This document discusses the consequences of globalization for decentralized governments and opportunities for adjustment. It summarizes that globalization constrains government taxation and spending while increasing inequality, and decentralized governments can help address these issues. The document then outlines features of decentralized governments and arguments for decentralization, before discussing challenges like economic shocks, fiscal competition, and ensuring fiscal responsibility. It concludes by suggesting responses like enhancing federal redistribution roles, promoting state and local economic growth, increasing revenue decentralization, and improving coordination across levels of government.

1. Decentralisation in a Globalised World:
Consequences and Opportunities
Robin Boadway
Queen’s University, Canada
13th Annual Meeting of the Network on Fiscal Relations
Across Levels of Government
OECD, Paris, France, November 23–24, 2017

2. Overview
Consequences of globalisation for decentralised federations
How decentralisation facilitates response to globalisation
(OECD/KIPF study: encourages both growth and inequality)
How decentralisation should adjust to globalisation
Account for other factors accompanying globalisation
Urbanisation and agglomeration
Advances in information technology
Focus mainly on federations of federal, state, local
governments with legislative discretion

3. Relevant Features of Globalisation
Governments constrained by globalised markets for products,
capital and skilled persons
Much production knowledge-intensive and footloose
Technological innovation concentrated in urban areas
Services of growing importance (e.g., high-tech, finance)
Employment becoming increasingly precarious
Growing inequality within OECD nations
Gains from growth accrue to top income groups
International inequality moderated
Nations prone to economic shocks transmitted from abroad, often
regionally specific
Accountability of government enhanced by instantaneous flow of
information to citizens

4. Stylised Features of OECD Federations
Economic union with factor and product mobility
Social union with common citizenship rights: ‘Solidarity’
Federal and state governments have independent legislative
authority; local governments face state oversight
Federal government responsible for national public goods,
macro policy, legal system, social insurance, equalisation
States responsible for state public goods, social programs and
some targeted transfers: major redistributive programs
Local governments dominant in infrastructure
Combined state-local expenditures ≈ federal expenditures
Transfers relative to goods/services higher at federal level

5. Stylised Features, continued
Federal government has broader taxing powers
Decentralisation of revenue-raising varies among federations
Often, states use 1 broad-based tax and can borrow
Local governments more restricted and reliant on states
Both federal government and state/local governments implement
significant redistribution policies
Income taxes and transfers
Public services and in-kind transfers
Federal-state transfers include equalisation, bloc transfers and
specific transfers; State-local transfers often conditional
Response to shocks depends on design of transfers and extent of
revenue autonomy

6. Relations between Levels of Government
Typically hierarchical, with considerable cooperation: States deal
with localities
Vertical fiscal gap based on tax and transfer choices with federal
dominance
Federal government influences state choices by
Conditional grants
Mandates
Power of disallowance
Moral suasion
Bilateral/multilateral agreements for harmonisation of taxes and
spending programs, shared responsibilities, internal economic union

7. Standard Arguments for Decentralisation
Good governance by locating decisions close to citizens:
reduce information, agency, administration costs
Respect for local preferences and needs, while abiding by national
standards
Holding governments to account by exit (migration) and
voice (local participation by citizens, community leaders)
Innovation and experimentation in service delivery
(Laboratory federalism)
Beneficial fiscal competition with other jurisdictions including
through yardstick competition and mimicking best practices

8. Adverse Effects of Decentralisation
Horizontal Imbalances
Fiscal Inefficiency: Induced migration of persons & businesses
Fiscal Inequity: Identical persons treated differently
But, horizontal imbalances may reflect agglomeration benefits
Fiscal Competition May Be Detrimental
Race-to-the-bottom in state redistributive policies
Sub-optimal tax rates and levels of public services
Distortions from non-harmonised policies
Inadequate Response to Shocks
Insufficient state revenues hampers response
Prospect of federal bailout encourages profilgacy
Federal government may pass deficits to states

9. Intergovernmental Fiscal Arrangements Enable Benefits of
Decentralisation while Mitigating Costs
Fiscal equalisation transfers can undo the horizontal imbalances
without unduly influencing state behaviour
Block transfers can close vertical gap and encourage states to
abide by minimum national standards in program design
Fiscal harmonisation agreements ameliorate detrimental effects on
internal economic and social union
Fiscal rules/fiscal councils can encourage fiscal responsibility and
minimise chances of bailouts
Decentralising revenue-raising to states induces greater fiscal
accountability, responsiveness to local needs and shocks

10. The Issue of Local Governments
Enhancing effectiveness of local governments, especially in larger
urban areas, is challenging but crucially important
Demands on local government for infrastructure and other services
are substantial, but providing fiscal tools is difficult
Localities vary greatly in size: Asymmetric approaches relevant
Local equalisation based on needs is feasible
Federal-local relations?: Some local programs of national
importance, and cities home to critical industries
(A problem unique to federations)

11. Challenges and Opportunities of Globalisation and
Information Revolution
Competitiveness demands innovation, entrepreneurship and
investment in physical, intangible and human capital
Inequality magnified; gains of growth accrue to better-off
Global markets constrain taxes on capital and skilled labour
Vulnerability of all levels of government to fiscal shocks
Information and new technology hastens change and disrupts
labour markets, but empowers citizens and non-government
entities to hold governments to account
Demands on local governments enhanced by urbanisation and
growth of services

12. Possible Responses by Decentralised Federations I:
Addressing Inequality
Enhancement of Federal Role
Progressive taxation and social insurance
Taxing rents at source
State/Local Governments Have Supporting Role
Redistribution and opportunity on expenditure side
Education and training, health, social services, childcare,
housing
Harmonisation of Federal/State Policies
To preclude race to the bottom

13. Possible Responses by Decentralised Federations II:
Economic Growth
Federal Role
Investment- and innovation-friendly business taxation
(e.g., cash-flow)
Investment in human capital and information technology
Local Governments
Infrastructure
Innovation hubs and agglomeration of skilled persons
Home to capital markets, incl. venture capital
States
Coordinating role with local governments in infrastructure,
transportation, education

14. Enhancing Accountability by Revenue Decentralisation
Decentralising Revenue-Raising to States Well-Established
State participation in broad tax bases (income, sales)
Tax harmonisation and single collection agency
States choose own rates, raise marginal revenues
Retain federal-state block grants and equalisation
Stable and Adequate Local Revenues a Priority
Evidence of infrastructure deficits, local revenue constraints
Localities too reliant on transfers, often not guaranteed
Property taxes relied on too heavily in some federations
Piggy-backing on state/federal broad-based taxes
Revenue-sharing a possibility

15. Other Challenges for Decentralisation in Globalised World
Dealing with Asymmetric Shocks
Fiscal equalisation system
Importance enhanced by decentralisation
Responsive only with a lag
Local equalisation as local governments take on responsibility
Factor mobility
Avoiding Soft-Budget Constraints
No failsafe method since federal government cannot commit
Decentralisation mitigates soft-budget constraint
Fiscal councils enhance the transparency and sustainability of
subnational budgets, and provide early warning of fiscal
problems

16. Looking Forward: Federal/State/Local Responses
Federal government cedes authority to global markets and
supernational bodies, yet must address growing inequality and
skills enhancement
Improvement of social safety net, education/training,
innovation
Leadership/cooperation with subnational governments who
most efficiently deliver services to citizens
Greater role for local governments, esp. larger urban areas
Infrastructure to support innovation, service economy
Hubs for innovation and human capital development
Social capital, bigger role in subnational service delivery
Some loss of authority at state level
Hourglass federalism

17. Federal/State/Local Responses, continued
Increased emphasis on coordination among governments
Harmonisation of federal-state policies
Federal-state-local coordination on infrastructure,
environmental policies
Develop mechanisms for federal-urban interaction
Institutional options: fiscal councils, fiscal rules
Financing local governments
Arrangements that foster local autonomy, responsibility
Possibility of asymmetric arrangements for large cities
Own revenues challenging: Piggy-backing, revenue-sharing
Intergovernmental grants as instrument of fiscal
equity/efficiency, harmonisation, accountability
Private financing of public projects: Infrastructure banks,
PPPs

18. Issues for Future Investigation
Explore options for realigning fiscal responsibilities that
recognise:
Importance of federal role in addressing inequality, innovation
and human capital investment
Need for local governments to provide infrastructure and
innovative hubs possibly in collaboration with non-government
actors
Need for cooperation among government, especially federal
and local governments
Options for local government finance: own revenue-raising,
revenue-sharing, intergovernmental transfers
Mechanisms/institutions for intergovernmental agreement,
private sector participation and financing