Academic journal article Public Finance and Management

Fiscal Federalism in Transition Countries: The Three Baltic States Compared

Academic journal article Public Finance and Management

Fiscal Federalism in Transition Countries: The Three Baltic States Compared

Article excerpt

1. INTRODUCTION

An important element of the development of public finance systems in former communist countries in Central and Eastern Europe (CEE) concerns decentralization of the power to tax and spend. After regaining independence, these countries faced fundamental choices regarding the division of public tasks across levels of government and the fiscal relations between these levels. As Goetz (2001) and Rosenbaum (2013) have argued, CEE countries had a strong tradition of centralization under former Soviet rule, and the public sector reforms in the transition period essentially were about dispersion of political, economic and administrative power. Fiscal decentralization through the development of self-governing local governments was one of the three principal areas where such dispersion took place; the other two being the enhancement of civil society and the strengthening of legislative bodies (Rosenbaum, 2013).

This paper compares the three Baltic countries that formally became independent from the Soviet Union in September 1991: Estonia, Latvia and Lithu- ania. The case selection of these three transition countries is based mainly on similarities in general background variables as size, GPD per capita (see table 1 for such general characteristics) and time of EU membership (2004). An additional argument is that of all CEE countries that joined the EU (in 2004 and 2007) these three countries have developed most progressively in terms of fiscal decentralization over the period 1993-2010 (according to Aristovnik, 2012).

Local government reform in the three Baltic States has been the subject of earlier publications (Wrobel, 2003; Vilka, 2004, 2012; King, Vanags, Vilka & McNabb, 2004; Vanags & Vilka, 2006; Trasberg, 2009; Linnas, 2011; Mäeltsemees, 2012; Saperkiene & Lazauskiene, 2012), but these publications do not always specifically deal with public finance and/or fiscal federalism issues, and generally are descriptive and low on -comparative- analysis. In this paper the situation regarding fiscal federalism in the three Baltic countries is analyzed for the period 2001-2013 to show the step-by-step development from formerly communist countries to market economies, embedded in the EU. In addition, the data for Estonia, Latvia and Lithuania are compared with the EU-28, to see if and to what extent the countries are (dis)similar to (trends in) the EU at large. These two combined comparisons - comparison over time of the three post-communist countries as such and comparison of those three countries with the EU-28 at large - will enhance our understanding of the development of public finance systems in former communist countries. Our main aim is to see whether there really has been a dispersion of fiscal power as part of the transition process as expected by Rosenbaum (2013).

Fiscal federalism has many aspects (see Groenendijk, 2003, for a comprehensive overview of fiscal federalism theory and sub-national public finance). In this paper the focus is on four essential elements of fiscal federalism: the administrative set up, the tasks and functions allocated to sub-national governments, revenue structure and fiscal autonomy, and fiscal discipline. Other elements of sub-national public finance systems (such as expenditure structure, sub-national investment levels and composition, use of EU structural funds) could have been taken into account, but have been discarded due to paper length constraints.

For each aspect we systematically compare the three Baltic states, and subsequently compare these three states with other countries of the EU-28 (if the data refer to 2012 and earlier: the EU-27). The comparisons are aimed at drawing out patterns over time, as well as communalities and differences within the larger EU context. The paper thus aims at answering the following questions:

- How has fiscal federalism (in terms of the four selected aspects) developed in the three Baltic states in the transition period of 2000-2013? …

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