THE GENERAL THEORY OF FISCAL FEDERALISM, FAILURE, ANDTRENDS ESPECIALLY IN THE DEVELOPING WORLD

Abstract

Tiebout (1956) and Oates (1977) work contributed immensely to the need to decentralize
across the developing world. Tiebout (1956) exudes that decentralization has salutary effects
on the public sector because autonomy at this level creates competition among sub national
jurisdictions to provide the most efficient policies for their electorates. Every government of
the world would want a fall in inflation, unemployment, stable exchange rate, balanced budget,
possibly low interest rate, all indices of a robust economy. But the realization of a better
economy has not been forth coming especially for federal developing countries of the world
(Wibbels 2000, Tanzi, 1996). This paper examines “fiscal federalism” its apparent failure and
why it is very much still being practiced throughout the world especially in the developing
countries. In doing this previous theoretical overview on the issues, especially Wibbles (2000)
experiment was presented as an illustration to support the evidence presented by other
researchers. It also in general term examines fiscal federalism in a general normative terms and
uses it to try to find the puzzle behind the continuing practice of fiscal federalism across the
globe especially in developing countries even though it has been adjudged to be a failure
especial in federal developing countries (Wibbles 2000). This paper is purely based on desk
research using secondary sources of information. It is hoped the exposition of this nature on
fiscal federalism would provide a platform for countries practicing or thinking of the system a
good psyche to reflect on their decision.