The Effects of Intergovernmental Grants in Ethiopia: International Lessons

Abstract

Intergovernmental grants are an important feature of federal systems of governments in many countries. Grants from one level of government to another have been primarily used as a way of addressing the vertical fiscal imbalance that is often created in a federation. In the presence of disparate taxing capacity of regions, designing a good intergovernmental grant system that is acceptable by all regions is usually challenging. Yet the success of fiscal federalism greatly depends on how the federal government addresses the fiscal needs of regional governments through intergovernmental transfers. What lessons can relatively young federal countries like Ethiopia draw from the experiences of other countries? We examine various kinds of grants and their potential effects on the recipient regional government spending and economic growth. We also explore how federal transfers might affect the fiscal behaviour of regional governments and the welfare of the residents of recipient regions. We look at these important issues from both theoretical and practical perspectives focusing on the applicability of the international lessons to Ethiopia. Keywords: Grant, Intergovernmental, lesson, International DOI: 10.7176/PPAR/10-10-03 Publication date: October 31 st 2020