Decentralization and Sub-National Economics Thematic Group

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The World Bank /

Data Note

Decentralization & Sub-National Regional Economics Thematic Group

August 2004

Measuring Fiscal Decentralization

Available data are imperfect, but provide some indicative evidence on the extent of decentralization and the importance of public finance at the state and local level.

Fiscal Decentralization IndicatorsApril 2004

Decentralization is a complex and multifaceted concept that spans fiscal, political, and administrative dimensions. While measuring decentralization is equally complex, the fiscal flows to, from and among different levels of government can be used to assess aspects of fiscal decentralization across countries, regions, and time.

Fiscal decentralization encompasses expenditure and financing dimensions. To understand who does what, the amount of sub-national government spending relative to the central government (e.g., relative to total public expenditure or GDP) or on particular sectors (e.g., education or health) is often analyzed. How sub-national governments finance these expenditures, either through own revenues, shared revenues, or transfers from the central government is also relevant.

The best data source for cross-country analysis of fiscal flows is the International Monetary Fund’s (IMF) Government Finance Statistics (GFS), which provides data with consistent definitions across countries and years. The purpose of the GFS is to provide data for monitoring, analyzing and evaluating the performance of the general government sectors, in a framework that is applicable across countries with different legal and institutional structures.

The GFS provides a snapshot of state and local finances in almost 70 countries. Disadvantages are that coverage for particular regions and individual years may be limited. For example, coverage of OECD countries, transition economies, and Latin America tends to be more complete than other regions.

Unlike recent efforts to provide more detailed measurements, albeit for a limited sample of countries (see Ebel and Yilmaz, 2002; Meloche et. al., 2004), the GFS does not measure the autonomy sub-national governments actually have over revenues and expenditures. Since sub-national governments are typically constrained in fiscal decision making to some degree by higher levels of government, this could lead to an overestimate of decentralization.

Fiscal Decentralization Indicators

The World Bank’s Decentralization and Sub-National Regional Economics Thematic Group has prepared over a dozen indicators of fiscal decentralization from the IMF GFS. These are accessible on the Thematic Group’s website. The indicators include broad measures of sub-national revenue mobilization, transfers, expenditures, including sectoral indicators in health and education (see Annex).

These indicators can used to illustrate global, regional, and country trends in decentralization. Given the many indicators, and multiple ways to present them, there is no single best way to present the data. Since data are not available for all countries in any given year, the most recently available observations are used to describe magnitudes across countries/regions. This note presents two, illustrative indicators.

Expenditure Decentralization

The share of sub-national expenditures in total government expenditures provides one broad measure of decentralization. Annex Figure 1 shows graphically the total share of sub-national expenditures, grouping OECD and developing countries. The graph highlights the differences in expenditure shares according to this measure. State and local tiers of government contribute to these shares. For example, South Africa’s sub-national expenditure share is 49 percent, of which 11 percent is attributable to local governments.

However, these measures do not assess the extent to which expenditures are restricted to certain activities (e.g., due to earmarked/conditional grants versus block transfers, central mandates, etc.). The actual degree of sub-national expenditure autonomy varies significantly on a country-by-country basis. Aggregate figures also mask the fact that sub-national expenditure shares differ markedly across sectors. For example, defense spending typically tends to be highly centralized, while countries exhibit varying degrees of expenditure decentralization in social sectors.

Vertical Revenue Imbalances

The distribution among types of sub-national revenues can provide a broad measure of the degree of decentralized, own-revenue mobilization and the dependence of sub-national governments on central transfers. Annex Figure 2 plots these types of revenues, grouped by region. Within regions, countries are ranked by the share of sub-national tax and non-tax revenues in total revenue.

Since sub-national expenditure assignments typically exceed tax and non-tax revenue assignments, sub-national governments depend on intergovernmental transfers in addition to locally derived revenues. Limited own source revenue mobilization is typically due to the fact that revenues are more effectively collected at higher levels, insufficient tax bases have been assigned to lower levels, and/or local revenue capacity and effort are weak.

The degree to which sub-national governments depend on higher level transfers to finance their expenditures can be interpreted as a measure of vertical imbalance. For example, in Albania, transfers accounted for 97 percent of total sub-national revenues.

Aggregate measures of vertical imbalance will not capture the significant horizontal disparities that typically exist across regions within a country (e.g., wealthy cities with a buoyant tax base versus poor, lagging regions).

Conclusion

Decentralization is a multi-dimensional phenomenon. No single indicator neatly summarizes the degree of decentralization. Data limitations suggest that these indicators must be interpreted with caution, but can provide a starting point for evaluating intergovernmental fiscal relations across countries.

Additional qualitative indicators are also available for expenditure and revenue assignments, the regulatory system for sub-sub-national borrowing, and characteristics of the transfer system. These can be further complemented with indicators of political/electoral decentralization, including the presence of elections at the sub-national level (World Bank 2000).

This note was prepared by Kai Kaiser and Ines Kudo

Aggregate Expenditures Measures

1Sub-National Share of Expenditures (% Total)

2Sub-National Share of Expenditures (% Total, Net Defense & Interest)

3Sub-National Expenditures (% GDP)

Sectoral Expenditures Measures

4Education Share of Sub-National Spending (% Sub-National)

5Sub-National Education Spending (% Total Education)

6Health Share of Sub-National Spending (% Sub-National)

7Sub-National Health Spending (% Total Health)

Revenue Measures

8Sub-National Grants Share (% Total Sub-National Revenues)

9Sub-National Tax Revenue Share (% Total Sub-National Revenues)

10Sub-National Nontax Revenue Share (% Total Sub-National Revenues)

11Vertical Imbalance

12Sub-National Own-Source Revenues (% GDP)

13Sub-National Own-Source Revenues (% Total Own-Source Revenues)

14Sub-National Tax Revenues (% Total Tax Revenues)

15Sub-National Property Tax (% GDP)

16Total Property Tax (% GDP)

Per Capita Measures

17Per Capita Sub-National Expenditures (USD)

18Per Capita Sub-National Revenues (USD)

Summary Tables & Figures

A summary snap-shot of decentralization across countries is provided by comparing the latest available observations (starting with data after 1990). Given the prevalence of missing data, especially for recent years, this strikes a balance between coverage and selection of the most recent observation for any given country.

The tables present the corresponding country level indicators arranged by region. Users can select sub-sets of these data to create customized tables (e.g., for sub-sets of countries such as federations).

Those interested in annual, country-level indicators and more details on how the indicators were calculated are referred to the World Bank Fiscal Decentralization Indicators Country Dataset (in Microsoft Excel).

Fiscal Decentralization IndicatorsAugust 2004

Selected Summary Figures by Country

Summary Figures of Selected, Fiscal Decentralization Indicators by Region

Summary Table of Selected Indicators

Sub-National Share of Expenditures (% Total) / Sub-National Share of Expenditures (% Total, Net Defense & Interest) / Sub-National Expenditures (% GDP) / Education Share of Sub-National Spending (% Sub-National) / Sub-National Education Spending (% Total Education) / Health Share of Sub-National Spending (% Sub-National) / Sub-National Health Spending (% Total Health) / Sub-National Grants Share (% Total SN Revenues) / Sub-National Revenues (% GDP) / Sub-National Revenues (% Total Revenues)
(year) / DECENT1 / DECENT2 / DECENT3 / DECENT4 / DECENT5 / DECENT6 / DECENT7 / DECENT8 / DECENT12 / DECENT13
Africa / Congo, Rep. / 2000 / 0.4 / 0.5 / 0.1 / 0 / 0 / 0 / 0 / 0 / 0 / 0
Mauritius / 1999 / 4.7 / 5.3 / 1.2 / 0.9 / 0.3 / 0 / 0 / 63 / 0.5 / 2
Senegal / 1998 / 6.7 / 7.9 / 1.3 / 6.6 / 2.6 / 12.9 / 23.8 / 33.9 / 1.1 / 6
South Africa / 2001 / 49.1 / 57.8 / 15.5 / 0 / 0 / 0 / 0 / 81.6 / 2.9 / 9.6
Zimbabwe / 1991 / 13.7 / 16 / 5.1 / 4.2 / 0 / 7.5 / 0 / 2.3 / 4.5 / 14.8
East Asia / Indonesia / 1998 / 11.3 / 14.8 / 1.9 / 4.6 / 6.9 / 2.1 / 9.3 / 75 / 0.5 / 3.1
Macao / 2001 / 7.1 / 7.1 / 0 / 0 / 0 / 0.1 / 0 / 70.3 / 0 / 2.4
Malaysia / 1997 / 19.1 / 23.7 / 0 / 0 / 0 / 0 / 0 / 21.2 / 0 / 15.2
Mongolia / 2001 / 35.6 / 39.3 / 0 / 42.3 / 71 / 21.5 / 52.8 / 46.1 / 0 / 19.7
Thailand / 2001 / 12.5 / 14.3 / 2.8 / 0 / 0 / 0 / 0 / 41.1 / 1.7 / 8.7
East and Central Asia / Albania / 1998 / 18.7 / 26.6 / 0 / 41.6 / 80.2 / 8.4 / 29.5 / 96.8 / 0 / 1.2
Azerbaijan / 1999 / 24.6 / 27.7 / 0 / 60.7 / 84.2 / 15.6 / 84.3 / 50.4 / 0 / 15.1
Belarus / 2001 / 41.7 / 43.7 / 19.1 / 28.2 / 81.8 / 19.7 / 78 / 16.8 / 16.5 / 36.2
Bulgaria / 2001 / 17.3 / 20.3 / 6.7 / 32.9 / 58.9 / 9.2 / 15.7 / 33.8 / 4.6 / 12.1
Croatia / 2001 / 12.2 / 13.3 / 6 / 10.7 / 15.6 / 1 / 0.9 / 5.6 / 5.5 / 12.4
Czech Republic / 2001 / 21.1 / 22.4 / 9.4 / 24.3 / 38.9 / 1.1 / 1.5 / 36.7 / 5.8 / 14.6
Estonia / 2001 / 27.2 / 28.5 / 10.1 / 45.4 / 67.2 / 1.4 / 2.7 / 39.3 / 6 / 16.1
Frm Yugoslavia / 1990 / 80.9 / 91.6 / 0 / 15.5 / 0 / 21.3 / 0 / 14.2 / 0 / 78.1
Georgia / 2001 / 35.3 / 41.2 / 0 / 30.3 / 77.9 / 6.2 / 40.8 / 12.4 / 0 / 33.1
Hungary / 2001 / 27.5 / 31.3 / 13.3 / 15.3 / 34.1 / 0 / 0.1 / 51.4 / 7 / 15.8
Kazakhstan / 2000 / 40.5 / 44.4 / 8.6 / 30.3 / 84 / 19.9 / 86 / 13.8 / 9.9 / 45.9
Latvia / 2001 / 30.6 / 32.4 / 10.4 / 45.5 / 72 / 1.6 / 4.8 / 28.1 / 6.8 / 20.7
Lithuania / 2001 / 21.6 / 23.9 / 0 / 58.9 / 68.3 / 0.4 / 0.6 / 10.3 / 0 / 19.7
Moldova / 2002 / 27.9 / 32.6 / 0 / 43.2 / 76.1 / 23.3 / 65.1 / 26 / 0 / 23.4
Poland / 2001 / 35.1 / 38.6 / 16.1 / 27.9 / 71.8 / 24.9 / 93.1 / 40.9 / 9.5 / 23.4
Romania / 2001 / 17.9 / 20.6 / 6.5 / 36.2 / 56.4 / 0.1 / 0.2 / 10.5 / 5.8 / 17.7
Russian Fed / 2001 / 41.4 / 48.8 / 0 / 16 / 82.2 / 10.8 / 88.1 / 16.5 / 0 / 32.6
Slovak Republic / 2001 / 7 / 7.9 / 2.9 / 0.3 / 0.2 / 0.6 / 0.3 / 21.4 / 2.3 / 6.5
Slovenia / 2001 / 11.6 / 12.4 / 5.2 / 25 / 23 / 1.4 / 1.2 / 21.7 / 4.2 / 9.7
Tajikistan / 2001 / 33.7 / 37.7 / 0 / 38.3 / 82.4 / 15.1 / 81.3 / 24.5 / 0 / 27.1
Ukraine / 2001 / 30.2 / 33.5 / 0 / 25 / 60.5 / 22.9 / 81.8 / 29.5 / 0 / 24.2
Latin America and the Caribbean / Argentina / 2001 / 45.8 / 54.1 / 13.2 / 29.9 / 80.2 / 11.4 / 83.2 / 0 / 9.4 / 40.6
Bolivia / 2001 / 34.5 / 39.5 / 11.2 / 31 / 39.4 / 12.2 / 33.9 / 51.7 / 5.6 / 24.3
Brazil / 1998 / 44.5 / 50.6 / 17.7 / 0 / 0 / 0 / 0 / 38 / 12.2 / 32
Chile / 2001 / 8 / 8.8 / 2 / 0 / 0 / 0 / 0 / 7.2 / 1.9 / 7.7
Costa Rica / 1990 / 3 / 3.4 / 0.8 / 0 / 0 / 0 / 0 / 14.2 / 0.7 / 3
Dominican Rep / 1996 / 2.6 / 2.9 / 0.4 / 0 / 0 / 0 / 0 / 8.6 / 0.1 / 0.8
Mexico / 2000 / 23.1 / 26.3 / 0 / 0 / 0 / 0 / 0 / 47.1 / 0 / 23.6
Netherlands Antilles / 1995 / 60.6 / 62.4 / 0 / 19.6 / 75.3 / 3.9 / 39 / 0 / 0 / 62
Nicaragua / 1993 / 9.9 / 12.4 / 3.1 / 0 / 0 / 0 / 0 / 1.7 / 2.6 / 10.1
Panama / 1994 / 2 / 2.3 / 0.5 / 0.5 / 0.1 / 0.3 / 0 / 0 / 0.7 / 2.5
Paraguay / 1993 / 2.6 / 3.1 / 0.4 / 7.5 / 0.9 / 16.1 / 5.6 / 0 / 0.3 / 2.3
Peru / 2001 / 25 / 28.1 / 4.9 / 0 / 0 / 0 / 0 / 73.4 / 1.4 / 8.3
Trinidad & Tobago / 1995 / 4.1 / 5.1 / 1.2 / 0 / 0 / 0 / 0 / 0 / 1.3 / 4.2
Uruguay / 1997 / 11 / 11.9 / 3.7 / 0 / 0 / 0 / 0 / 0 / 0 / 0
Middle East / Bahrain / 1996 / 2.8 / 3.6 / 0.7 / 0 / 0 / 0 / 0 / 0 / 0.6 / 2.3
South Asia / India / 1999 / 52 / 73.1 / 12.5 / 27 / 89.4 / 6.1 / 73.4 / 39 / 6.2 / 33.6

Fiscal Decentralization IndicatorsAugust 2004