Intergovernmental Fiscal Relations in Developing Countries

The financing and management problems of many of the largest cities in developing countries have be­gun to attract the serious attention of economists. Several factors explain why these issues have been so long ignored: the traditional concerns of development economists have been macro growth models and the agricultural sector; the urban fiscal problem was small in relation to the financial problems of the central gov­ernment; aid donors dealt with central governments; the fiscal data of local governments were scanty; and troublesome local government issues seemed better left to administrative specialists. Things have changed, pri­marily because the fiscal problems of cities have become national concerns and because donors have recognized that the success of capital projects in urban areas is closely tied to the ability of local governments to meet recurrent cost obligations. This chapter addresses an increasingly important aspect of urbanization in developing countries--the problems and practices of urban government finances. It identifies and analyzes the most important pressures on local budgets, suggests major options for reforms, and sets out constraints on improvements. An important limitation to this effort is the inadequacy of comparable data, as reflected by the paucity of empirical support for these arguments