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Fiscal Decentralization and Local Finance in Developing Countries

Development from Below

Roy Bahl and Richard M. Bird

This book draws on experiences in developing countries to bridge the gap between the conventional textbook treatment of fiscal decentralization and the actual practice of subnational government finance. The extensive literature about the theory and practice is surveyed and longstanding problems and new questions are addressed. It focuses on the key choices that must be made in decentralizing, on how economic and political factors shape the choices that countries make, and on how, by paying more attention to the need for a more comprehensive approach and the critical connections between different components of decentralization reform, everyone involved might get more for their money.
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Chapter 7: Intergovernmental transfers

Development from Below

Roy Bahl and Richard M. Bird

Extract

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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