Fiscal Decentralization and the Challenge of Hard Budget Constraints

Contents......Page 6
Preface......Page 8
Contributors......Page 10
I Introduction......Page 12
1.1 The Context of Decentralization......Page 14
1.2 Soft Budget Constraints and Bailouts: Exploring the Commitment Problem......Page 18
1.3 Basic Fiscal and Political Institutions......Page 24
1.4 Additional Hard Budget Constraint Mechanisms......Page 28
1.5 Introduction to the Case Studies......Page 35
Notes......Page 38
References......Page 39
II Decentralized OECD Countries......Page 44
2 Transfers and Bailouts: Enforcing Local Fiscal Discipline with Lessons from U.S. Federalism......Page 46
2.1 Ensuring Local Fiscal Discipline......Page 47
2.2 Fiscal Discipline in U.S. Federalism: Some Lessons Learned......Page 65
2.3 Conclusion......Page 80
Notes......Page 82
References......Page 91
3 Constraining Subnational Fiscal Behavior in Canada: Different Approaches, Similar Results?......Page 96
3.1 Hardening Soft Budget Constraints: The Provinces......Page 98
3.2 The “Second World” of Canadian Public Finance: The Municipalities......Page 110
3.3 Two Roads to Realism?......Page 122
3.4 Conclusion......Page 127
Appendix 3A: Fiscal Equalization......Page 128
Appendix 3B: Federal-Provincial Stabilization Agreement......Page 130
Appendix 3C: Provincial Budget Rules......Page 131
Appendix 3D: Ontario Muncipal Structure......Page 132
Notes......Page 134
References......Page 138
4 Vertical Imbalance and Fiscal Behavior in a Welfare State: Norway......Page 144
4.1 Scandinavian-Style Administrative Federalism......Page 146
4.2 Centralized Financing of Decentralized Spending: Hierarchical Controls......Page 148
4.3 The Political Control Mechanism......Page 153
4.4 Evaluation of Fiscal Performance......Page 156
4.5 Strategic Behavior and Bailouts......Page 159
4.6 Reform......Page 166
References......Page 168
5 Soft Budget Constraints and German Federalism......Page 172
5.1 Hierarchical Structure and Intergovernmental Fiscal Relations......Page 176
5.2 The Political Mechanism......Page 185
5.3 The Capital Market and Its Regulation......Page 186
5.4 Deficits and Bailouts in Saarland and Bremen......Page 189
5.5 Conclusions and Prospects for Reform......Page 192
Notes......Page 195
References......Page 196
III Developing Countries with Histories of Federalism and Fiscal Decentralization......Page 198
6 Argentina: Hardening the Provincial Budget Constraint......Page 200
6.1 Macroeconomic Background......Page 201
6.2 Constitutional and Political Framework......Page 202
6.3 Historical Evolution of Fiscal Federal Relations......Page 203
6.4 Evolution of Budget Constraints......Page 214
6.5 Lessons from the 1990s......Page 218
Notes......Page 220
References......Page 221
7 Federalism and Bailouts in Brazil......Page 224
7.1 Hierarchical Structure......Page 225
7.2 The Political Mechanism......Page 236
7.3 The Credit Market Mechanism......Page 239
7.4 State-Level Fiscal Crises and Bailouts......Page 240
7.5 Reform Efforts......Page 248
7.6 Conclusions......Page 254
Notes......Page 256
References......Page 257
8 The Challenge of Fiscal Discipline in the Indian States......Page 260
8.1 Description and Overview of Indian Federalism......Page 261
8.2 Incentives and Channels of the Soft Budget Constraint......Page 274
8.3 Potential Control Mechanisms......Page 280
8.4 Conclusion......Page 292
Notes......Page 294
References......Page 295
IV Newly Decentralizing Countries in Transition......Page 298
9 Soft Budget Constraints and Local Government in China......Page 300
9.1 Evolution of Intergovernmental Fiscal Relations, 1980s–1990s......Page 303
9.2 Forms of the Soft Budget Constraint......Page 311
9.3 Conclusion......Page 329
Notes......Page 331
References......Page 332
10 Creating Incentives for Fiscal Discipline in the New South Africa......Page 336
10.1 South Africa’s Intergovernmental System: The Apartheid Era......Page 337
10.2 South Africa’s Intergovernmental System: The New Era......Page 340
10.3 Lessons......Page 355
Notes......Page 359
References......Page 361
11 Systemic Soft Budget Constraints in Ukraine......Page 364
11.1 The System of Intergovernmental Finance and its Implications for Budget Constraints......Page 365
11.2 Political Mechanisms and Their Influence on Budget Constraints......Page 377
11.3 Subnational Borrowing and Hard Budget Constraint Failure......Page 383
11.4 Conclusion......Page 398
Notes......Page 400
References......Page 402
12 Strengthening Hard Budget Constraints in Hungary......Page 404
12.1 The System of Intergovernmental Finance and Its Impact on Budget Constraints......Page 405
12.2 Political Incentive Structures and Their Influence on Budget Constraints......Page 420
12.3 Subnational Borrowing and Its Regulation......Page 424
12.4 Conclusion......Page 434
Notes......Page 436
References......Page 438
V Conclusion......Page 440
13 Lessons and Conclusions......Page 442
13.1 A Schematic Overview of the Case Studies......Page 444
13.2 Market Mechanisms......Page 449
13.3 Hierarchical Mechanisms......Page 461
13.4 Designing a Hard Budget Constraint......Page 466
13.5 Concluding Reflections......Page 472
Notes......Page 473
References......Page 475
B......Page 478
C......Page 479
D......Page 481
G......Page 482
I......Page 483
N......Page 484
S......Page 485
T......Page 486
Z......Page 487