The new Handbook of Multi-Level Finance (2015)—edited by Etisham Ahmad and Giorgio Brosio—provides a comprehensive review of the state of knowledge on fiscal federalism and provides considerable insight into how multi-level government finance and policies can be made to work in the presence of political economy constraints.
Rather than treating local governments as ‘miniature central governments’, the handbook places local government finance in the context of a multi-level governance system and provides original perspectives on the main pillars of fiscal decentralization, including the assignment of expenditure responsibilities and local budget systems; the assignment and collection of local taxes; the design of intergovernmental fiscal transfers; and the role of local government borrowing and fiscal rules. In addition, the book further explores several special topics, including the role of multi-level finance in poverty reduction, structural change and the environment, natural disasters, and the role of (fiscal) decentralization in overcoming intra-state conflict.
The Handbook provides an comprehensive review of the latest literature on subject of fiscal federalism and the role of policies and institutions in creating sustainable outcomes. In doing so, it provides a usefulguide to researchers, practitioners, and policy makers seeking informed policy options. Contributors to the book include Ehtisham Ahmad, Roy Bahl, Pranab Bardhan, Richard Bird, Hansjörg Blöchliger, Robin Boadway, Giorgio Brosio, Bernard Dafflon, Timothy Goodspeed, Jorge Martinez-Vazquez, Dilip Mookherjee, Paul Bernd Spahn and Teresa Ter-Minassian.
Compared to the earlier Handbook Of Fiscal Federalism (2008) by the same editors, the Handbook on Multi-Level Finance follows a ‘second generation’ approach to exploring new developments in the theory of public finance, which does not assume that decision-makers or governments are necessarily benevolent. Instead, second-generation fiscal federalism theory acknowledges that central and local government actors (whether politicians, bureaucrats or their associated institutions) are often motivated by narrower personal and institutional incentives. In many chapters of this volume, the normative approach often associated with firstgeneration fiscal federalism has given way to an approach which blends sound technical guidance with political economy analysis, thus emphasizing the importance of institutional arrangements and information flows to ensure there are appropriate incentives and sanctions to generate good governance.
Two areas of second generation fiscal federalism and multi-level finances are not well-represented in the current volume. First, sticking closely to the political decentralization and federalism literatures, the handbook does not deal with non-devolved decentralized finances (i.e., deconcentration, delegation and other possible forms of local public sector expenditures). Recent research by the Local Public Sector Initiative identifies this as a major gap in the current state of knowledge in local public sector finance.
Second, while individual chapters consider specific local government finance topics in the context of second generation theory, the book does not comprehensively address the crux of second-generation fiscal federalism, namely the overarching tension between sound intergovernmental fiscal design and the policy economy constraints imposed on intergovernmental and local fiscal systems. For instance, if fiscal decentralization is driven by the desire of the ruling political party to enhance its own electoral chances (rather than forming part of a serious effort to transfer authority and enhance local public services), will devolution still be social-welfare enhancing? If local political leaders are prone to elite capture rather than guided by local public participation, does revenue decentralization remain conceptually superior over grant-funding of local activities? In a second generation world, does revenue decentralization lead to greater local political accountability, or does greater space for local political decision-making and more accountable local leadership trigger greater local revenue performance? How can local governments contribute to the delivery of pro-poor public services if functional authority and revenue sources are retained centrally for political and institutional reasons? Can multi-level fiscal systems effectively incentivize greater local government budget transparency?
As the state of knowledge on fiscal federalism and multi-level finance is evolving, these ‘second generation 2.0’ questions are yet to be addressed in a comprehensive manner.
Ehtisham Ahmad and Giorgio Brosio (eds). 2015. Handbook of Multilevel Finance. Edward Elgar Publishing. (ISBN: 978 0 85793 228 0)