Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 17: Promoting responsible and sustainable fiscal decentralization
Traditional (first-generation) theories of fiscal federalism (Tiebout, 1956; Musgrave, 1959; Oates, 1972) emphasized the potential efficiency gains from fiscal decentralization. Based on the key assumptions of benevolent governments, differences in preferences and significant citizen mobility, they argued that expenditure functions should be assigned to the lowest level of government capable of internalizing the benefits from those functions. This would improve preference matching, because local governments can be expected to know their citizens’ preferences better than the central government, and because citizens unsatisfied with their local government’s performance can vote local officials out of office, or even move to a different locality (‘vote with their feet’). The normative prescriptions of first-generation theories have been subject to a broad array of criticisms, especially over the last two decades. Second-generation theories (Quian and Weingast, 1997; Oates, 2005; Weingast, 2009) have focused on political economy influences on decentralization processes, such as: _ Political motivations for decentralization and its timing, pace and sequencing, that go well beyond a quest for efficiency gains in resource allocation. Such motivations may include helping keep countries together in the face of ethnic or other conflicts; reducing ‘excessive’ powers of central government; and promoting ‘yardstick’ competition among or within government levels. _ Representation failures in electoral processes, reflecting voters’ information asymmetries and the power of economic elites to buy influence. _ De facto limitations to citizens’ mobility.
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