Fiscal decentralization : theory as reform

Abstract

The last decade has seen a renewed interest in the concept of fiscal decentralization or fiscal federalism. This comes after a half-century of fiscal centralization in most developed and developing nations. This paper examines the theory behind fiscal decentralization and suggests the reasons for its renewed popularity. Two countries are examined in some detail: Brazil, which moved in this direction after their constitutional reform of 1988; and China, which is currently considering a policy change in this direction. Lessons from those two countries and comparisons with some other developed and developing nations are provided. The author concludes that fiscal decentralization provides promise for those nations wishing to encourage their subnational governments to assume additional responsibilities. However, special attention must be given to implementation issues, especially methods of dealing with fiscal inequities.