New Rules for Implementation of Fiscal Decentralization
Roy Bahl provided in his 1999 paper “Implementation Rules for Fiscal Decentralization” twelve rules for implementing fiscal decentralization. These have been referenced and perhaps even followed by the practitioners in implementing fiscal decentralization technical assistance in the transition and developing countries over the past 15 years. The most common rule referenced is that “finance follows function”, yet this is more often violated in practice than probably any other of the rules and for many good reasons. Even Bahl in his paper indicates that following this rule in rarely followed.
So, what should we make of these rules and how should we assess their relevance or practicality over these years. In this brief I want to challenge all of these rules and offer a new set that conforms within my experience to the reality and practicality of implementing fiscal decentralization. I take them one-by-one with some critique and offer an alternative rule.
Since Professor Bahl formulated these rules over a 15 years ago there have been many fiscal decentralization programs implemented in both developed and developing/transition countries. So, by this time these rules should have been fully tested in the actual field of fiscal decentralization. Unfortunately, there seems to have been no earlier examination or assessment of these rules and how they have been employed in actual fiscal decentralization efforts.
It seems fair to state that there have been few successes in implementing fiscal decentralization over this period, despite the millions and millions of funds spent by the donor community in these efforts. There are probably fewer objectively verifiable successes than the fingers on your hands. So, the question has to be why have they not succeeded. Is it from not following these rules or that these rules where not realistic or practical to begin with when they were tried.
It is the contention of this paper that these rules where not based on the realities of the political, economic, and social situation in which they were applied and following them, to the extent possible, probably contributed to the unintended consequence of the failures that are evident today.
Because of this failure there is a need for a new formulation of what rules of fiscal decentralization implementation will provide a greater success rate and more beneficial impacts of fiscal decentralization in the future. The other alternative is to simply give up on fiscal decentralization as a good idea that could not be implemented.
Rule 1: Fiscal Decentralization Should be Viewed as a Comprehensive System
New Rule 1: Define a few strategic entry points (two to four) of least resistance and moderate consensus for fiscal decentralization and build from this base for success.
Rule 2: Finance Follows Function
New Rule 2: Function evolves from Finance
Rule 3: There Must Be Strong Central Ability to Monitor and Evaluate Decentralization
New Rule 3: Establish External Institutional Monitoring and Evaluation Mechanism not influenced by governmental stakeholders
Rule 4: One Intergovernmental System Does Not Fit the Urban and Rural Sector
New Rule 4: Treat Equals Equally and Unequals Unequally
Rule 5: Fiscal Decentralization Requires Significant Local Government Taxing Power
New Rule 5: Allow Local Governments Authority to Utilize National Level Taxes Applied by the Local Governments as Additions to the Taxpayers Bill
Rule 6: Central Governments Must Keep the Fiscal Decentralization Rules That They Made
New 6: Central Government Fiscal Decentralization Rules Must be Kept to Minimum of Restriction on Local Government Authorities in areas of revenue sources and borrowing capacities
Rule 7: Keep It Simple
New Rule 7: Keep It Transparent
Rule 8: The Design of the Intergovernmental Transfer System Should Match the Objectives of the Decentralization Reform
New Rule 8: The Design of the Intergovernmental Transfer System should be based on a minimum of objective and verifiable criteria and apply both carrot and sticks to the transfers to the local governments
Rule 9: Fiscal Decentralization Should Consider All Three Levels of Government
New Rule 9: Fiscal Decentralization Should be Based on the Principle of Subsidiarity regardless of the levels of government
Rule 10: Impose a Hard Budget Constraint
New Rule 10: Local Governments should be allowed to have budget deficits to be financed within limits of their future intergovernmental transfers
Rule 11: Recognize that Intergovernmental Systems Are Always in Transition and Plan for This
New Rule 11: No law, fiscal rule, expenditure assignment, revenue source, or borrowing limits should be allowed to exist longer than five years into the future without being renewed by national level policy and legislation
Rule 12: There Must be a Champion for Fiscal Decentralization
New Rule 12: There must be organized a broad based grass roots political and civic organizational support for fiscal decentralization
New Rule 13: If at least 8 of the above 12 rules cannot be applied, do not undertake fiscal decentralization.
