DIRECT INTERNATIONAL COMPARISON OF EU MEMBER STATES FISCAL DECENTRALIZATION SYSTEMS WITH THE CONCEPTUAL INDEX OF FISCAL DECENTRALIZATION (CIFD) IN THE CONTEXT OF EUROPEAN CHARTER OF LOCAL SELF-GOVERNMENT (ECLSG).

AuthorFinzgar, Mateja
  1. Introduction

    The literature in the field of fiscal decentralization evinces no consensus on how to unify the mutually different fiscal decentralization systems of individual countries. Having reviewed the relevant literature related to fiscal decentralization, we find that authors primarily present their findings to the public from a theoretical perspective and do not use any suitable research reflecting the real situation regarding fiscal decentralization in individual countries, and, at the same time, enable their direct comparison. Namely, such research is based on the use of, more or less, classical and auxiliary indicators, which only indirectly describe the relationships between individual government strata. Moreover, such indicators are not appropriately embedded in the context of the ECLSG's most important guidelines, the fundamental multilateral legal instrument in the field of local self-government in Europe.

    The ECLSG was adopted by the Council of Europe in 1985 but did not come into force until 1988, when it was ratified by the parliaments of its initial four member states, later joined by other member states. By signing the Charter, the member states of the Council of Europe unified awareness in the belief that one of the ways to achieve unity is by making agreement at the local community level; simultaneously, they undertook to implement the guidelines, or so-called fundamental principles, set forth in the Charter in their legislative regulation of local self-government.

    In this paper, we focus on the selected fundamental principles in the Article 9 of the ECLSG that relates to local community financial resources, which we believe to represent the foundation for establishing an effective fiscal decentralization (1) system in every member state of the Council of Europe; these systems should be rooted in the principles of flexibility, financial resources being commensurate with responsibility, autonomy and equality.

    The ECLSG steers European countries in the common direction of establishing effective fiscal decentralization systems based on determined guidelines for the development of local communities. To discover which of the analyzed countries have formed more and which have formed less effective fiscal decentralization systems, we must make a direct international comparison of their established fiscal decentralization systems. We believe that better compliance with the fundamental principles of the ECLSG results in more effective fiscal decentralization systems in individual countries. Our direct international comparison of existing EU-28 fiscal decentralization systems was made using the CIFD, which is comprised of the following five indicators:

    --[IF.sub.i]: the flexibility indicator for country i with values between 0 and 1;

    --[IS.sub.i]: the indicator for local community financial resources being commensurate with local community responsibility in country i with values between 0 and 1;

    --[IA.sub.i]: the autonomy index for country i with values between 0 and 1;

    --[II.sub.i]: the equalization index for country i with values between 0 and 1; and

    --[IR.sub.i]: the indicator for the number of local communities in country i with values between 0 and 1.

    In this way, we obtained a result for the analyzed countries (European Union member states) in the form of determinable levels of fiscal decentralization, whereby CIFD's indicators alone point to higher or lower levels of fiscal decentralization system compliance with the selected fundamental principles of the ECLSG. Here, we assume that CIFD represents a model of the real situation and that it is comprised of such parameters/indicators whose value can change in different observation periods. Such indicators were used to prepare a simulation of an empirically based CMFD, which reflects high compliance with the fundamental principles of the ECLSG and can be used by member states (that is, signatories to the Charter) as a basis for improving the effectiveness of their existing fiscal decentralization systems.

  2. Overview of theoretical baselines and comparisons of fiscal decentralization systems

    The establishment of a decentralized public sector should provide a solution for the conceptual public problem of choice, whose central issue is connected to the ability to effectively allocate responsibilities, powers and financial resources from the national to the local level, keeping in mind local population heterogeneity throughout the world (Finzgar and Oplotnik, 2013, p. 655). It is assumed that local authorities in individual countries will only be effective once given suitable powers and access to financial resources formed of a suitable combination of their own financial revenue and intergovernmental transfers (Boex, 2009, p. 8). The traditional, first generation of literature related to the concept of fiscal decentralization is provided by pioneers in this area, such as Tiebout (1956), Musgrave (1959), Buchanan (1965), Olson (1969), Samuelson (1954) and Oates (1972).

    First-generation authors present their conclusions, suggestions and findings regarding fiscal decentralization from a theoretical perspective without suitable quantitative or qualitative empirical research reflecting the actual situation regarding fiscal decentralization in individual countries and, consequently, enable their direct comparison. In spite of the gap between the authors' theoretical findings regarding assumptions concerning the effectiveness of local authority/decentralized unit work and practice in many developed countries, they have been used as the central foundation for further research in the field of fiscal decentralization.

    The awareness that fiscal decentralization systems must be looked at from a broader perspective has strongly increased amongst new-age authors or representatives of the second generation in the field of fiscal decentralization, such as Weingast (1995), Seabright (1996), Basley and Coate (2003), and Wagner (2007). The second-generation attributes an important role to citizens who, by cooperating in public matters, impact decision making in relation to the environment they live in and, consequently, enable more effective local authority operation in relation to the supply of public goods and the implementation of general administration responsibility.

    Many published quantitative and qualitative studies carried out by second-generation and other new-age authors are based on the use of classical methods/indicators, which only indirectly describe relationships in individual local authority/decentralized units and/or relationships between the central government and local authority/ decentralized unit level. As such, the results of studies obtained on this basis are insufficient in terms of unambiguously presenting the actual situation in terms of fiscal decentralization in individual countries, making direct comparisons difficult. As aforementioned, the literature published thus far does not provide a common consensus regarding how to unify the different fiscal decentralization systems of individual countries.

  3. Direct international comparison of fiscal decentralization systems utilizing the conceptual index of fiscal decentralization (CIFD)

    Each EU-28 member state has developed its own model and operational structure for its national government and local authorities/decentralized units. Fiscal decentralization is, therefore, in practice and theory, treated differently in each country, meaning that the government system differs from one country to another. A direct comparison of such very different government systems providing a realistic presentation of fiscal decentralization in individual countries in a selected time period represents a major challenge. By forming the CIFD we wanted to unify the different fiscal decentralization systems. By finding a common denominator, that is, CIFD, for such systems, it can be verified which systems were created to achieve higher and which were created to achieve lower levels of effectiveness. The establishment of real effectiveness of individual fiscal decentralization system can assist in outlining a country's strengths and weaknesses. Being aware of its strengths and weaknesses, individual countries can appropriately upgrade their existing fiscal decentralization system in a direction which achieves increased effectiveness.

    CIFD includes a total of five indicators, four of which directly reflect the fundamental principles of the ECLSG, and relate to the local authority/decentralized unit financial resources. We believe that the observation of the selected fundamental principles of the ECLSG is a basis for the establishment of more effective fiscal decentralization systems. European countries also differ significantly in terms of the number of local authorities/decentralized units, and this is a consequence of their different primarily historical, as well as geographical and cultural, backgrounds. The number of local authorities/decentralized units thus presents CIFD's fifth selected indicator. Initially, CIFD is presented as a figure, followed by a formula, including presentation of every indicator.

    As seen in Figure 1, CIFD is comprised of two parts: the first part is presented in terms of the quantified fundamental principles of the ECLSG (indicators [IF.sub.i], [IS.sub.i], [IA.sub.i], [II.sub.i]), while the other presents the number of levels of local authority/decentralized units (indicator [IR.sub.i]) (2). The CIFD's formula is as follows:

    CIFDi = W1 X [IF.sub.i] + W2 X ISi + W3 x IAi + W4 x IIi + W5 x, (1), where:

    CIFDi--the conceptual index of fiscal decentralization of country i;

    [W.sub.1-5]--importance weighting of individual of CIFD indicators, whereby total value W = 1;

    [IF.sub.i]--flexibility indicator of country i with values between 0 and 1;

    [IS.sub.i]--the indicator of local government financial resources being commensurate with country i's responsibilities with values between...

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