immanent volatility of financial markets dominated by private actors. In order to counter destabilizing tendencies, the presence of institutions with the logic of action that differs from that of the market is necessary. As public banks are not primarily concerned with profitability, they can play this role. To a certain extent, their presence in the market is an automatic stabilizer because public banks provide credit with long maturation. In times of crisis, they can also be used for discretionary intervention, that is, opening up new credit lines.

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Achieving Fiscal Sustainability

Edited by Naoyuki Yoshino and Peter J. Morgan

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Peter J. Morgan and Long Q. Trinh

Sustainable and inclusive growth in emerging Asian economies requires continued high levels of public sector investment in areas such as infrastructure, education, health, and social services. These responsibilities, especially with regard to infrastructure investment, need to be devolved increasingly to the regional government level. However, growth of sources of revenue and financing for local governments has not necessarily kept pace, forcing them, in some cases, to increase borrowing or cut spending below needed levels. This chapter reviews alternative models of the relationship between central and local governments, and provides an overview and assessment of different financing mechanisms for local governments, including tax revenues, central government transfers, bank loans, and bond issuance, with a focus on the context of emerging Asian economies. The chapter also reviews financing mechanisms for local governments and mechanisms for maintaining fiscal stability and sustainability at both the central and local government levels. Based upon the evidence on the decentralization process in Asia, it proposes some policy implications for improving central–local government relations and fiscal sustainability.