Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 9: Fiscal Federalism in Planned Economies
Govinda Rao Introduction This chapter deals with the challenges of fiscal federalism in planned economies. The discussion on fiscal federalism in the mainstream literature refers to decentralization and not federalism per se. The benefits attributed to and costs associated with fiscal federalism refer to decentralization.1 However, fiscal federalism is supposed to deal with all multilevel fiscal systems irrespective of whether the system is federal or unitary. As stated by Oates (1977, p. 4), [T]he term federalism for the economist is not to be understood in a narrow constitutional sense. In economic terms, all governmental systems are more or less federal; even in a formally unitary system, for example, there is typically a considerable extent of de facto fiscal discretion at decentralized levels. Thus, the analysis in this chapter refers to multilevel fiscal systems in all planned economies irrespective of whether they are formally unitary or federal. This discussion relates to planned economies. Of course, centralized planning is negation of federalism. In centrally planned economies, the decisions on prices, outputs and allocation of resources are taken by the central planner and here, neither the market nor the subnational governments have any role in resource allocation. The subnational governments simply implement the functions assigned to them as agents of the central government. However, most of the centrally planned economies have made, and are making, a transition from command to market, and in some countries such as India, planned development strategy has historically coexisted with market determined resource allocation. In economies that...
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