Intergovernmental Transfers: Concepts, International Practice and Policy Issues

There is a large conceptual and empirical literature on intergovernmental fiscal transfers.1 Drawing on this work and examples from various countries, we provide in this chapter a broad overview of the theory and practice of intergovernmental transfers, with particular focus on developing countries. We begin with a review of the main objectives of intergovernmental transfers and the criteria used to evaluate them. We then consider the principal types of transfers and the mechanisms used to implement them. Given the common problem of fiscal disparities across subnational jurisdictions and the particular interest of Asian Development Bank in this topic, we also discuss the measurement of redistribution and equalization in theory and practice, one of the most difficult challenges in designing transfers. Finally, we examine the linkages between transfers and other major elements of the intergovernmental fiscal system, an important dimension of fiscal transfer design that often receives inadequate
attention. We conclude with some broad lessons about designing intergovernmental transfer systems in developing countries.