Public sector transition in post‐communist economies: the struggle for fiscal decentralisation in the Czech and Slovak Republics

Abstract

Studies of economic transition often focus on the private sector, but successful transition also requires devolution in the public sector. This study compares fiscal decentralisation in the Czech and Slovak Republics, whose institutions began to diverge only after their 1993 ‘velvet divorce’. This article reviews challenges confronted in this fiscal decentralisation. Local finance problems are related to revenue generation, the use of the property tax and the transfer of funds to municipalities. Local political autonomy includes the ability to exercise some autonomy in resource use. Little can be expected where sub‐national governments generate little revenue independently. Potential moral hazard problems are associated with central generation of property tax revenues, as occurs in the Czech case. The EU has not promoted fiscal decentralisation in these republics, although it has encouraged ‘reforms of public administration’ to devolve power. But fiscal decentralisation and public administration reform are complementary strategies rather than strategy substitutes.