Ethiopia: Ugly Mathematical Unit Cost Fiscal Equalization Formula; Beautiful Findings

Abstract

Purpose: Grant allocation formulas used to allocate fiscal resources among different tiers of government have proved to be useful in many countries around the world. This article provides a unit cost approach equalization formula that was used in the Federal Democratic Republic of Ethiopia (FDRE) to transfer resources from the regions to the woredas (districts) in 2007. Study methodology: The study approach involved gathering and reviewing of pioneering literature; identifying six representative sectors; field visits to collect and collate data; and data analysis. Findings: The developed model was highly equalizing. The FDRE adopted the study recommendations and the regional governments used the formula, or a modified version thereof, to transfers resources to woredas. Research limitations: It was not easy to access the required data. Furthermore, the representative sectors may not holistically reflect the actual budgetary needs of the Local Governments (LGs) due to their heterogeneous tax bases and expenditure needs. This can be addressed with future research to further refine the model presented and granularity of data used. Practical implications: The study developed and specified a mathematical unit cost equalization model, which was applied to Tigray region in FDRE. The model’s ability to equalize was tested and evaluated econometrically. Social implications: The paper identified six representative sectors that have high synergies in terms of poverty eradication via improved social service delivery. These sectors attracted large budgetary allocations.