Abstract
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Fiscal Decentralization in Eastern Europe:
A Twenty-Year Perspective
Aleksander ARISTOVNIK
University of Ljubljana, Faculty of Administration, Slovenia
In recent two decades, fiscal decentralization has become a central concern in countries around the world, especially in emerging market economies in Eastern Europe. These economies have been particularly interesting for this topic because when communism collapsed in 1989, these countries embarked on a transition from highly centralized, planned systems to more decentralized market-dominated economies. Indeed, past movement towards democratic forms of governance has been closely associated with the demand for decentralized government. In many Eastern European economies, the political and economic failure of autocratic, highly centralized socialist regimes may have provided an impetus to the subsequent decentralization initiatives. At the same time, increased fiscal decentralization, in itself, is seen as an important means of increasing democratic participation in the decision-making process, thereby, enhancing accountability and transparency of government actions. In yet other countries, the trend towards greater autonomy for subnational levels of government is driven by the need for national coherence in the face of ethnic or regional centrifugal forces or conflicts.
Using methodology developed by Vo (2005), the paper empirically assesses the degree of fiscal decentralization in Eastern Europe in last twenty years, also in comparison with the EU countries. The analysis applies a fiscal decentralisation index (FDI) to make systematic international comparisons of nations’ degree of fiscal decentralisation. FDI is composed of two main components, i.e. »Fiscal autonomy for subnational governments« and »Fiscal importance of subnational governments«. First component represents the ratio between the own sourced revenue over its expenditure for particular subnational government. This ratio can be seen as the level of vertical fiscal imbalance between the national government and subnational governments. The second component represents the ratio between the expenditure made by subnational region and the public sector expenditures of the whole economy (including both expenditures from the national government and all subnational governments). However, a simple ratio like this is partial, as it misses many factors that impact on fiscal decentralisation. Consequently, an adjustment factor is included to account for institutional constraints on fiscal events. The data set comes from the Government Finance Statistics (IMF), Statistical Office of the European Communities (EUROSTAT) and World Development Indicators (WDI) and covers the EU member states, candidate and potential candidate counties from the region.
The empirical results show that in comparison with the other EU countries fiscal decentralization in Eastern Europe is on average still lower. Moreover, the paper points out that there is no unique design or optimal degree of decentralisation. Indeed, the level of decentralisation has been primarily shaped in large measure by political, historical, and ethnic realities, and its effectiveness influenced by the institutional design and capacities of the various levels of government. In addition, the results show that fiscal decentralisation, in general, positively effects economic growth and the size of public sector in the analyzed region in the last twenty years. Finally, it is concluded that public finance reform in the Eastern European economies have progressed relatively slowly towards providing greater fiscal autonomy for regional and local governments.
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