Fiscal Decentralization and the Challenge of Hard Budget Constraints, vol 1

Edited by Jonathan A. Rodden () and Gunnar Eskeland

in MIT Press Books from The MIT Press

Abstract: In many parts of the world, lower levels of government are taking over responsibilities from national authorities. This often leads to difficulty in maintaining fiscal discipline. So-called soft budget constraints allow these subnational governments to expand expenditures without facing the full cost. Until now, however, there has been little understanding of how decentralization leads to large fiscal deficits and macroeconomic instability. This book, based on a research project at the World Bank, develops an analytical framework for considering the issues related to soft budget constraints, including the institutions, history, and policies that drive expectations for bailouts among subnational governments. It examines fiscal, financial, political, and land market mechanisms for subnational discipline in Argentina, Brazil, Canada, China, Germany, Hungary, India, Norway, South Africa, Ukraine, and the United States. The book concludes that the dichotomy between market and hierarchical mechanisms is false. Most countries--and virtually all developing countries--must rely on market mechanisms as well as hierarchical constraints to maintain fiscal discipline. When bailouts cannot be avoided, they present important opportunities to reform underlying institutions. Successful market discipline--where voluntary lenders perform important monitoring functions--is most likely to emerge from a gradual process that begins with carefully crafted rules and oversight.

Keywords: decentralization; hard budget constraints; soft budget constraints (search for similar items in EconPapers)
JEL-codes: G18 (search for similar items in EconPapers)
Date: 2003
Edition: 1
ISBN: 0-262-18229-7
References: Add references at CitEc
Citations: View citations in EconPapers (241)

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