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The existing literature establishes that there exists inefficiency in energy consumption in Pakistan. In particular, with regard to electricity consumption, the problem of moral hazard is prevalent in the public sector. In this study, we observe this aspect by focusing on the behaviour of consumers once they are held liable to monitoring with the associated punishment mechanism. By providing evidence from a field experiment, we make three conclusions. First, individuals respond to both the monetary and non-monetary punishments. Alternatively, with the introduction of punishments, they reduce moral hazard with respect to electricity consumption. Second, the habitual violators of rules reform their behaviour after they are made accountable for their actions. Third, if appropriate monitoring systems along with the associated punishment mechanism are introduced, we can have beneficial effects in terms of resolving the energy crisis on the aggregate level. JEL Classification: H83, D12, D00, D03, D04 Keywords: Moral Hazard, Monitoring, Punishment, Electricity Consumption, Public Sector

Tax administration ranges from complete centralization to complete autonomy with a mix of the two being the most common. In the past few decades, a number of advances have been made in strengthening the legal and regulatory framework; in broadening the tax base by identifying and registering taxpayers and potential taxpayers; in initiating programs/practices to improve taxpayer compliance; in improving the capacity to process information; in developing their risk-analysis capacity to focus on potential tax violators; in strengthening investigation, audit and enforcement capacity; in improving analytical capacity and ability for carrying out studies on tax burdens, collection trends, compliance gaps and impacts of policy changes; and in the implementation of procedures to reduce corruption.

Local property taxes are important sources of own revenues for local governments around the world. However, their potential as a source of own revenues are not fully exploited especially in the developing countries due to inefficiencies in tax administration. Even in industrial countries, use of this tax instrument in dealing with urban sprawl remains to be seen. This chapter presents a synthesis of global practices in real property tax to make this knowledge readily accessible to practitioners and students. It is intended to serve as a primer on worldwide practices on real property taxes to guide better design and administration of these taxes to fulfill fiscal and social policy and economic development objectives.

This chapter evaluates the conditionality of development assistance in terms of its intended and unintended consequences. The chapter provides conceptual perspectives from the game theory, the public choice, the fiscal federalism, the political economy, the new institutional economics, and the new public management literature on the design of external assistance and its potential impacts. It shows how neglect of these conceptual considerations in the past resulted in the lack of effectiveness of aid conditionality and the waste of such assistance. It highlights the emerging consensus by the development assistance community on both the instruments of development finance and the associated conditions. It also briefly notes the progress, or lack thereof, for practice to conform to the emerging consensus. It cites examples where an inappropriate design of conditionality led to adverse consequences for project and program outcomes. Finally, the chapter provides lessons on major issues in the conditionality of development assistance.

This chapter presents a framework for evaluating the quality and timeliness of Public Expenditure Review (PER) as well as conducting a review of its impact. Public Expenditure Review (PER) is a widely used tool by the development assistance community to develop advice on budgetary institutions and allocations. This tool has also been used by both industrial and developing countries as an aid to public sector reforms. The chapter highlights specific elements to consider and to rate in such an analysis and how to develop final cost-efficiency and net benefit ratings.

This chapter provides a framework for the evaluation of anti-corruption programs. The impact of corruption on public service delivery performance and poverty alleviation is widely recognized. A wide consensus has also recently emerged that corruption is a symptom of failed governance and hence curtailing corruption requires addressing the causes of bad governance. Nevertheless, the menu of potential actions to curtail corruption is very large, so a framework is needed that guides ordering potential actions. Prioritization of various actions depends on both the conceptual and empirical views of what works and what does not work in the context of a specific situation. Such a framework is also needed for evaluating country anti-corruption programs and policies. The chapter concludes that path dependency is critical in determining the relative efficacy of various anti-corruption programs.

This chapter reviews expenditure and service delivery arrangements for social services. Responsibilities of local governments for social services—specifically schooling, health care, and social protection programs—vary substantially across countries. That variation accounts for the considerable differences found in the magnitudes of their budgets and in local governments’ relative roles in the countries’ public sectors. This chapter examines the roles of local government in the three areas in an effort to better understand the differences among those services, the differences across countries in the responsibility assignments among governments, and the implications for local public finance.

This chapter surveys the fiscal structure of local government across major industrial countries and draws lessons from their practices and experience. The approach uses broad comparisons of local governments’ expenditures and revenues to illustrate the diversity of practices across countries and to provide insight into how and why quite different arrangements can be workable fiscal arrangements. In contrast to core services, local government responsibility for social programs and the funding of those programs are the major determinants of differences among countries.

This chapter considers local income, sales, and environmental taxes. Personal income and sales taxes are major local taxes in only a handful of countries and they are often (but not always) supplemental to local property taxes. Their attractiveness often depends on the services to be funded and alternative revenues. While not as good as the property tax in meeting the criteria for a solid local tax, they have positive features. Relevant issues include local administration versus piggybacking, setting local rates versus tax sharing, limits or no limits on tax rates, cross-border effects, harmonization with senior governments, and capacity to generate revenue. Although comparatively small but of potential importance, environmental taxes are also reviewed.

This chapter discusses local land and property taxes. There are two components to the property tax—the base and the rate. In most countries, the base is property value, but in some countries it is based on area. Regardless, the success of any assessment system depends on a number of critical components—property identification; assessment uniformity; assessment responsibility and frequency; an effective appeals mechanism; and making use of ever-improving mass assessment techniques. The tax rate is the second component. Local governments should be responsible for setting the local rate. Major issues include variable versus uniform tax rates; overtaxation of business properties; use of tax limits; property tax incentives; regressivity and tax relief; and treatment of special properties.

This chapter provides a conceptual overview of the principles of expenditure and revenue assignment to local governments. Local government is seen to be more aware of local preferences and conditions and more accountable to local residents than senior governments. Core and noncore responsibilities are distinguished (e.g., local streets versus schooling). Financing follows function. Financing follows the benefit criterion; that is, local residents pay for the local services from which they benefit—with user charges and local taxes although grants may be needed. Various (especially) noncore services involve interjurisdictional spillovers and/or redistributive considerations and so, if assigned to local governments require intergovernmental transfers to achieve efficiency and equity objectives. Financing alternatives and appropriate uses are reviewed.

A large majority of the well-known governance indicators are based on the opinions of external experts. However, they do not fully capture how citizens perceive the governance environment and outcomes in their countries. This chapter discusses the advantages of a uniform and consistent framework for measuring governance quality across countries and over time based on evaluations by citizens, and the related challenges. We implement this framework in practice using data from the World Values Survey and provide a worldwide ranking of countries based on how citizens perceive the governance quality in their own countries. We further discuss how to correct the resulting citizen-centric governance indicators (CGI) for biases that could potentially be present in public opinion surveys, and the possible use of these indicators in policy-making.

Littering, the improper disposal of small quantities of waste, is one of the main causes of environmental degradation. To protect the environment from this degradation, we need to factor out the determinants of littering behaviour. In this study, we conduct a controlled laboratory experiment to examine whether people would avoid littering if the social cost of this behaviour was internalised. Based on the microeconomic theory relating to externality, we test whether penalising littering decreases its level compared to when it is not.. The results indicate that when the cost of production of littering is internalised, the level of littering drops. JEL Classification: C92, D62 Keywords: Litter, Externality, Private Cost, Internalisation, Experiment, Baseline Treatment, Cost Treatment

We attempt to improve the understanding and measurement of decentralization and its relationship with corruption in a worldwide context. This is done by presenting the conceptual underpinnings of such a relationship as well as using more defensible measures of both decentralization in its various dimensions as well as corruption for a sample of 158 countries. It is the first paper that treats various tiers of local governments (below the intermediate order of government) as the unit of comparative analysis. By pursuing rigorous econometric analysis we demonstrate that decentralization, when properly measured to mean moving government closer to people by empowering local governments, is shown to have a significant negative effect on the incidence of corruption regardless of the choice of the estimation procedures or the measures of corruption used. In terms of various dimensions of decentralized local governance, political decentralization matters even when we control for fiscal decentralization. Further voice (political accountability) is empirically shown to be more important in combating corruption than exit options made available though competition among jurisdictions.

The purpose of this paper is to address a central question in fiscal federalism - whether or not fiscal decentralization implies serious risks for fiscal discipline and macroeconomic management for the nation as a whole. This paper addresses this important issue by drawing upon the existing evidence regarding macro management and fiscal institutions in federal and unitary countries. This is supplemented by cross country regression analysis plus the analysis of two case studies: the Brazilian federation and the unitary regime in China. The main conclusion of the paper is that decentralized fiscal systems offer a greater potential for improved macroeconomic governance than centralized fiscal regimes. This is because the challenges posed by fiscal decentralization are recognized and they shape the design of countervailing institutions in federal countries to overcome adverse incentives associated with incomplete contracts or the “common property” resource management problems or with rent seeking behaviors.

Mexico has experimented with several tax instruments designed to promote private capital formation. Among such initiatives were general and industry-specific tax credits, employment tax credits, and corporate tax credits. The authors examine relative efficacy of such instruments using a dynamic computable general equilibrium model. They carry out model simulations using three equal-yield investment incentive scenarios: increases in investment tax credits, increases in employment tax credits, and an equivalent reduction in the corporate tax rate. The authors present outlines of the tax policy environment with model details and they highlight alternate tax incentives regimes. Conclusions and summary results are provided by the authors.

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.

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.

This research investigates the sustainability of Micro Credit system in Pakistan and impact of poverty alleviation. Data were collected from 400 respondents who used Micro credit by using the simple random sampling technique and data were analysis by using SPSS-18 version. Interviews of farmers/ growers, officers of micro credit, office public and private supporting services, Institutions and other professionals were conducted by using structured interview. Present study attempts to viability of Micro credit system in Pakistan and how its impact on, macro economic policies designed to accelerate growth were combined with appropriate fiscal polices for income redistribution for reducing inequalities. The second style aims at public investment in creating an infrastructure for providing health, education, etc. with a view to promoting quality of life. Results showed that Micro credit has positive impact on alleviate poverty in Pakistan. The case study indicates that 40% of the beneficiaries opened shops/small provision stores, followed by investment in poultry, embroidery and livestock.

This paper attempts to improve the understanding and measurement of decentralization and its relationship with corruption in a worldwide context. This is done by presenting the conceptual underpinnings of such relationship as well as using superior and more defensible measures of both decentralization in its various dimensions as well as corruption for a sample of 182 countries. It is the first paper that treats various tiers of local governments (below the inter-mediate order of government) as the unit of comparative analysis. In contrast, previous analyses erroneously focused on subnational governments as the unit of analysis which yields invalid cross-country comparisons. By pursuing rigorous econometric analysis, the paper demonstrates that decentralization, when properly measured to mean moving government closer to people by empowering local governments, is shown to have significant negative effect on the incidence of corruption regardless of the choice of the estimation procedures or the measures of corruption used. In terms of various dimensions of decentralized local governance, political decentralization matters even when we control for fiscal decentralization. Further voice (political accountability) is empirically shown to be more important in combating corruption than exit options made available through competition among jurisdictions.

Intergovernmental finance is a significant source of sub-national finance in most countries. In both industrial and developing countries, formula based "manna from heaven" general purpose transfers dominate but co-exist with highly intrusive micro-managed "command and control" specific purpose transfers. Both these types of transfers undermine political and fiscal accountability. Reforms to bring in design elements that incorporate incentives for results-based accountability are resisted by both donors and recipients alike. This is because the donors perceive such reforms as attempts at chipping away at their powers and recipients fear such programs will be intrusive. This paper presents conceptual and practical underpinnings of grant designs that could further simplicity, objectivity, and local autonomy objectives while furthering citizen-centric results-based accountability. The paper further highlights a few notable recent initiatives in both industrial and developing countries that embrace such directions for reform. The paper concludes that results-based intergovernmental finance offers significant potential to minimize tradeoffs between local autonomy and accountability while furthering access to merit goods.

This monograph is a study of economic decision making by governments in a federation. A federation is simply a multilevel system of government in which different levels of government exist, each of which has some independent authority to make economic decisions within its jurisdiction. By economic decisions, we include a variety of things. Governments can acquire resources to provide public goods and services. Expenditures for these purposes can be of a current nature (e.g., hiring employees, purchasing materials) and a capital nature (e.g., buildings, infrastructure). Governments can raise revenues in order to finance services provided by the private or nonprofit sectors, such as hospitals, universities, or insurance. They can arrange to have resources redistributed among households in the economy. They can introduce regulations in the markets of the private sector so as to influence resource allocation there; or they can interfere with the pricing mechanism as an alternative way of achieving resource allocation or redistributive effects, such as through subsidizing or taxing certain activities. They can also attempt to influence the aggregate amount of activity that occurs in the economy both through budgetary actions and through changes in the amount of money and credit circulating in the economy. BASIC CONCEPTS OF FEDERALISM Constitutional divisions of powers among various orders of government fall into three categories: unitary, federal, and confederal.

THE TYPES OF TRANSFERS AND THEIR PURPOSE Federal-state transfers are an important feature of all federations, and their analogue is used in nonfederal countries that have multiple levels of government as well. These transfers form part of a broader system of fiscal relations between the federal and state levels of government. We begin this introductory section by outlining the forms that transfers can take before turning to the rationale for federal-state transfers. In what follows, we use the terms “transfers” and “grants” interchangeably. Forms of Intergovernmental Transfers Intergovernmental transfers form part of the system of federal-state fiscal arrangements that are in place to coordinate fiscal decision making at the two highest levels of government, federal and state. Federal-state fiscal relations consist primarily of a set of financial transfers from the federal government to the states and a set of arrangements for coordinating and sharing particular tax bases. There may also be federal-state agreements on fiscal issues, such as agreements on internal trade, agreements to coordinate the exercise of policy responsibilities that are jointly occupied by the two levels of government (e.g., environmental polices), and interactions between the governments through regulations. In principle, the two levels of government could be financially independent and separate, but that is typically not the case. The federal government will generally collect more tax revenues than it needs for its own purposes and transfer some of the excess to the states either as grants or by the explicit sharing of tax revenues. This outcome reflects the fact that, while it may be efficient to decentralize expenditure responsibilities to a considerable extent, it is less efficient to decentralize revenue raising.

The design of intergovernmental fiscal transfers has a strong bearing on efficiency and equity of public service provision and accountable local governance. This book provides a comprehensive one-stop window/source of materials to guide practitioners and scholars on design and worldwide practices in intergovernmental fiscal transfers and their implications for efficiency, and equity in public services provision as well as accountable governance.

Misleading conclusions can be drawn from studies of tax incidence that ignore the special features of developing countries. Incorporating these features can sometimes reverse the incidence pattern of taxes relative to what is often taken to be conventional wisdom. Even where patterns are not reversed, quantitative differences can be substantial. The "newer" views of incidence have implications for tax restructuring options being considered in several developing countries. The proposed restructuring may appear to lead only to a more regressive tax system, because of improper incidence analysis. Copyright 1991 by Oxford University Press.

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.

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.

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.

For various reasons-whether philosophical, political, humanitarian, or by institutional mandate-people are concerned for the well being of the most vulnerable groups in society: women, the poor, and the elderly. Some would even measure the value of a political system by how well it cares for the least of its members. Related to this is the orientation of government toward the public more generally and the extent that it listens and responds to its citizens. More specifically, it is the rules and norms-the institutional framework-of government through which it takes into account the preferences of people on a day-to-day basis, not just at the ballot box. ""Public Expenditure Analysis for Citizen-Centered Governance ""explores two themes: the orientation of government towards its more vulnerable groups and the extent to which government is responsive to its citizens. The first part of the book provides tools, methodologies, and examples of how to examine the impact of government expenditures, taxes, pension systems and other policies on women, the poor, and the elderly. The second part looks at the different ways that the government listens to citizens' voices and proposes a new institutional framework for governments that wish to implement reforms that increase responsiveness: citizen-centered government and citizen - centered budgeting.

Debates about the appropriate role, policies, and institutions of the state are often hampered by the lack of a definition for good government. To provide a quantifiable measure of good government, the authors develop an index for the quality of governance for a sample of 80 countries. They apply the index to the debate on the appropriate level of fiscal decentralization. In measuring the quality of governance, the authors develop indices for the government's ability to: a) Ensure political transparency and a voice for all citizens (the citizen participation index measures political freedom and political stability). b) Provide effective public services efficiently (the government orientation index measures judicial and bureaucratic efficiency and the absence of corruption). c) Promote the health and well-being of its citizens (the social development index measures human development and equitable distribution of income). d) Create a favorable climate for stable economic growth (the economic management index measures outward orientation, independence of the central bank, and an inverted debt-to-GDP ratio). In relating the index of governance quality to degree of fiscal decentralization for the 80 countries, the authors are not surprised to find a positive relationship between fiscal decentralization and quality of governance. But the strength of the correlation is surprising.

In a largely corruption-free environment, anti-corruption agencies, ethics offices, and ombudsmen strengthen the standards of accountability. In countries with endemic corruption, however, the same institutions function in form but not in substance; under a best-case scenario such institutions might be helpful, but the more likely outcome is that they help to preserve social injustice. The anti-corruption strategy the World Bank announced in September 1997 defined corruption as the "use of public office for private gain" and called for the Bank to address corruption along four dimensions: • Preventing fraud and corruption in Bank projects. • Helping countries that request Bank assistance for fighting corruption. • Mainstreaming a concern about corruption in Bank work. • Lending active support to international efforts to address corruption. The menu of possible actions to contain corruption (in both countries and Bank projects) is very large, so Huther and Shah develop a framework to help assign priorities, depending on views of what does and does not work in specific countries. Their framework, based on public officials' incentives for opportunistic behavior, distinguishes between highly corrupt and largely corruption-free societies. Certain conditions encourage public officials to seek or accept corruption: • The expected gains from undertaking a corrupt act exceed the expected costs. • Little weight is placed on the cost that corruption imposes on others. In a country with heavy corruption and poor governance, the priorities in anti-corruption efforts would then be to establish rule of law, strengthen institutions of participation and accountability, and limit government interventions to focus on core mandates. In a country with moderate corruption and fair governance, the priorities would be decentralization and economic reform, results-oriented management and evaluation, and the introduction of incentives for competitive delivery of public services. In a country with little corruption and strong governance, the priorities might be explicit anti-corruption agencies and programs, stronger financial management, increased public and government awareness, no-bribery pledges, efforts to fry the "big fish," and so on. This paper - a product of the Country Evaluation and Regional Relations Division, Operations Evaluation Department - is part of a larger effort in the department to improve the development effectiveness of external assistance. Anwar Shah may be contacted at ashah@worldbank.org.

Decentralized fiscal structures are more suitable in developing countries than centralized structures are, especially when they are supported by strengthening the rule of law, an independent central bank, an independent judiciary, a charter of rights, appropriate limits on various levels of government, institutions for conflict resolution and for the evaluation of government efforts at all levels, and mechanisms (including a free media) for listening and making government accountable to the citizenry. Shah examines the reasons developing countries are reexamining the respective roles of the private sector, civil society, and various levels of government - and considering new fiscal arrangements between national and lower levels of government. Decentralization may be particularly well-suited to developing countries, where central governments are not as well developed as in industrial countries - because information requirements and transaction costs are lower at lower levels of government and the government can be more responsive and accountable to the citizenry. Vital to the success of decentralized decisionmaking, says Shah, are: -A broad public consensus that decentralization is appropriate. -Civil service reform designed to encourage a service orientation, to discourage command-and-control governance and rent-seeking, and to prevent the central government from have a direct say in the recruitment and promotion of subnational civil servants. -Proper monitoring and oversight of governance. Other lessons from experience: -When there is citizen participation and transparency in decisionmaking, limited budgeting, auditing, and accounting systems at the subnational level should not be considered a barrier to decentralization. Those technical capabilities can be borrowed from higher levels of government. -Indonesia and Pakistan provide good examples of assymmetric decentralization, in which various powers can be assigned to different levels of government, depending on capacity. -The delinking of taxing and spending decisions leads to lack of accountability in the public sector. -Revenue-sharing (tax by tax) distorts incentives for efficient tax collection. -Properly structured (simple, transparent, consistent with objectives) fiscal transfers can improve government accountability. Fiscal transfers can also be used to encourage competition for the supply of public goods. In Canada and Chile, for example, Catholic schools compete with public schools for financing. This paper - a product of the Country and Regional Evaluation Division, Operations Evaluation Department - is part of a larger effort in the department to learn lessons of evaluation in improving public sector performance in developing countries. The author may be contacted at ashah@worldbank.org.

The authors examine the composition of public spending and its implications for economic growth. They use a translog production function by treating gross domestic product as the output and labor, private capital, and several types of public sector capital stocks as the inputs, using time series data for 25 countries for 1965-84. The production functions of all but four countries exhibited increasing returns to scale. The highest output elasticity was for human resource development capital, followed by private capital and labor. Output elasticity of infrastructure capital was found to be relatively small, with the exception of Latin American countries where it exhibited relatively high values. Military capital had negative output elasticity in slightly more than half of the cases considered. The results suggest that reshaping public spending priorities in favor of human resource development and away from military spending would positively stimulate world economic renewal.

Bob McLarty does not find the case for a fiscal need approach to equalization convincing for four reasons. First, according to him, given that multiple objectives are pursued under the Canadian Equalization program, economic analysis is not of much use to policymakers. Second, a fiscal need approach compensates provinces for their past mistakes. Third, it will create perverse program design incentives for the provinces. Fourth, such an approach will undermine federal flexibility in the use of its “spending power.” In the following paragraphs, I contend that these arguments simply call for greater clarity in the exposition of the fiscal need approach to equalization but strengthen rather than weaken the case for its adoption by Canada.

The existing fiscal equalization program in Canada attempts to equalize per capita tax burden alone and completely ignores the expenditure side. This paper examines the consequences of this neglect both conceptually as well as empirically. The paper concludes that a program of equalization that ignores the expenditure side cannot be defended on economic efficiency and equity grounds. Further, such a program might not be consistent with the constitutional intent of equalization in Canada. The paper argues that the present system of equalization in Canada could be improved by explicitly recognizing relative expenditure needs of the Canadian provinces in the formula. The paper implements an objective methodology for measuring these needs and provides tentative calculations based on the proposed approach. The paper concludes that a fiscal needs based program of equalization would differ greatly from the present program in terms of its redistributive impact and further that under such a program the total amount of equalization transfers made by the Federal Government might also be reduced.

The design of intergovernmental fiscal transfers has a strong bearing on efficiency and equity of public service provision and accountable local governance. This book provides a comprehensive one-stop window/source of materials to guide practitioners and scholars on design and worldwide practices in intergovernmental fiscal transfers and their implications for efficiency, and equity in public services provision as well as accountable governance.