Too Much of a Good Thing? Own Revenues and the Political Economy of Intergovernmental Finance Reform: The Albanian Case

Brief

Too Much of a Good Thing? Own Revenues and the Political Economy of Intergovernmental Finance Reform: The Albanian Case

January 10, 2012

Abstract

Decentralization projects in developing and transitional countries are typically accompanied by efforts to increase the own-revenue powers of local governments. Both the literature of fiscal federalism and the practices of donors and domestic reformers often see the strengthening these powers as critically important to the success of local government reform initiatives. The recent history of Albanian intergovernmental finance reform, however, suggests that there can be too much of a good thing: Placing the enhancement of local government tax powers at the center of decentralization projects can not only crowd outtheoretically and practicallycritically important efforts to develop stable, predictable, and adequate transfer systems, but can also be politically self-blocking. In this paper, we use the Albanian case to illustrate why in developing countries with highly skewed tax bases there are good reasons to focus first on stabilizing transfer systems, and only secondarily on expanding local government own-revenue powers.

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