Abstract
This paper provides an in-depth analysis of the relationship between fiscal decentralization and pro-poor outcomes based on the role of fiscal incentives. The literature on the relationship between fiscal decentralization and pro-poor outcomes is not well established in this area. A conceptual model is developed to explore in more detail this relationship, while endeavoring to illuminate the complexity of the issues involved for policy makers in developing countries. Four types of fiscal incentives are explored: namely, resources, responsibility, autonomy, and accountability. The paper then assesses the effectiveness of the Vietnamese system of fiscal decentralization for achieving pro-poor outcomes through a devolved system of fiscal incentives. The paper suggests that evidence from the Vietnamese case indicates that fiscal decentralization may contribute to poverty reduction outcomes, but does not provide evidence that fiscal decentralization is in and of itself inherently pro-poor. Rather, the lesson from Viet Nam is that if poverty reduction is an explicit objective for government, the system of fiscal decentralization should target pro-poor outcomes through an appropriate system of fiscal incentives. Since 2002, budgetary reallocation and income redistribution linked to poverty outcomes has been more strongly associated with equalizing fiscal transfers than with devolved finances in general. This represents a broadly correct approach to target poverty outcomes in a territorially unbalanced country like Viet Nam. Targeted transfers contribute to pro-poor outcomes by increasing the level of resources available to finance poverty spending. However, increasing the level of fiscal transfers for poverty spending will not ensure that fiscal transfers are then spent efficiently. In order to better realize these efficiency objectives, the government can promote greater fiscal and administrative decentralization of resources and responsibility to district- and commune-level governments. Further gains in this area must also be supported by greater levels of fiscal autonomy and fiscal accountability at the local government level.
Highlights
The classic argument for maximizing local discretion was made by Oates (1977), who posited that the greatest efficiency is achieved when budgetary choices are made by local officials elected by local citizens who have to meet the full cost of their decision through local taxes
As described there can be four types of fiscal incentives promoted by the central government, which should in theory positively affect the behavior of the subnational government through signals that address fiscal resources, fiscal responsibility, fiscal autonomy, and fiscal accountability
This paper has reviewed the literature on the relationship between fiscal decentralization and pro-poor outcomes
Summary
The classic argument for maximizing local discretion was made by Oates (1977), who posited that the greatest efficiency is achieved when budgetary choices are made by local officials elected by local citizens who have to meet the full cost of their decision through local taxes. This paper makes the following assumption: if a country has a defined national poverty reduction strategy, as does Viet Nam, and if the state budget is a relatively accurate budgetary interpretation of that policy, broadly the case for Viet Nam, public expenditures may be considered adequately pro-poor at the aggregate. Following from this assumption it is possible to consider if decentralized expenditures and related institutional reconfiguration of government responsibilities have been used for the promotion of poverty outcomes at the subnational level. Exploring the Theoretical Relationship between Fiscal Decentralization and Poverty Reduction
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