The Palestinian Economy. Theoretical and Practical Challenges

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Proceedings “The Palestinian Economy: Theoretical and Practical Challenges” 261 and feasibility may require that higher (or lower) levels of government impose certain taxes or carry out certain expenditures, even when it is not appropriate to do on equivalence grounds. The vertical intergovernmental fiscal transfers found in most countries are motivated largely by this consideration. However, if as suggested here, more adequate sub-national taxes are made available, this “fiscal gap” (Boadway and Hobson 1993) argument for transfers disappears with respect to richer jurisdictions since the richer units of government at sub-national levels should be essentially self-sufficient. Any grants from higher levels of government that are made to the poorer sub-national units for reasons of regional equalisation should be clearly inframarginal, so that, as McLure (1999) notes, all SNGs, rich and poor alike, will face the full marginal tax price of the spending decisions for which they are responsible. Only in this way can the “hard budget constraint” critical to good intergovernmental fiscal and financial policy be achieved. 16 Good sub-national taxes should thus in principle satisfy two main criteria. First, they should provide sufficient revenue for the richest sub-national units to be essentially fiscally autonomous. 17 Second, they should clearly impose fiscal responsibility at the margin on SNGs. The simplest and probably best way to achieve this goal is by allowing those governments to establish their own tax rates with respect to at least some major taxes. The most immediately important issue facing many larger countries, for example, is undoubtedly the need to develop a satisfactory revenue base for regional governments, that is, one for which those governments are politically responsible. One possibility is to permit regional surcharges on personal income taxes. Another potentially promising approach may be to establish sub-national value-added taxes. Such a tax already exists and works well in Canada (Bird and Gendron 1998), and it now seems that it may be feasible to implement it in some circumstances even in countries with less well-developed tax administrations. Another key problem facing many countries is how to replace the various unsatisfactory state and local taxes on business that exist in most countries by some less distortionary form of taxation. Recently, a “business value tax” – in essence, a relatively 16 Bird (2001) spells out this argument in some detail. For a useful recent review of experience with hard budget constraints in a variety of countries, see Rodden, Eskeland and Litvack (2003). 17 Of course this objective does not preclude intergovernmental fiscal transfers not only to achieve the usual “spillover” objectives but also, in some circumstances, in order to ensure the adequate provision of certain services to “national standards”: for a suggested design for such a system in Colombia, for instance, see Bird and Fiszbein (1998).
262 Zagha low rate flat tax levied on an income-type value-added base – has been suggested for this purpose. 18 In contrast to the proposal mentioned in the previous paragraph, which is motivated mainly by the desire to provide more adequate “own” revenues to regional governments and hence to encourage greater fiscal responsibility and accountability, this proposal is aimed primarily at improving the allocative efficiency of sub-national revenue systems. Given the obviously lesser attraction of efficiency than of revenue as a political goal, better local business taxation may be less likely to find a welcoming political audience. Nonetheless, since revenue pressures may soon produce a proliferation of increasing, and increasingly distorting, sub-national business taxes many developing and transitional countries, it seems important to at least begin to think of some better alternatives. In an illuminating study about “The Changing Role of Government” in China, Saich (August 2004, which is a background note for the World Bank Report on China’s 11 th Five Year Plan) suggested that To satisfy citizens’ needs, government will have to further develop alternative service providers 19 and form new partnerships. Local governments alone will not be able to provide the necessary services. His survey reveals that citizens view local government as less adapt at providing the kind of social support that needs to accompany the economic transition. 20 To resolve the problems of service provision, government will have to make more effective use of the market and not-for-profit-organisations. In recent years pluralism of service delivery has expanded with voluntary organisations supplementing state provision of basic services and with the expansion of private education and health institutions. The shift primarily resulted from the adoption of cost recovery as the main principle in determining service provision (Flynn, Holiday, and Wong 2001: 9). China has moved further down the road of privatisation, under its slogan of socialisation (shehuihua) than most OECD countries that have adopted a conscious policy to boost the role of markets in service provision. China has shifted from an emphasis on equality in social welfare provision to one based on efficiency and cost recovery. This has resulted in further delegation of responsibility to local governments and communities to provide welfare, as 18 The history of this idea, and various examples found around the world, are discussed in Bird (2003). An empirical application of this approach to Canada may be found in Bird and Mintz (2000) and Bird and McKenzie (2001). 19 The reference is made to NGOs here. 20 During the discussion of the first draft of this research paper, Prof. Marco Missaglia suggested that I include the NGO sector in my discussion of fiscal decentralisation in a more profound fashion. I acknowledge his idea and therefore I added a subsection describing the Palestinian NGO sector and its relative importance.
Page 1 and 2: The Palestinian Economy Theoretical
Page 3 and 4: © Gianni Vaggi - Marco Missaglia -
Page 6: VOLUME II
Page 9 and 10: 246 Zagha 1. Introduction The local
Page 11 and 12: 248 Zagha and groups in political d
Page 13 and 14: 250 Zagha drawbacks in the politica
Page 15 and 16: 252 Zagha it is not surprising that
Page 17 and 18: 254 Zagha economy (including expend
Page 19 and 20: 256 Zagha social norms sharply dist
Page 21 and 22: 258 Zagha Bird (1995) puts it, info
Page 23: 260 Zagha intergovernmental fiscal
Page 27 and 28: 264 Zagha need to be given access t
Page 29 and 30: 266 Zagha Such failures are found i
Page 31 and 32: 268 Zagha 4.1.3. The Relationship b
Page 33 and 34: 270 Zagha a final account report of
Page 35 and 36: 272 Zagha 4.1.6. Functions of LGUs
Page 37 and 38: 274 Zagha • Management of LGU ass
Page 39 and 40: 276 Zagha Figure 2: Local Governmen
Page 41 and 42: 278 Zagha In summary, what the data
Page 43 and 44: 280 Zagha on the cash basis. Almost
Page 45 and 46: 282 Zagha Figure 7: Business Opinio
Page 47 and 48: 284 Zagha within the Palestinian na
Page 49 and 50: 286 Zagha Table 5: Number of NGOs i
Page 51 and 52: 288 Zagha Fiscal decentralisation i
Page 53 and 54: 290 Zagha Burki, J., Perry, G., Dil
Page 55 and 56: 292 Zagha Palestinian Legislative C
Page 58 and 59: Issues, Performance and Trajectorie
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Proceedings “The Palestinian Econ
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The Effect of the Israeli-Palestini
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Assessing the Causes of Inequality
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Labour Force Instability and Employ
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424 Olivera provisions - in particu
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426 Olivera Figure 1: Economic Grow
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428 Olivera 3. Traditional economic
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430 Olivera costs and lower market
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The Palestinian Economy. Theoretical and Practical Challenges

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