Federalism, Decentralization, Globalization, and Economic Reforms: Some Issues

Federalism and decentralization are emerging as important policy issues in many countries and in international institutions. Economists and political scientists (Breton and Scott (1978), Weingast (1995), Breton (1996), Musgrave (1959), Oates (1972)), have long been concerned with the theory of fiscal federalism, by which is meant a “general normative framework for the assignment of functions to different levels of government and the appropriate fiscal instruments for carrying out these functions” (Oates (1999)). The functioning of fiscal federalism in many developed and developing economies has been analyzed as well (Ter-Minasian (1997), Walsh (1992)). There is also a large literature on the related topic of decentralization in a broad sense, including delegation of rights and responsibilities from one level of government to another, deconcentration and devolution (Manor (2000), World Bank (1999), Dethier (2000), Tanzi (2000)). Political and economic corruption has been identified as a barrier to development as well as transition to a market economy and democratic polity. Some expect decentralization to reduce corruption while others see decentralization as contributing to increased corruption. The problem of governance in the public and private (corporate) sectors, which subsumes corruption, has drawn the attention of multilateral financial institutions such as the International Monetary Fund (IMF) and the World Bank (IMF (1997, 2000), World Bank (1994)).