American Cities and Fiscal Issues Effecting Local Development

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What does Fiscal Federalism actually mean?


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1. Fiscal federalism is rather a heading than one theory, stretched like an umbrella above

different research perspectives. This is correspondingly reflected by various types of

fiscal federalism theories. Contrary to what one would think according to its titling, fiscal

federalism doesnt necessarily intend only the analysis of the financial system within

federal states.

2. Especially in the research about Fiscal Federalism it is important to know that there are

a lot wisdoms how fiscal policy should be organized within a state.


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With characteristics of federal systems we mean: their essential features, the peculiarities

which describe them.

Financial decentralization: Structuring the fiscal responsibility to allocate and distribute

money from taxes according to the principle of subsidiarity

First of all, we expect many answers to that question, but only two will be in the center of

attention for the next half an hour


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First, I will give you a general idea about what kind of theories developed within the wide

scope of research, how their focus changed in recent years and how their assumptions can

help us to discuss the relationship between the characteristics of federal systems and their

level of financial decentralization. I will give you a short introduction about the settled

federal states like the German case

Second, Ulrich is going to present you some more profound empirical evidence from our

Italian case.

After that I am going to summarize the results in order to get our discussion started. During

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I will focus now to present you the main developments in fiscal federalism literature which concentrate on the financial structure in federal states.

main question in FF lit: How should finances be organized to be used effectively?

1. Problems of the old theories of fiscal federalism

Main concentration on a roved federal states North America leavin aside the emer in ones like S ain and Ital still toda : hard to conce tualize an universal, ,

type of regional systems even if it would be necessary (Ahmad/Brosio 2006: 4)

Fiscal decentralization as a key solution for financial distribution and allocation, following the principle of subsidiarity (Rodden 2006: 19)

Governments are run by benevolent policy makers intending to maximize the welfare of their communities, failure can only derive from a lack of knowledge

Governments as a black box, means research does not focus on the decision making

Challenging the theory: bailout Brazil and Argentina

1980s and 1990s, extensive loans, governors with the same political affiliation as the federal level spent more and made larger deficits subnational entities were secure

to be bailed out by the government

First, the old theories are reflecting the mainly economic approach to Fiscal Federalism, concentrating on economic assumptions without including the political scope;

second, historical events like Brazil and Argentina open the theoretical perspective, more research on fiscal structure of states

2. Emerging second generation of fiscal federalism theories (Oates 2005)Splitting off across scientific lines:

- Rethinking the role of the financial system and its institutions

- More actor-centered analysis: Does decentralized federalism enhance the fiscal discipline of government?

Combining political and economic assumption in the political economy approach

Which is todays most popular approach to Fiscal Federalism (and other areas like European Integration)

(maybe short overview, depends on time frame)

Based on a rational view of actors, means:

One is acting on his own cost and benefit calculation and will decide always for his own profit, different to that, one could have the assumption that

individuals act and decisions are influenced by social effects, like today the fear of an overall financial breakdown.

Most used in fiscal federalism research because of the assumption that fiscal decisions are rational decisions based on economic rules

- Ulrich is applying this approach to Italy later on.

This so called second generation of fiscal federalism theory highlights what range of different variables could influence the actual outline of fiscal policy. It is not possible

reduce fiscal policy only to its economic influence, the actors are one the major explaining variables but also institutional arrangements like the systems characteristics.

There are studies about the influence of federal features on fiscal policy outcome.


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Germany

A case ofcooperative federalism, functional division of tasks between the different state

levels with the principle of solidarity and homogeneity

Bundesrat is a crucial veto-player in German fiscal policy, which flows into a forced

negotiation system

Fiscal policy in Germany is coordination through negotiation, main bodies:

Conference of the Finance Ministers and Conference of the Minister-Presidents

De facto asymmetric federalism, based on cultural and economic diversities between

former west and east Germany, is influencing the

fiscal equalization fund and its reform approaches within the long-term warm-up of the

second reform of the German federal structure.


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New FF Theory can help us to identify the main variables, e.g. institutions, actors etc. The

theory broadens our scope, FF is not only about economics!

Both strands of theories show us that Fiscal Federalism has perils and promises. But we will

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b


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What did we learn about our initial question?


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Pro Hypothesis:

we found some empirical evidence that the obvious features of federal systems do indeed

matter for the outlines of their financial structure

Against Hypothesis: BUT

1. The relationship between the two variables varies according to the stage of federal

development of the states, like we saw in the Italian case we are facing one of the

general methodological problems of recent comparative federalism research: how can

we characterize emerging decentralized states with their quick changing movements. So

the problems start right at the beginning.

2. Like in all other research areas, it is hard to distinguish and estimate the different

influences on a political system. Beside the characteristics of a federal system there are

actor preferences which matters, the upcoming election, a normative shift within a

financial crisis or decisions of a constutional court like in Germany. Another crucial factor

is of course the European Union with its economic policy.

And a second BUT: We do need to take into account the characteristics of federal state

especially when we want to know more about its capacity to reform fiscal policy.


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Old theories: decentralization and therefore a federal structure of a state can enhance the

electiveness of fiscal policy. Based on the assumption of benevolent political actors this

wisdom failed in the 1990s.

,

the actors behavior, the systems logic and their institutions. This literature comes to a

divided result: Characteristics of federal systems can also hinder the effectiveness of fiscal

policy. Looking at the German case, some scholars argue that the forced negotiation system

leads to a strong interweaving of state levels which makes an effective policy or reformmore difficult and untraceable for the public. This approach is well known as

Politikverflechtungsfalle.

Some other scholars say instead, that this interweaved decision making give better and

more effective results. Especially in fiscal policy, they argue, do the forced coordination of

decision take the needs of the different levels better into account.

However, this discussion shows us one important point: It is important to reassure our

understanding of federalism which we adopt throughout the year. Do we think that

federalism should be for the people or for the policy?


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American Cities and Fiscal Issues Effecting Local Development