Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview

Chapter 2
Fiscal Devolution

Devolution—the granting of greater political and fiscal responsibility and power to subnational units of government and the performance of more government functions at the subnational level—has been in full swing worldwide for the last decade. A 1994 World Bank report noted that of the 75 developing countries with populations greater than 5 million, all but 12 were in the process of transferring fiscal power from the center to subna- tional governments (Dillinger 1994). In the once highly centralized com- munist states with virtually no subnational autonomy, devolution has been a universal phenomenon. In some countries subnational govern- ments have long existed but frequently only as agents of the central or provincial government and with little real authority or financial autono- my. In other countries, a history of tension between competing “sover- eigns” at the center and in the regions has left a legacy of imperfect and damaged intergovernmental relationships.


Principle of Subsidiarity

There are well-rehearsed economic and political arguments in favor of de- volution that appeal to the efficiency and desirability of grassroots deci- sionmaking and accountability. To the economist the subnational govern- ment’s greater knowledge of subnational needs strengthens the links between tax revenues and spending benefits that accrue to subnational tax- payers. Subnational authorities can respond more readily and effectively to local conditions, resulting in improved delivery of government services. Bringing expenditure assignments closer to revenue sources enhances ac- countability and transparency. Political arguments often adhere to the principle of subsidiarity, that is, in a democracy, the lowest level of govern- ment that can determine and effectively meet the needs of its constituency is the most appropriate structure of government.

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