Fiscal Decentralization and Intergovernmental Transfers in Less Developed Countries

Abstract

This article addresses the issue of fiscal decentralization in developing countries, and the use of intergovernmental transfers to achieve this objective. We find that developing countries have more centralized fiscal structures and argue that this is consistent with the theory of fiscal federalism. Economic development, however, does push the advantage toward decentralization. We also show that developing countries use a wide variety of transfer instruments to fund local governments, and that these instruments give the national government varying degrees of control over local government finances.

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