Person:
Shah, Anwar

Global Practice for Governance, The World Bank

Fields of Specialization

governance; public sector reform; budgetary accountability;

Departments

Global Practice for Governance, The World Bank

Last updated January 31, 2023

Full item page

Publication Search Results

Now showing 1 - 10 of 25

Fiscal Decentralization in Developing and Transition Economies: Progress, Problems, and the Promise

(World Bank, Washington, D.C., 2004-04) Shah, Anwar

The author discusses the revolution in public sector thinking that is transforming the public sectors of developing and transition countries. Countries are reconsidering their fiscal systems and searching for the right balance between central government control and decentralized governance. Political decentralization has advanced in most countries. Subnational expenditures in developing countries as a percentage of total public expenditures have also increased over the past two decades. However, the process is far from complete. In many countries, the central government is still involved in the delivery of local services, local governments have few sources of own-revenues, local governments have limited access to borrowing for capital projects, and the design of intergovernmental transfers does neither address regional fiscal equity nor convey appropriate incentives for fiscal discipline, improved service delivery performance, and accountability to citizens. Decentralized public governance can help realign public sector incentives through greater accountability to citizens, and attenuate the "democracy deficit" caused by globalization and the role of supranational institutions and regimes. However, this requires careful examination of the entire fiscal system. Elements of a comprehensive package of fiscal system reforms would include: (a) Clarifying roles of various levels of government in public service delivery; (b) Reassigning taxing responsibilities to ensure local revenue autonomy, accountability, and efficiency without endangering an internal common market; (c) Designing fiscal transfers to ensure regional fiscal equity and to create an enabling environment for innovative and competitive service delivery; (d) Facilitating responsible credit market access to subnational governments; (e) Designing institutional arrangements for intergovernmental fiscal relations to better coordinate policies; and (f) Aligning operational capacity with the authorizing environment through the "accountability for results" framework of public management.
Implementing Decentralized Local Governance: A Treacherous Road with Potholes, Detours, and Road Closures

(World Bank, Washington, D.C., 2004-06) Shah, Anwar ; Thompson, Theresa

During the past two decades, a silent revolution in public sector governance has swept across the globe aiming to move decision making for local public services closer to the people. The countries embracing and adapting to this silent revolution have had diverse motives and followed even more diverse approaches. This paper attempts to present a stylized view of the motivations and approaches used to strengthen local governance. The quest for the right balance, i.e. appropriate division of powers among different levels of government, is not always the primary reason for decentralizing. There is evidence that the decentralization decision may have more to do with short-term political considerations than the long-run benefits of decentralization. To take stock of progress worldwide, we take a comparative look at developments in political, fiscal and administrative decentralization for a selected group of countries. Most of the decentralization literature deals with normative issues regarding the assignment of responsibilities among different levels of government and the design of fiscal transfers. The process of decentralization has not received the attention it deserves as the best laid plans can fail due to implementation difficulties. We revisit major controversies regarding preferred approaches to obtaining a successful outcome. Key approaches examined are big push versus small steps; bottom up vs. top down; and uniform vs. asymmetric decentralization. Finally, Indonesia's 1999 big bang decentralization program is evaluated. The program should be commended for its achievements over a short period of time, however incentives are lacking for local governments to be accountable and responsive to their residents.
Making Federalism Work : The 18th Constitutional Amendment

(World Bank, Washington, DC, 2012-11) Shah, Anwar

The almost unanimous passage of a landmark consensus constitutional amendment "the 18th Constitutional Amendment" restored Pakistan's constitution to its original intent of a decentralized federation of four provinces as envisaged in the 1956 and 1973 constitutions. This amendment was hailed by policy makers and academics alike as a major step forward in reforming the multi-order governance in Pakistan. This paper takes a closer look at the provisions of this amendment and highlights both the potentials and pitfalls of the new constitutional order for good governance in Pakistan. The paper concludes that the amendment must be seen as a first yet small and incomplete step in reforming multi-order governance in Pakistan. A large unfinished reform agenda remains to be charted.
Corruption and Decentralized Public Governance

(World Bank, Washington, DC, 2006-01) Shah, Anwar

This paper examines the conceptual and empirical basis of corruption and governance and concludes that decentralized local governance is conducive to reduced corruption in the long run. This is because localization helps to break the monopoly of power at the national level by bringing decisionmaking closer to people. Localization strengthens government accountability to citizens by involving citizens in monitoring government performance and demanding corrective actions. Localization as a means to making government responsive and accountable to people can help reduce corruption and improve service delivery. Efforts to improve service delivery usually force the authorities to address corruption and its causes. However, one must pay attention to the institutional environment and the risk of local capture by elites. In the institutional environments typical of some developing countries, when in a geographical area, feudal or industrial interests dominate and institutions of participation and accountability are weak or ineffective and political interference in local affairs is rampant, localization may increase opportunities for corruption. This suggests a pecking order of anticorruption policies and programs where the rule of law and citizen empowerment should be the first priority in any reform efforts. Localization in the absence of rule of law may not prove to be a potent remedy for combating corruption.
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, Chunli

In 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.
A Practitioner’s Guide to Intergovernmental Fiscal Transfers

(World Bank, Washington, DC, 2006-10) Shah, Anwar

Intergovernmental fiscal transfers are a dominant feature of subnational finance in most countries. They are used to ensure that revenues roughly match the expenditure needs of various orders (levels) of subnational governments. They are also used to advance national, regional, and local area objectives, such as fairness and equity, and creating a common economic union. The structure of these transfers creates incentives for national, regional, and local governments that have a bearing on fiscal management, macroeconomic stability, distributional equity, allocative efficiency, and public services delivery. This paper reviews the conceptual, empirical, and practice literature to distill lessons of policy interest in designing the fiscal transfers to create the right incentives for prudent fiscal management and competitive and innovative service delivery. It provides practical guidance on the design of performance-oriented transfers that emphasize bottom-up, client-focused, and results-based government accountability. It cites examples of simple but innovative grant designs that can satisfy grantors' objectives while preserving local autonomy and creating an enabling environment for responsive, responsible, equitable, and accountable public governance. The paper further provides guidance on the design and practice of equalization transfers for regional fiscal equity as well as the institutional arrangements for implementation of such transfer mechanisms. It concludes with negative (practices to avoid) and positive (practices to emulate) lessons from international practices.
How Close Is Your Government to Its People? Worldwide Indicators on Localization and Decentralization

(World Bank, Washington, DC, 2012-07) Ivanyna, Maksym ; Shah, Anwar

This paper is intended to provide an assessment of the impact of the silent revolution of the last three decades on moving governments closer to people to establish fair, accountable, incorruptible and responsive governance. To accomplish this, a unique data set is constructed for 182 countries by compiling data from a wide variety of sources to examine success toward decentralized decision making across the globe. An important feature of this data set is that, for comparative purposes, it measures government decision making at the local level rather than at the sub-national levels used in the existing literature. The data are used to rank countries on political, fiscal and administrative dimensions of decentralization and localization. These sub-indexes are aggregated and adjusted for heterogeneity to develop an overall ranking of countries on the closeness of their government to the people. The resulting rankings provide a useful explanation of the Arab Spring and other recent political movements and waves of dissatisfaction with governance around the world.
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, Astrid

Indonesia 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.
Fiscal Decentralization and Fiscal Performance

(World Bank, Washington, DC, 2005-12) Shah, Anwar

A resurgence of recent interest in fiscal federalism has been a source of concern among macroeconomic stabilization experts. They argue that a decentralized fiscal system poses a threat to macroeconomic stability as it is incompatible with prudent monetary and fiscal management. The author addresses these concerns by taking a simple neo-institutional economics with an econometric analysis perspective. His analysis concludes that, contrary to a common misconception, fiscal decentralization is associated with improved fiscal performance and better functioning of internal common markets. Fiscal policy coordination represents an important challenge for federal systems. In this context, fiscal rules and institutions provide a useful framework but not necessarily a solution to this challenge. Fiscal rules binding on all levels can help sustain political commitment in countries having coalitions or fragmented regimes in power. Coordinating institutions help in the use of moral suasion to encourage a coordinated response. Industrial countries' experiences also show that unilaterally imposed federal controls and constraints on subnational governments typically do not work. Instead, societal norms based on fiscal conservatism such as the Swiss referenda and political activism of the electorate play important roles. Ultimately capital markets and bond-rating agencies provide more effective discipline on fiscal policy. In this context, it is important not to backstop state and local debt and not to allow ownership of the banks by any level of government. Transparency of the budgetary process and institutions, accountability to the electorate, and general availability of comparative data encourages fiscal discipline. Fiscal decentralization poses significant challenges for macroeconomic management. These challenges require careful design of monetary and fiscal institutions to overcome adverse incentives associated with the "common property" resource management problems or with rent seeking behavior. Experiences of federal countries indicate significant learning and adaptation of fiscal systems to create incentives compatible with fair play and to overcome incomplete contracts. This explains why that decentralized fiscal systems appear to do better than centralized fiscal systems on most aspects of monetary and fiscal policy management and transparent and accountable governance.
A Framework for Evaluating Alternate Institutional Arrangements for Fiscal Equalization Transfers

(World Bank, Washington, DC, 2005-12) Shah, Anwar

Fiscal equalization programs are fairly common features of intergovernmental fiscal relations in industrial countries. Some developing countries have also recently introduced these programs and still others are contemplating such programs. Institutional arrangements for fiscal equalization vary across countries with wide variations in the form and membership of the relevant decisionmaking bodies. This paper provides a simple neo-institutional economics framework for assessing alternative institutional arrangements for their impacts on simplicity, transparency, and objectivity of the equalization program, as well as transaction costs for various parties involved. Comparing institutional arrangements across different countries is a daunting task. The success of these arrangements depends on a multitude of factors. The success of governance structures for fiscal matters may depend not only on the incentives regime associated with their inner structures but also their interactions with other formal and informal institutions in the country. This paper presents a simple framework to understand these incentives and interactions and draw implications for their impacts on transactions costs for the society as a whole and achievement of societal objectives. An application of these concepts to the specific case of institutional arrangements for fiscal equalization transfers are carried out and the predictions based on the theory are compared with observed experiences in major federal countries. The paper demonstrates that the simple new institutional framework presented here has a significant power for predicting potential impacts. The paper concludes, both in theory and practice, that the case for independent grants commission to enhance the transparency, equity, and accountability of the intergovernmental finance system is vastly exaggerated.