1Transfers and Incentives in Intergovernmental Fiscal Relations

Regardless of what revenues subnational governments raise themselves (Bird, 1999), fiscal transfers will undoubtedly continue to constitute the dominant feature of intergovernmental finance in most developing countries for years to come. The incentives such transfer systems create for both central and subnational governments will thus be critically important in determining the outcome of decentralization efforts. Before turning to some of the implications for incentives of alternative transfer designs, however, it is essential to consider briefly some aspects of the underlying context within which the transfer system must function. This is the task of the next section. Against this background, the second half of the paper considers briefly some key elements of transfer design.2 Transfers in Context In any country, intergovernmental fiscal transfers are part of a complex political, economic, administrative system. Their design, role, and effects can thus really only be understood in the specific institutional context in which they operate.3 Devolution or Delegation