Distinguished Speaker Seminar: Vito Tanzi - Challenges to Fiscal Decentralization

Mr. Vito Tanzi, former State Undersecretary for Economy and Finance, Ministry of Economy and Finance, Italy and former Director, Fiscal Affairs Department, International Monetary Fund (IMF) delivered a seminar on the future of fiscal federalism. In his presentation, he stressed upon the creation of supranational institutions to manage externalities that are associated with the globalization of economic activities. His principal argument is that responsibilities and powers be progressively shifted upward from national governments to international or global institutions. The international institution shall regulate national actions in order to maximize the joint welfare of nation states that comprise the domain of the institution.

Tanzi first provided a historical context of the emergence of welfare states as well as the principle of fiscal centralization. As he indicated, in the period following the World War II, national governments faced increasing pressure to maintain economic stability and to provide their citizens a minimum level of public services. The size of the government grew rapidly and, simultaneously, both power and economic role of the central government expanded in a significant proportion. Tanzi argued that the great expansion of national governments, however, did not displace the functions of sub-national governments or municipalities. Those sub-national institutions or municipalities rather preceded the creation of central governments in many cases and they represented political contracts between diverse constituents and the central government. They greatly facilitated the allocative and redistributive functions of the central government.

Tanzi then argued that the growing size of central government and the rising share of public spending in the GDP resulted in economic inefficiency. Economic growth in many countries faltered. Privatization and fiscal decentralization followed. In particular, the process of privatization not only reduced public provision of goods and services, but more so facilitated the private sector to undertake their production and distribution in general. Tanzi remarked that in the 1990s and thereafter the process further accelerated through the public-private partnership, and the role of private sector became more pronounced.

However, as the globalization of trade, investment, and financial activities deepened in recent time, the economic activities occurring within a nation state started to have international scope and they often produce adverse consequences at the international level. Tanzi discussed several issues ranging from global climate change to exchange rate management that require collective action at international level. The provision of public goods at the international level is therefore a necessity. He argued that the progressive, de facto, creation of supranational or global institutions could be optimal choice in many instances. He also discussed organizational and financial aspects of international institutions, highlighting the potential benefits for nation states. Mr. Tanzi argued that in the future, we will have a world with more global government and more important roles for municipal governments. The presentation ended with an urge that the academic and research community in fiscal federalism must consider the issue as an active research agenda.