The Palestinian Economy. Theoretical and Practical Challenges

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Zagha
Bird (1995) puts it, information asymmetry thus works both ways: the central government
may not know what to do, the local government may not know how to do it. 8
As I tend to agree with these critiques I will also add one more point to them based
on the Palestinian experience. This is namely the exclusion of the NGO sector from the
discussion of fiscal decentralisation. This is so because of two main reasons:
• The Palestinian NGO sector grew and became a social mobilisation factor even
before there was a central Palestinian national authority, and
• Secondly, the collective power and economic importance of the Palestinian
NGO sector (PNGO for short) is much more than that of the local government
units.
These points will become more evident as we move forward in the discussion below.
Up to this point, there is much to be said for the view that property taxes were the
best taxes that LGUs can levy. Unfortunately, that point falls far short of the task
facing SNGs 9 in many countries for a number of reasons. First, the conventional case
for user charges and property taxes is to some extent flawed. Property taxes, for
example, are often costly and difficult to administer well, and such problems are
greatly exacerbated as the tax burden increases. Moreover, in practice political
realities mean that increases in property taxes are often concentrated primarily on
those non-residential properties that most readily permit “tax exporting” (the shifting
of taxes to non-residents), thus undercutting one of the principal arguments for local
use of property taxes in the first place.
Second, even a well-administered local property tax cannot finance major social
expenditures (education, health, social assistance) except perhaps to a limited extent in
the richest (and usually largest) communities. 10 Since, as discussed further later, it is
desirable to the extent possible for governments to finance from their own revenues the
services they provide, either local governments that are dependent on property taxes are
essentially confined to providing “local” services (street cleaning, refuse removal, etc.),
or they are inevitably heavily dependent on transfers from higher levels of government.
8 Of course, this problem is of differential importance in different services. Providing for street cleaning or
garbage collection may not require sophisticated expertise, but power production and transmission, bulk
supply of clean water and public sanitation do. Decentralisation to the local level will often work better in the
former kind of services than the latter.
9 SNGs and LGUs are used interchangeably to mean the same thing.
10 User charges should be used only with caution in such social areas: for further discussion, see Bird (1976).