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Unformatted text preview: from the people for democratization (Rojas, 1999). In
Africa, decentralization has served as a path to national unity (World Bank, 1999).
This diversity in the list of factors that have contributed the interest in decentralization reflects institutional differences
across countries. Institutional factors, such as political, social, legal, and economic conditions, are generally important
for the analysis of public finance issues, but they are especially important for the analysis of fiscal decentralization. The
institutional context of fiscal decentralization entails the overall economic development, the nature of the legal system,
ongoing process of economic and political reform, the organization of monetary and financial institutions, and tensions
arising from ethnic, religious, or economic differences (Wildasin, 1997). This institutional background determines the
design of intergovernmental financial system and ultimately affects the outcome of fiscal decentralization reform
During the last two decades, the economic reforms in different parts of the world largely focused on the role of markets
and understated the importance of the organization of the public sector in achieving broader objectives such as
economic stability, sustainable growth, and provision of basic public services equitably across people and jurisdictions
(World Bank, 1999). The key element underlying the interest in fiscal decentralization is to achieve these objectives by
increasing efficiency, transparency, and accountability in the public sector.
In a fiscally decentralized system, the policies of subnational branches of governments are permitted to differ in order to
reflect the preferences of their residents. Furthermore, fiscal decentralization brings government closer to the people and
a representative government works best when it is closer to the people (Stigler, 1957). The theoretical argument for
fiscal decentralization is formulated as "each public service should be provided by the jurisdiction having control over the
minimum geographic area that would internalize benefits and costs of such provision." However, much of the
established theoretical literature of fiscal federalism has been based on issues that arose within developed countries,
particularly the US and Canada and the definition and implementation of fiscal decentralization differ greatly across
developing countries due to differences in economic and political structures. This diversity creates challenges to
measure and compare the degree of decentralization across countries and to make generalizations about it. 1.1. Existing Decentralization Indicators
Figure 1 shows the population weighted average shares of subnational expenditure and revenue in total public sector for
those 28 countries reported in the Government Finance Statistics of the International Monetary Fund (IMF) between
1980 and 1998 . The average expenditure and revenue shares of subnational governments in this group of countries
has been increasing steadily over time since 1980. 1
3 Oates, 1972.
Argentina, Austria, Bahrain, Belgium, Bolivia, Brazil, Canada, Costa Rica, Denmark, Dominican Republic, Finland, Hungary, Iceland,...
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