Metropolitan Cities in the National Fiscal and Institutional Structure

In this paper, Paul Smoke points out that an important yet neglected issue in the study of urban public finance in developing countries is how urban and metropolitan governments are situated in the broader national fiscal, institutional, and political framework. The ability of urban governments to effectively perform their roles in promoting economic development, addressing environmental problems, and dealing with other growth challenges he finds are impacted by the dynamics of this framework. The fiscal and institutional structures and intergovernmental relationships affect the ability of local governments to meet critical objectives.

The author based the analysis on the constitutional and legal framework for subnational governments in selected developing and middle-income countries located in Africa, Asia, Latin America, and the Middle East. The analysis covers:

• Approaches taken to decentralization and subnational government policy along with constitutional, legal, and/or administrative provisions used in each to establish the basis for local administration.
• The frameworks under which fiscal powers and functions are assigned to various levels of government.
• The use of subnational own- source revenue, tax- sharing provisions, and intergovernmental transfers in financing the budget needs of subnational governments and discusses the practice and effectiveness of subnational borrowing in providing for infrastructure investment needs.
• The affect a nation’s overarching national framework has on subnational government performance and looks at the degree of autonomy local governments have in budgetary matters.
• The role of international development agencies in supporting urban and local development in the countries studied.

Through his analysis the author concludes that the national fiscal and institutional frameworks in which local and metropolitan governments operate can decisively affect their performance. However, evaluating the nature and effects of these frameworks is not a simple exercise.

The desirability of additional revenue generation in many countries is well recognized. But national policies to increase revenue autonomy may have little impact if local governance is weak and citizens and businesses resist paying taxes because they lack faith in their metropolitan government. Metropolitan governments could be better supported by their national fiscal and institutional frameworks to meet their responsibilities and achieve their goals.

This paper was presented at a 2011 conference at The Brookings Institution organized by the Lincoln Institute of Land Policy and is Chapter 3 of the book Financing Metropolitan Governments in Developing Countries.