Intergovernmental transfers finance about 60 percent of subnational expenditures in developing countries and transition economies and about a third of such expenditures in OECD countries (29 percent in the Nordic countries, 46 percent in non-Nordic Europe). Beyond the expenditures they finance, these transfers create incentives and accountability mechanisms that affect the fiscal management, efficiency, and equity of public service provision and government accountability to citizens.

This chapter reviews the practices of intergovernmental finance, with a view to drawing some general lessons of relevance to policy makers and practitioners in developing countries and transition economies. The chapter provides guidelines for grant design. It describes the objectives and design of fiscal transfers in various countries around the world. It shows that in developing countries and transition economies, fiscal transfers focus largely on revenue-sharing transfers, with little attention paid to serving national objectives. It cites examples of simple but innovative grant designs that can satisfy grantors' objectives while preserving local autonomy and creating an enabling environment for responsive, responsible, equitable, and accountable public governance. The concluding section of the chapter highlights some lessons of relevance to current policy debates in developing countries and transition economies. It lists practices to avoid as well as those to emulate in designing and implementing grant programs.

DESIGNING FISCAL TRANSFERS

The design of fiscal transfers is critical to ensuring the efficiency and equity of local service provision and the fiscal health of subnational governments.