Presentation delivered during the 13th Annual Meeting of the OECD Network on Fiscal Relations Across Levels of Government, 23-24 November 2017, Paris, France.

1. Challenges and opportunities created
by globalization for subnational
governments
Comments by Teresa Ter-Minassian
Annual Meeting of the Network on Intergovernmental Fiscal Relations
Paris, November 23, 2017

2. Focus of the presentation
 A (necessarily very brief) discussion of:
 The range of impacts that a country’s increasing integration into the global
economy may have on subnational governments (SNGs); and
 The policies and institutional reforms that may help SNGs address the challenges,
and take advantage of the opportunities, created by globalization

3. Main potential effects of globalization
on SNGs
 Regional and local disparities increase, as a result of
 Changes in trade and FDI patterns
 Related greater premium on availability of human (skills and innovation capacity),
physical (infrastructure), and social (quality of institutions, environment, social cohesion)
capital
 Internal and foreign migration currents multiply the demand for urban public
services, including less traditional ones
 Some local tax bases (e.g. the values of land and buildings in rural and urban
“left behind” areas) shrink, but new ones (e.g. land value capture and incomes
from services in urban growth areas) flourish
 Financing opportunities increase, as a result of development of domestic
financial markets and, in some cases, access to external ones

4. Desirable policy responses by national
governments
 Assign to regional and local governments some revenue sources with good growth potential in a globalized environment
 Strengthen equalization systems by ensuring that the variables used to determine current transfers reflect as closely as possible
changing fiscal capacities and relative spending needs of SNGs. Revenues (such as royalties) created by growing global demand for
non renewable natural resources should be included in the equalization pool
 Develop sustainable regional development strategies, in close consultation with the SNGs, identifying candidates for “development
poles” based on comparative advantages, and use capital transfers to support their emergence
 Invest in the development of skills at different stages of individuals’ life cycles
 Adopt fiscal rules that allow responsible access by SNGs to financing
 Support SNGs’ efforts to strengthen their revenue collection, cost-effectiveness in delivering public services of their responsibility, and
asset and liability management

5. Desirable policy responses by regional
governments
 Regional governments can play a significant role in addressing disparities created by globalization within
their territory by:
 Distributing current transfers to their local authorities on the basis of equalization criteria
 Defining, in collaboration with national and local authorities, appropriate regional development strategies, identifying related
infrastructure requirements, and directing available investment resources accordingly
 Promoting the flow of private investments into their territory by:
 Avoiding excessive regulation
 Opening up public lands for environmentally sound private development
 Fostering cooperation between regional universities and innovation-oriented industries
 Investing in cost-effective training programs for skills updating and for retrenched workers
 The appropriateness of providing tax incentives to induce firms to locate in the region should be carefully evaluated in light of the
opportunity cost of the foregone revenue
 The significant resources required by such interventions should be mobilized through improved exploitation
of assigned revenue sources, review and re-prioritization of existing spending programs, a quest for evidence-
based efficiency gains, as well as through recourse to financing, when consistent with fiscal sustainability

6. Desirable policy responses by local
governments (I)
 Local governments (primarily large and medium cities) favorably affected by
globalization should strive to:
 Ensure the sustainability of the gains by strengthening governance and other institutions,
with a view to maintaining their attractiveness to domestic and foreign investors
 Tap into growing potential revenue bases through innovative tax policies (e.g. betterment
levies, congestion charges and other green levies; greater resort to user fees; and taxation of
shared local services); improving local property cadasters and valuation; and ensuring a
professional management of public property assets
 Invest the higher revenues into improved productive and social infrastructures, and into
effective local skills development programs
 Provide adequate social safety nets for the residents unable to benefit from the boom; and
 Create conditions for fiscally sustainable access to capital markets and use of PPPs

7. Desirable policy responses by local
governments (II)
 Local governments (including small cities and rural areas) harmed by globalization trends
also can and should respond constructively to the challenges
 Policy options include:
 Mergers of neighboring municipalities with dwindling populations; or at least creation of consortia
for the joint delivery of local public services
 Adapting public workforces to the decreasing demand for such services
 Identifying activities of potential comparative advantage, and their physical and human capital
requirements, and concentrating available budgetary resources in those areas (more strategic
planning and budgeting)
 Strengthening cooperation with higher levels of government, with a view to gaining technical and
financial support for the chosen development strategies
 Strengthening revenue enforcement, assets management, and the efficiency of local public
spending

8. Some concluding thoughts
 In conclusion:
 Globalization can be an important engine for growth, but not necessarily for a
growth that is regionally balanced, inclusive, or environmentally and socially
sustainable
 Addressing the imbalances created by globalization is challenging, and requires
multi-faceted and well-coordinated efforts by all levels of government
 The likelihood of success of such efforts is likely to be heavily influenced by the
level of social capital of a country, including the degree of social cohesion and related
willingness to accept redistribution; popular perceptions about the integrity and capacity
of the public officials; and the quality of institutions, including the system of
intergovernmental fiscal relations
 The gains from a country’s successful adaptation to globalization can be great; so
can the costs of failure, witness the worrisome recent rise of populism feeding on such
failures, in many parts of the world

9. Thank you!