Zero DraftSeptember 1, 2009

Conditional VS. Unconditional Grants: The Case of Developing Countries

Roy BahlGeorgia State University

Workshop on Intergovernmental Fiscal RelationsCopenhagen, DenmarkSeptember 17-18, 2009

DEFINITIONS

• Transfers• Taxes• Data Problems

WHAT IS CONDITIONALITY?

• Mandates (Funded or unfunded)• Pre-qualification• Match• Vertical Sharing Conditions

JUSTIFICATIONS FOR TRANSFERS

• Vertical Balance• Equalization• Externalities, National Purpose• Administration• Political Justification and Paternalism

Vertical Sharing

• Shared Tax (U)• Ad Hoc (C)• Cost Reimbursement (C)

HORIZONTAL SHARING

• Derivation (U)• Formula (C)• Cost Reimbursement (C)• Ad Hoc (C)

THE CASE FOR CONDITIONAL GRANTS

• Externalities• National Purpose• Avoid Corruption, Incompetence• Bureaucratic Politics

THE CASE FOR UNCONDITIONAL GRANTS

• Local Autonomy• Fungibility of Money• Lower Monitoring, Compliance Costs