Why Theory and Practice are Different: The Gap Between Principles and Reality in Subnational Revenue Systems

Ensuring adequate subnational revenues is a core concern of fiscal decentralization. Available empirical evidence suggests that subnational revenue generation in developing countries rarely meets needs and expectations, even where conventional advice has been or seems to have been followed. Are mainstream principles inappropriate, or are they just poorly applied? This chapter argues that both factors are often at play. Basic principles can be challenging to use, ignore certain critical factors, and say nothing about implementing the often demanding reforms they call for. The chapter outlines and illustrates common factors and dynamics at play and suggests how policy analysts might use and move beyond the mainstream principles to define more pragmatic and sustainable paths to subnational revenue reforms.