Global Practice for Governance, The World Bank
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governance; public sector reform; budgetary accountability;
Global Practice for Governance, The World Bank
Externally Hosted Work
Last updated January 31, 2023
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The Reform of the Intergovernmental Transfer System to Achieve a Harmonious Society and a Level Playing Field for Regional Development in China(World Bank, Washington, DC, 2006-12) Shah, Anwar ; Shen, ChunliIn China, most of the service delivery responsibilities are assigned to the subnational governments. Yet for reasons of efficiency in tax collection and administration, the central government collects revenues far in excess of its expenditure needs. In 2003 the central government collected 70 percent of consolidated revenues but accounted for only 30 percent of consolidated expenditures. The initial fiscal surplus of the central government enables it to use its spending power to provide financing to subnational jurisdictions for the achievement of national objectives and to influence local priorities. This paper examines the incentives associated with the design of such transfers and their implications for the efficiency and equity of public service provision and accountable local governance in China. The paper argues that the existing design of such transfers is not consistent with efficiency and equity considerations. It further undermines local autonomy without enhancing local accountability while creating incentives for imprudent fiscal management. Its main limitations include a complex and opaque system, a piecemeal approach to gap filling, lack of consistency of design with objectives, focus on input controls without regard for output accountability, incentives to support an antiquated management paradigm, a one-size-fits-all approach to local financing, and lack of transparency and regulatory framework for the intergovernmental transfer system. The paper makes specific suggestions on a reform of this system to overcome these limitations and on better use of fiscal transfers to create responsive, responsible, equitable, and accountable local governance in China.
General Purpose Central-provincial-local Transfers (DAU) in Indonesia : From Gap Filling to Ensuring Fair Access to Essential Public Services for All(World Bank, Washington, DC, 2012-06) Shah, Anwar ; Qibthiyyah, Riatu ; Dita, AstridIndonesia has come a long way from centralized governance to decentralized local governance, and today Indonesia ranks among the most decentralized developing countries. The Government of Indonesia is revisiting all aspects of local governance to make appropriate legal and institutional adjustments based on lessons leaarned during the past decade. An important area of this re-examination and possible reform is the central financing of subnational expenditures. The system of intergovernmental finance represents one of the most complex systems ever implemented by any government in the world. The system is primarily focused on a gap-filling approach to provincial-local finance in an objective manner to ensure revenue adequacy and local autonomy but without accountability to local residents for service delivery performance. This paper takes a closer look at Dana Alokasi Umum -- the most dominant program of unconditional central transfers to finance provincial-local government expenditures in Indonesia. The paper also presents illustrative simulations of alternative programs and compares these with the existing Dana Alokasi Umum allocations. The paper concludes that super complexity leads to lack of transparency, inequity, and uncertainty in allocation. Simpler alternatives are available that have the potential to address autonomy and equity objectives while also enhancing efficiency and citizen-based accountability. Such alternatives would represent a move away from the complex gap-filling approach to simple output-based transfers to finance operating expenditures. Capital grants would deal with infrastructure deficiencies. And the alternatives would institute fiscal capacity equalization as a residual program with an explicit standard to ensure that all local jurisdictions have adequate means to deliver reasonably comparable levels of public services at reasonably comparable levels of tax burdens across the country.
Autonomy with Equity and Accountability : Toward a More Transparent, Objective, Predictable and Simpler (TOPS) System of Central Financing of Provincial-Local Expenditures in Indonesia(World Bank, Washington, DC, 2012-03) Shah, AnwarDuring the past decade, Indonesia has transformed itself from centralized governance to decentralized local governance. Local governments were given extensive expenditure responsibilities while keeping the tax system centralized. To finance decentralized provincial-local expenditures, Indonesia implemented a new system of intergovernmental finance. This paper provides a review of the equity and efficiency implications of the current system of central-provincial-local transfers. It finds that the system of intergovernmental finance represents one of the most complex systems ever implemented by any government in the world. The system is primarily focused on a gap-filling approach to provincial-local finance to ensure revenue adequacy and local autonomy but without accountability to local residents for service delivery performance. This is done through a great degree of academic rigor using highly complex procedures. The complexity leads to a lack of transparency, inequity and uncertainty in allocation as well as creating incentives for jurisdictional fragmentation and reducing own-tax effort. Simpler alternatives are available that have the potential to address equity objectives while also enhancing efficiency and citizen-based accountability. Such alternatives would represent a move away from complex gap filling and special allocation approaches to simple, output based transfers to finance operating expenditures. These would be complemented by capital grants to deal with infrastructure deficiencies, and fiscal capacity equalization as a residual program with an explicit standard to ensure that all local jurisdictions have adequate means to deliver reasonably comparable levels of public services at reasonably comparable levels of tax burdens across the country. The paper argues that such an alternative system of intergoveernmental finance would preserve autonomy, while enhancing equity, simplicity, objectivity, transparency and accountability.