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Dilemmas and Compromises: Fiscal Equalization in Transition Countries

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Dilemmas and Compromises: Fiscal Equalization in Transition Countries Local Government and Public Service Reform Initiative DILEMMAS AND COMPROMISES: FISCAL EQUALIZATION IN TRANSITION COUNTRIES EDITED BY SERGII SLUKHAI LGI Fellowship Series OPEN SOCIETY INSTITUTE LOCAL GOVERNMENT AND PUBLIC SERVICE REFORM INITIATIVE Address Nádor utca 11 H-1051 Budapest, Hungary Mailing Address P.O. Box 519 H-1357 Budapest, Hungary Telephone (36-1) 327-3100 Fax (36-1) 327-3105 E-mail [email protected] Web Site http://lgi.osi.hu/ First published in 2003 by Local Government and Public Service Reform Initiative, Open Society Institute–Budapest © OSI/LGI, 2003 All rights reserved. TM and Copyright © 2003 Open Society Institute OPEN SOCIETY INSTITUTE ISSN: 1586 4499 ISBN: 963 9419 73 7 All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Copies of the book can be ordered by e-mail or post from OSI. Copyeditor: John Kowalzyk Printed in Budapest, Hungary, September 2003. Design & Layout by Createch Ltd. Contents Preface...................................................................................................................................9 Sergii Slukhai Fiscal Equalization in Transition Countries: Searching for the Right Policy .........................11 1. Introduction.......................................................................................13 2. Setting up a Problem..........................................................................15 3. Trends in Intergovernmental Fiscal Relations......................................18 4. Vertical and Horizontal Imbalances and Need for Equalization ..........22 5. Evolution of Equalization Instruments ...............................................26 6. Agenda for Reforming the Equalization Policy: Using Lessons from the Experience of Other Countries......................28 References ................................................................................................31 Endnotes ..................................................................................................32 Sorin Ionită Halfway Th ere: Assessing Intergovernmental Fiscal Equalization in Romania......................33 1. Introduction.......................................................................................36 2. Th e Structure of Local Governments in Romania...............................37 3. Subnational Government Framework.................................................39 4. Intergovernmental Fiscal Relations .....................................................40 4.1 Functions of Local Governments ...............................................41 4.2 Revenues of Local Governments ................................................43 5. Th e Equalization System ....................................................................44 5.1 Sources of Funds........................................................................45 5.2 Vertical Equalization ..................................................................49 5.3 Horizontal Equalization .............................................................51 6. Conclusions and Recommendations...................................................56 References ................................................................................................61 Endnotes ..................................................................................................62 Annex: Map of Romania...................................................................... 5 Ildar Zulkarnay Fiscal Equalization Policy in the Russian Federation............................................................65 1. Introduction.......................................................................................67 2. Trends in Intergovernmental Fiscal Relations......................................68 2.1 Assignment of Expenditure Responsibilities ...............................69 2.2 Revenue Assignment..................................................................73 2.3 Some Problematic Issues in Intergovernmental Finance..............75 3. Equalization System ...........................................................................77 3.1 Vertical Imbalance and the Equalization.....................................77 3.2 Horizontal Interregional Disparities and Th eir Equalization.......79 3.3 Horizontal and Vertical Equalization on the Sub-regional Level: Th e Case of Bashkortostan................91 4. Conclusions and Recommendations...................................................97 4.1 Current State of Intergovernmental Fiscal Relations in the Russian Federation and Equalization Policy Recommendations ....................................................................97 4.2 Current State of Intergovernmental Fiscal Relations in Bashkortostan and Other Subjects of the Federation and Equalization Policy Recommendations .............................101 References ..............................................................................................104 Annex: Tables and Figures .................................................................106 Yuriy Lukovenko Ukraine: Steps towards Eff ective Fiscal Equalization .........................................................121 1. Introduction.....................................................................................123 2. Fiscal Decentralization in Ukraine: Main Issues................................124 3. Characteristics of Local Finance and Intergovernmental Fiscal Relations.................................................................................128 3.1 Local Government Finance ......................................................128 3.2 Shortcomings of Ukrainian Intergovernmental Finance ...........129 3.3 Budget Code: New Approaches and Old Problems ..................131 4. Fiscal Equalization: Towards New Techniques.................................134 4.1 Previous Policy in Local Government Expenditure Equalization.........................................................134 4.2 Vertical Imbalance....................................................................136 4.3 Horizontal Equalization in the Recent Past ..............................136 4.4 New Equalization Procedure ....................................................137 6 LOCAL GOVERNMENT AND PUBLIC SERVICE REFORM INITIATIVE 5. Subnational Expenditures on Education: Towards an Eff ective Use of Public Resources?..................................143 5.1 Th e Present Situation in Secondary Education after Independence...................................................................143 5.2 Spatial Disparities in Educational Expenditures .......................144 6. Conclusions and Policy Recommendations ......................................146 6.1 Conclusions.............................................................................146 6.2 Policy Recommendations .........................................................146 References ..............................................................................................151 Endnotes ................................................................................................154 Annex.....................................................................................................155 List of Contributors ..........................................................................................................165 Index.................................................................................................................................167 LGI Fellowship Program ...................................................................................................169 7 Preface Th e present volume Dilemmas and Compromises: Fiscal In fact, a further criticism applies to the entire Equalization in Transition Countries analyzes the equal- local government system and not just equalization ization system of three post-communist countries: policy. Unclear divisions of functions among the Russia, Romania and Ukraine. Each country displays central government administration and the various a fundamentally diff erent model and stage of decen- tiers of local governments signifi cantly hinder the tralization: application of any kind of equalization system. In • Russia and Ukraine are post-Soviet countries that essence, fi rst the issue of division of competencies experienced a long break in local self-government should be settled and then the technique of equaliza- activities; Romania, on the other hand, while also tion should be improved. Th is is the long-term recom- a former Communist country, underwent a shorter mendation of the authors. period under this system and is currently a candi- Th e authors analyze in detail the method of equali- date country to the European Union, zation applied in their respective countries. Th ey present both trends in the division of funds (how • Romania and Ukraine are unitary countries, while equalization transfers have changed over time) as well Russia is a federation. as the eff ects of applied equalization techniques. A presentation of the eff ects of the application Th is selection of countries permits generalization of equalization transfers in each country leads to an of the problems encountered in the following analysis interesting conclusion: in essence, the methods cur- to many other countries undergoing transformation. rently used are
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