Purpose
There is ample empirical evidence that macroeconomic instability––as evidenced by unsustainable fiscal deficits, high government debt, and financial crises––is one of the factors militating against sustained growth and development in the African region. Various attempts have been made by African governments in the past two decades to improve fiscal policy design and implementation in the region but progress has so far been modest.
The recent move towards multi-party democracy in the African region coupled with intense political pressure has led central governments in several countries to decentralise some fiscal responsibilities to lower-level (state, provincial, and local) governments and the private sector. This move to increased decentralization has already been witnessed in developed countries and especially towards the build up of the European Union.
However, despite the increasing popularity of fiscal decentralisation in the region, it is not quite clear what the economic consequences might be for African countries in general and the poor in particular. There is therefore a need to examine this issue critically with a view to identifying how to make the decentralisation process effective without putting the welfare of vulnerable groups in the society at risk. The proposed ad-hoc expert group meeting, to be held in Addis Ababa, Ethiopia, from 7th – 9th October 2003, will provide an opportunity for African policymakers and academics to examine the nature, consequences, and the challenges posed by decentralisation in the region.

Issues to be analysed

The organisation of the proposed ad-hoc expert group meeting and the issues to be addressed are as follows:

Theories of Federalism and Decentralisation

Under this sub-theme, an overview of the theories of fiscal federalism and decentralisation will be presented. Furthermore, the optimal degree of fiscal decentralisation in the region will be analysed. Evidence suggests that African countries have often created too many layers of governments, which, given low capacities, necessarily increases bureaucracy and costs of providing goods and services.
This sub-theme will also be an examination of reasons why states or local governments should provide certain public goods and services traditionally provided by central governments, whilst other public goods and services should still be centrally provided. In addition, there will be an outline of why despite decentralization, there will still be need for a central body to intervene.

Economic Consequences of Decentralisation

The implications of decentralisation for equity, efficiency, macroeconomic stability, regional competition, corruption and inequality between regions will be addressed under this sub-theme. Tax reforms and the assignment of taxes and expenditures are an important issue in decentralization as certain taxes may not be suited to be collected in a decentralized environment, whilst others will be more suited. Although industrial countries do provide some experience on the assignment problem, the case may be different for the majority of African countries where institutional capacities are weak and where democratic institutions are at best fragile and where vested interests of minority groups are more likely to be relevant. Hence, the assignment problem is likely to be of a different nature. In addition, the tax base of African countries where information asymmetries are large and where there is a substantial informal sector does not mirror that of industrial countries, hence lessons to be learnt will remain limited.

Tax Incidence, Growth and development in Africa

The link between tax incidence, growth and development will be explored in this sub-theme. We investigate how the incidence of taxation affects economic growth; reference will be made to the distinction between the statutory and economic incidence of taxation as well as static and dynamic incidence. There will be a discussion of the impact of decentralization on the incidence of taxation. Emphasis will be on empirical evidence based on African data.

Institutions, Decentralisation and Growth

There is growing recognition of the fact that the ultimate impact of fiscal decentralisation on economic performance will depend on the nature of domestic institutions. In this sub-theme, we examine the role institutions can play in making fiscal policy work in the region.
One argument in favour of decentralisation is that it will lead to more democratic accountability. There is however some concern that it may also make it difficult for citizens to hold their politicians accountable for their actions. In this sub-theme, we address this issue by outlining how drawing heavily from the recent experiences of selected African countries. Thus, an issue highly relevant to African economies is the fact that due to weak institutional capacity and fragile democratic institutions, the non-poor may easily capture policies that were initially targeted towards the poor – what is referred to ‘capture’ in the literature. The idea being that the more decentralized a system is, the less the poor are protected. Hence capture is likely to occur at either lower levels of government, or in areas where income inequality is high – as the effects of ‘campaigning funds’ will be higher (see Brosio (2000)).

Country Studies on Federalism and Decentralisation

Several case studies will be presented here, including Ethiopia, Ghana, Tanzania, Nigeria, Namibia and Kenya.