Emerging Economies

QUESTION 1.) INTERGOVERNMENTAL TRANSFER REFORM

Intergovernmental transfers are simply the transfer of revenues from one level of government to another level (vertical transfers) or across multiple governmental units at the same level of government (horizontal transfer). Intergovernmental transfers (primarily vertical) are often the main source of financing for sub national governments in developing countries and therefore play a critical role in any multi-tiered or decentralized fiscal system. Intergovernmental transfers serve three main purposes. The first is to ensure that each sub-national government is afforded the right amount of revenues to cover their expenditures, or needs, in order to provide (at the very least) the central or national government’s mandated minimum standard of public goods, services, and infrastructure. The second is to correct for factors that cause or create sub national inequalities and lead to fiscal imbalances. The third is to help achieve a stable and harmonized inter-governmental fiscal system; one which will enhance economic growth and provide further support for carrying out central (and to a lesser degree sub national) government objectives.

Intergovernmental transfers can be broken down into two broad categories: matching or non-matching transfers. Matching transfers require the recipient to spend the funds on a designated purpose and to contribute (or match) a percentage or equal amount of funds to be spent or used for financing the same purpose. Matching transfers can be further broken down into open-ended and closed transfers. Open-ended transfers mean that the central government (or transferor) will match the sub-national recipient’s contributed funds dollar for dollar (or by some predetermined formula). A closed transfer simply means that the amount of funds matched and eventually transferred is capped at a certain amount. Non-matching transfers do not require the recipient to match the funds transferred....