Fitz,
Thank you for the kind comments and I look forward to contributing to the PFM Board discussion and resources. This module referenced in the post was some work we did some time ago with the World Bank Institute in 2001. For a comprehensive look at these types of issues on fiscal equalization (that this blog post brings up as well as some of the issues brought up in earlier blog posts on conditional vs. block grants and other funding formulae (in the Framing the Decentralization post from April 29, 2010)), I would point everyone to a more recent 2007 book publication by Springer Verlag that I edited with Bob Searle (formerly with the Commonwealth Grants Commission of Australia) entitled, Fiscal Equalization: Challenges in the Design of Intergovernmental Transfers. More information about the book can be found at
http://aysps.gsu.edu/isp/4228.htmlPolicymakers in both developed and developing countries face significant challenges with the introduction and reform of equalization grants and other intergovernmental transfers. One of these challenges is a lack of any clear framework, in either the decentralization literature or the recorded details of international practice, from which to consider numerous hard issues. For example, should capital expenditure needs of sub-national governments be considered part of equalization grants? Are independent grants commissions a preferred institutional set up for implementing equalization grants? What is the appropriate relationship between the untied and tied grants elements of the system? Should we try to equalize differences in fiscal capacity or expenditure needs, or both? And how do we measure these differences with limited data?
This book is a collection of invited papers that highlighted the state of knowledge in intergovernmental transfer design in 2004 (and is still relevant now), especially for developing and transitional countries where data and administrative capabilities may be weak. It presents new thinking about a list of challenging policy issues and provides useful options for policymakers. The essays were presented at a conference held in Atlanta in October 2004 entitled “Challenges in the Design of Fiscal Equalization and Intergovernmental Transfers.” The actual conference papers were posted in the International Studies Program Working Paper Series: papers 0410 -0421 (2004) at
http://aysps.gsu.edu/isp/working_papers.htmlBelow are the five specific themes of the book followed by a short content description of each chapter.
1. The fundamental nature and objectives of equalization grants and their consequences on efficiency and equity;
2. The appropriate institutional setting for the design and implementation of equalization grant systems (whether by independent grants commissions or central government ministries);
3. The challenges in the design of formulas with limited data availability for recurrent and capital purposes;
4. The coordination of equalization grants with other related policies, including specific purpose grants, revenue sharing and borrowing; and
5. The political economy behind equalization transfers.
The chapter by Jeff Petchey and Sophia Levtchenkova examines how fiscal capacity equalization, when not done correctly, can create an incentive for regions to act strategically in order to influence the size of their grant, leading to inefficiencies in the provision of local public goods.
Bert Hofman and Susana Cordeiro Guerra review the causes and consequences of interregional fiscal inequities among sub national governments and empirically examine the case of East Asian countries.
Catherine Hull and Bob Searle focus on the impact of fiscal equalization on service delivery, using data for Australia.
Alex Brillantes and Jose O. Tiu Sonco II take a comprehensive view of the role of transfers in the fiscal architecture of countries.
Anwar Shah focuses on the incentives and interactions facilitated by the different arrangements and draws implications for their impacts on the transaction costs involved in achieving society’s objectives.
Paul Bernd Spahn examines the institutions surrounding the funding rules and distribution mechanisms used for equalization grants.
Roy Bahl and Sally Wallace concentrate on the vertical dimension of the intergovernmental transfer system rather than on horizontal disparities.
Jamie Boex and Jorge Martinez-Vazquez focus on the challenge of designing intergovernmental equalization transfers with imperfect data, in particular how to put together distribution formulas when data for fiscal capacity and expenditure needs are not readily available.
Sophia Levtchenkova and Jeff Petchey re-examine the issue of how to account for capital expenditure needs in the context of an equalization policy.
Bob Searle and Jorge Martinez-Vazquez analyze the relationship between equalization grants and tied (or conditional) grants.
Dana Weist’s chapter underlines the importance in developing and transitional countries of integrating intergovernmental capital financing systems (loans and transfers) with intergovernmental transfer systems aimed at recurrent service provision.
Stuti Khemani finds that there is consistent and robust international evidence that politics impacts on the distribution of transfers across sub-national jurisdictions, with particular forms of political decision-making leading to particular forms of political distortions in the distribution of resources across regions.
