International Center for Public Policy

2000 Working Papers

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Working Paper Number 00-10
Can Indonesia Decentralize? Plans, Problems, and Prospects
James Alm, Robert H. Aten, and Roy Bahl, December 2000

Working Paper Number 00-09
Making Decentralization Work: The Case of Russia, Ukraine, and Kazakhstan
Era Dabla-Norris, Jorge Martinez-Vazquez, and John Norregaard, October 2000

Russia, Ukraine, and Kazakhstan have all carried-out comprehensive reforms of their inter-governmental fiscal systems in the decade since the inception of transition; and all three countries are in the process of considering or implementing far-reaching “second-generation” reforms in this area. In retrospect, the combination of efforts aimed at consolidating macroeconomic stabilization during the early years of the transition, together with the fundamental structural changes in the economy, in some cases strong centrifugal forces, and political and ethnic conflicts, created an extremely complex setting for fiscal decentralization. This goes a long way in explaining why the fiscal decentralization process in the three countries has been rapid, haphazard and largely non-transparent, with the emerging system of federalism having important implications for budgetary developments.

The objectives of this paper are to discuss key aspects of the ongoing decentralization process in three important transition economies, Russia, Ukraine, and Kazakhstan; to identify areas where the present systems have clear adverse impacts on efficiency and—potentially—macroeconomic performance; and to offer a roadmap for future reform.

Working Paper Number 00-08
Municipal Affairs in India: A Critical Appraisal of Selected Issues
S. Rama Rao, September 2000

The paper addresses issues which hamper the functioning of the local governments in India. In view of the fact more independence has been given to these institutions, there is room for more discussion about their efficient and equitable operations. The major issue is that State governments influence decision making of the local governments. The octroi (Bombay) and no-octroi (Cochin) cities which are policies of the States are vivid examples of how the States accentuate regional inequality. Octroi cities could be considered to be the better-off ones than the no-octroi cities. The property tax, a direct tax is alleged to be potential for unpopularity and therefore dependence on this is relatively less favored than its potential. This initial differentiation widens the disparity in the budget outlook of the local bodies with impacts on their infrastructural development. No-octroi cities rely more on the Property taxes to sustain their expenditures. In addition, other issues come into play, such as the difficulties in property tax administration. Any attempt to hike up property tax base and rate involves a political cost, which politicians are not willing to face. Other than the tax, the Rent Control Act (RCA) tends to freeze rental values, which consequently dampens housing construction and renovation, which in turn dampens the property tax base. The dampening of the housing industry suggests loss of revenue in terms of property taxes for the local bodies. To overcome these impediments, new funding methods such as the issue of Bonds and external Technical Assistance Projects were implemented.

Another issue addressed in this paper is the quality of the services provided. The lethargic performance of personnel in these institutions is a contributing factor to low performance as evidenced by poor water quality, and low quantity, bad sewerage and drainage, poor road conditions and pollution. To cope with these problems, some suggestions are made in this paper. In the first instance, revenue generation is very Important for the provision of services. On the cost side, over-staffing should be avoided in order to maintain expenditures within reasonable levels. The option for selective privatization, proper integration of NGOs and the Ward Committee in the local affairs need to be considered. Accountability is an additional tool which could be used to enhance productivity at the personnel level.

Working Paper Number 00-07
Incentive Targeting, Influence Peddling, and Foreign Direct Investment
Kelly Edmiston, Shannon Mudd and Neven Valev, September 2000

Working Paper Number 00-06
Budgeting and Fiscal Management in Transitional Economies
Jorge Martinez-Vazquez and Jameson Boex, September 2000

The past ten years have been witness to one of the largest experiments in economic history, namely the transition of centrally planned economies to market-based economies. While policy reform in transitional countries has encompassed virtually every sector of the economy, modernization of public sector budgeting practices and fiscal management techniques have been widely recognized as critical to the success of the economic transition experiment. However, the breadth and pace of fiscal management reform in countries in transition (CITs) has largely fallen short of expectations; a decade into the economic transition, none of the transitional economies has fully adopted modern budgeting and fiscal management techniques similar to those in western countries. A less efficient and less controllable public sector has made the task of macroeconomic management more difficult and overall has retarded economic recovery and growth in transitional countries. This paper investigates the main reasons for why fiscal management reform has failed to take hold during the first decade of the economic transition and discusses what challenges remain ahead in budget policy reform.

While the timing of the transformation of the budgeting process from essentially a pure accounting mechanism during the communist era to a true fiscal management tool has not been identical in all CITs, the evolution of the reform process can be broken down into three distinct periods. During the first period, the early transition, most transitional economies saw some important economic reforms but a lack of budgeting and fiscal management reforms. Budget officials either felt comfortable with the status quo and felt little pressure to change the budget system inherited from the socialist regime or actively sought to preserve the budget institutions inherited from the previous regime. In the second transition period, CITs put in place a set of fiscal policy and fiscal management reforms, practically always in response to a macroeconomic crisis, which in some ways was brought about by the initial lack of fiscal management reform. However, as discussed below, this wave of reforms during the second transitional period was generally of an emergency nature and failed to establish a sound framework for fiscal discipline and accountable and efficient expenditure policies. As a result, renewed fiscal crisis spurred more structural fiscal reform efforts during the third, ongoing period of transition.

Working Paper Number 00-05
Fostering Subnational Autonomy and Accountability in Decentralized Developing Countries: Lessons from the Papua New Guinea Experience
Kelly Edmiston, August 2000

Working Paper Number 00-04
User Charge Financing of Urban Public Services in Africa
William Fox and Kelly Edmiston, July 2000

Expansion and improvement of public services is essential to improving quality of life and productivity in developing countries. Some African countries have been diligent in expanding the infrastructure necessary to provide public services, but unfortunately, most have not done a very good job of paying for them. Imposition of user charges to fund public services would go far toward eliminating the financial problems faced by many African countries in providing services and would raise additional revenues that could be used to pay for other government expenditures. In addition to the financial benefits of user charges, there are many other benefits from their imposition. User charges have the potential to greatly improve the public sector’s efficiency, to impart a more equitable distribution of the financing burden of public services, to provide better information regarding infrastructure needs, and to improve the quality of existing services.

This paper is organized as follows. Section 2 discusses the general nature of user charges: what they are, the services upon which they should be imposed, and evidence of the willingness to pay them. Section 3 discusses the extent to which user charges have been imposed in Africa in the past. Section 4 articulates the theory behind the efficient pricing of public services, resulting in a guide for setting appropriate user charges - in general as well as under special but common circumstances. Section 5 addresses the revenue implications of user charge financing, including the tendency of efficient prices to raise adequate revenues, ways to recover costs when efficient prices lead to deficits, and the attractiveness of user charges for taxation. Section 6 examines equity considerations of user charges. Finally, the analysis is brought together in section 7 by means of a case study of water supply services in Egypt. Throughout the paper, special attention is paid to the practical issues of levying user charges in Africa, issues which are too often overlooked in the literature. Concluding comments are provided in Section 8.

Working Paper Number 00-03
IMF Conditionality and Objections: The Russian Case
Jorge Martinez-Vazquez, Felix Rioja, Samuel Skogstad and Neven Valev , June 2000

Working Paper Number 00-02
Intergovernmental Fiscal Relations: Universal Principles, Local Applications
Richard M. Bird, April 2000

Working Paper Number 00-01
Tax Reform in The Tax Reform Experiment in Transitional Countries
Jorge Martinez-Vazquez and Robert McNab, January 2000