Local Revenues Under Fiscal Decentralization in Developing Countries

Paul Smoke examines local revenue generation under fiscal decentralization in developing countries. He finds that local capacity for generating own-source funds is rare due to a lack of attention to local politics. According to Smoke, public finance experts often use a narrow technical framework to analyze local revenues, thereby overlooking the political ramifications of reforms. For example, the sequence of implementing a viable reform has not been given due consideration. He suggests that local governments should first implement simple and politically acceptable changes and then follow them by more complex and controversial transformations.

Tax increases or initiation of new levies must be associated with improvements in local service delivery. Classroom-based or on-the-job capacity building is also crucial. In sum, Smoke advocates a broader approach to local revenue reform: (1) the design of local revenue systems should include mechanisms for connecting with taxpayers; (2) local fiscal reforms should be contemplated, along with the larger decentralization and public sector reform agenda; and (3) more research on the political and strategic aspects of revenue reform is needed.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2007 and is Chapter 3 of the book Fiscal Decentralization and Land Policies.