61 Rethinking local government: Essays on municipal reform - VATT

Fiscal federalism: International experiencesand the Nordic responseof central <strong>government</strong> is less clear. The comprehensive literatureabout ‘Leviathan’ <strong>government</strong> is not explicit about the sources of<strong>government</strong> failure. Mobility and competition are relevant in theNordic context also, but the dominating thinking has concentrated onthe understanding of the public sector as an administrative system.The new ‘second generation’ fiscal federalism theory introducespolitical and institutional conditions for the working of fiscalfederalism (Oates, 2005, Boadway and Shah, 2009). This literaturedeals with issues of fiscal discipline and accountability and is ofparticular relevance for the Nordic model with a strong center. Recentcollections of country studies by Rodden et al. (2003) and Dafflon(2002) discuss the concern for opportunistic behavior, excessive<strong>government</strong> and fiscal imbalance in federalist systems. They formthe background of the “dangers of decentralization” discussed byPrud’homme (1995).The Nordics struggle with the balancing of integration into thewelfare state and <strong>local</strong> autonomy. The expansion of welfare serviceshas increased the role of decentralized <strong>government</strong>, but has alsoincreased the involvement of central <strong>government</strong>. Some argue thatthe welfare state aspects have threatened basic values of <strong>local</strong> selfrule and democracy. Nordic <strong>government</strong>s have reformed their fiscalfederalism to improve the conditions for the handling of expandedwelfare services and to strengthen <strong>local</strong> accountability. Thebackground and content of the reform process are discussed in thisarticle.2.2 Fiscal discipline and accountabilityAs mentioned in the introduction, the conventional theory of fiscalfederalism is really a theory about decentralized <strong>government</strong>.Decentralization of public goods accommodates preferenceheterogeneity, but must be traded off against the disadvantagesassociated with economies of scale and externalities. The theorydesigns well-functioning decentralized <strong>government</strong>s that can handle16