Generating inclusive and sustainable growth: the role of policy and multilevel fiscal institutions

Sustainable growth strategies depend critically on the role of the state in different societies, and the incentive structures associated with alternative institutional arrangements. In particular, in multi-level countries, incentive structure matter even more, as elements of "game play" between different levels of government becomes possible. Under these circumstances, organizational structures borrowed from advanced countries may not function as expected and could generate deleterious incentives. This paper focuses on the institutions and governance issues as preconditions for sustainable growth. The paper argues that the key to growth-compatible institutions is information. This is clear on the spending side, to ensures that funds are used efficiently for the purposes intended. A requirement is for budgeting and reporting standards that are common across jurisdictions at the same level and between levels of government, together with appropiate tracking of cash. On the revenue side, effective subnational control over a revenue base and an arms length administration are critical for accountability. This can be achieved with rate setting authority at lower levels, together with components of administration at higher levels. Of course, an appropriately designed tax policy agenda does much to foster appropriate structural reforms that generate growth. Such would be the case with say a carbon tax, with appropriate responsibilities at different levels of government —although many of the associated issues are beyond the scope of the current paper. Finally, while both policies and institutions need to be synchronized, the political economy of reforms requires a careful analysis of gainers and losers, and appropriate measures for inclusion, especially for the poor. While the paper focuses on examples from Latin America, there is much to be learnt from the successful experiences of emerging countries from other parts of the world, especially China.