Fiscal decentralization and intergovernmental fiscal relations: A cross-country analysis

Fiscal decentralization consists primarily of devolving revenue sources and expenditure functions to lower tiers of government. By bringing the government closer to the people, fiscal decentralization is expected to boost public sector efficiency, as well as accountability and transparency in service delivery and policy-making. Decentralization also entails greater complexity in intergovernmental fiscal relations, and coordination failures in fiscal relations are likely to have a bearing on fiscal positions, nationally and subnationally. Evidence provided in this paper for a sample of 30 countries suggests that coordination failures in intergovernmental fiscal relations are likely to result in a deficit bias in decentralized policy-making, particularly in the case of developing countries, which may not meet important requirements for successful decentralization. (C) 2000 Elsevier Science Ltd. All rights reserved.