FISCAL DECENTRALIZATION A Political Theory with

Abstract

NE of the most important political developments of recent decades is the widespread move toward greater decentralization of government. Given the high level of centralization under communist rule, decentralization has naturally been a feature of postsocialist systems and has played an extraordinarily important but very different role in the two largest transition economies, Russia and China. 1 Decentralization has also been a pronounced trend in many newly democratic countries in Latin America, Asia, and Africa. 2 Much of the vast literature on federalism and decentralization in both political science and economics is informed by the theory of fiscal federalism, which identifies numerous advantages in transferring powers and responsibilities to lower levels of government. 3 Ideally, each public good and service should be provided by the jurisdiction that would most fully internalize its benefits and costs. For a number of goods and services, this jurisdiction is clearly smaller than the national