You are on page 1of 74

INTERGOVERNMENTAL FISCAL TRANSFER SYSTEM IN FEDERATION OF BOSNIA AND HERZEGOVINA – EQUALIZATION ASPECTS

By Halko Basaric

Submitted to Central European University Department of Public Policy

In partial fulfillment of the requirements for the degree of Master of Arts in Public Policy

Supervisors: Professor Robert Ebel and Profesor Adrian Ionescu

Budapest, Hungary 2006

ABSTRACT
Decentralization as a policy option has become, together with other public sector reforms, a hallmark of the transition process in the Central and Eastern Europe. Decentralization accounts for improved transparency and accountability, well designed it can enhance resource efficiency as well as serve as key to the accomplishment of a nation’s broader economic goals of macro-economic stability, privatization and maintenance of the social safety net. But, for decentralization to “work” it is essential that there is a fiscally strong central government that can set standards which serve the purpose of equalizing the service delivery and living conditions of the citizens. This thesis explores present system of intergovernmental relations in Federation of Bosnia and Herzegovina (FBiH), an entity comprising State of Bosnia and Herzegovina (BiH). It argues that those arrangements create huge vertical and horizontal imbalance between cantons and municipalities, which represents a potential threat to building a new nation. Peculiar intergovernmental relations, which favor intermediate level-cantons, left FBiH Government without fiscal power for equalization, and are direct consequence of strong centrifugal forces that emerged in the course and after the four-year conflict. For the first time after the Dayton Peace Accord, and after introduction of VAT on the state level, FBiH Government has introduced a formula based public revenues allocation system, thus replacing the previous derivation based one. The thesis examines new system, suitability of its design to Bosnian fiscal federalism and test whether the formula corrects growing fiscal imbalances. It finds that new transfer system is comparatively better solution for transition country such as BiH, provided that other reforms are implemented simultaneously.

i

TABLE

OF

CONTENTS

Introduction.........................................................................................................................1 Why Decentralize?..................................................................................................1 Classis Theoretical Frameworks..............................................................................3 Fiscal Decentralization............................................................................................5 Intergovernmental Transfer System in Federation of Bosnia and Herzegovina.....8 Chapter 1: Legal Framework for Intergovernmental Fiscal Relations..............................12 1.1 Tradition of Self-Governance..........................................................................12 1.2 Legal Framework.............................................................................................13 1.3 Local Governance in Federation of Bosnia and Herzegovina.........................15 1.4 Local Governance in Republika Srpska..........................................................18 Chapter 2: Functions of Local Governments in Federation of Bosnia and Herzegovina. 20 2.1 Functions Exclusively Assigned to Federal Level..........................................26 2.2 Functions Assigned to Cantons and Functions Delegated to Municipal Level..........................................................................................26 2.3 Concurrent Responsibilities.............................................................................28 2.4 Functions Assigned Exclusively to Municipalities.........................................28 Chapter 3: Revenues Sources............................................................................................30 3.1 Reasons for Decentralizing Revenues.............................................................30 3.2 Situation Before VAT Introduction.................................................................32 3.3 Tax System Reform-A Policy Window for Fiscal Equalization.....................36 Chapter 4: New Intergovernmental Transfer System in Federation of Bosnia and Herzegovina............................................................38 4.1 Theoretical Framework...................................................................................38 4.2 New Formula Based Allocation Mechansm in FBiH......................................43 4.3 How Good New System Performs?.................................................................46 Conclusion.........................................................................................................................48 Appendices........................................................................................................................51 Bibliography......................................................................................................................56

ii

iii .I would like to express my sincere gratitude to team implementing USAID’s Governance Accountability (GAP) Project in Bosnia and Herzegovina. especially to Policy Advisor Mrs. I would like also to thank my supervisors Robert Ebel and Adrian Ionescu for their guidance and support. Jasmina Djikic.

After years spent under monolithic political system. Anwar Shah 1997). rich and poor. has been on the agenda of many countries already for decades. and to achieve political stability (Bird and Ebel. especially for the countries with weak governance (Ebel and Yilmaz 2002. people in transition countries ask for more autonomy and self-governance. central government is “forced” to devolve some power to the regional government in face of strong centrifugal or even secessionist forces in the society. developed and developing ones. In this case stabilization of economy is more easily achieved if the central government is not locked into fixed arrangements with the subnational governments. Countries decide to decentralize for a variety of reasons. Centralization has its benefits as well. though the results are not unambiguous. which are transmitted and magnified in the domestic public sector. however. finds that transition countries are more sensitive to the swings on the international markets. 2005). Decentralization. According to World Bank (2001) there are three imperatives behind this phenomenon: Political Imperative. Some see decentralization as the mean to boost the economic growth and as part of effort to improve the governance in the country (Ebel and Yilmaz 2002. In other countries. Macroeconomic stability and equity are also of concerns for the decentralization. unitary and with more complex governmental structure. Some 95% of the democracies around the world have elected some sort of subnational governments (World Bank Development Report 2000).INTRODUCTION Why decentralize? Decentralization is the word that has marked the transition process through which countries of Central and Eastern Europe have been going after the fall of communist regimes. Roy Bahl (1999) for example. Vazquez-Martinez and McNab 2005). The decision-making power 1 .

provide that there is no existence of economies of scale and externalities for delivering those services. Following types of decentralization can be identified: Political decentralization. Local politicians better know the need and desires of their constituents and citizens can better know their political representative. Economic Imperative. or the provision was centrally regulated. In socialism. for local governments can more accurately determine citizen’s preferences and diversify the level of service. It aims to give citizens and their elected representatives more power in public decision making. the size of the public sector in providing goods and services for citizen was immense. It is the transfer of responsibility for planning. Under the old system. financing. Service Delivery Imperative. increase accountability and citizens participation. and managing certain public functions 2 . Decentralization of provision of goods and services is one way to achieve that goal. responsibility. This imperative re-affirms Oates’ Decentralization Theorem (Oates 1972): Provision of public services is done more efficiently by the local government than if it is centrally provided. Final result should be more political stability and better governance Administrative decentralization seeks to redistribute authority. and financial resources for providing public services among different levels of government. majority of the services were either directly delivered by the central government. It is often associated with pluralistic politics and representative government. but it can also support democratization by giving citizens or their representatives more influence in formulating and implementing policies. For transition countries there was not other option but to reduce public sector share in the national economy. Decentralization entails transfer authority and responsibility for public functions to subordinate or quasi-independent governments organization of the private sector (Rondinneli).vested by the legislation to the locally elected officials.

In Tiebout’s model. Classic Theoretical Frameworks The theoretical foundation for the public finance analysis was laid in the works of three distinguished scholars: Charles Tiebout (1956). under the condition that there is large number of local communities providing local services at the tax price equal to the marginal cost. which is not often the case with administrative decentralization. If local governments and private organizations are to carry out decentralized functions effectively. and it seeks to prove that there is a “market-type” solution the determining the level of public expenditure on the local level. or functional authorities. they must have adequate revenues—raised locally or transferred from the central government—as well as the authority to make expenditure decisions. Local voter reveal their preferences by “voting by feet”.from the central government and its agencies to field units of government agencies. local households seek a community of residence that provides a fiscal bundle closely approximating their demands for local services. Richard Musgrave (1959) and Wallace Oates (1972). similar to that in private markets. It splits the public sector into three branches: Macroeconomic Stabilization-which is assigned to the central government. semi-autonomous public authorities or corporations. which generates Pareto-efficient outcome. Financial responsibility is a core component of decentralization. Fiscal decentralization include devolving some of the political decision-making power to the local level. or areawide. subordinate units or levels of government. regional. Overall managing of the economy and monetary policy should be prerogatives of the central government. Regional government because of their openness and possibility of interregional 3 . Fiscal decentralization. Musgrave’s “The Theory of Public Finance” is a departure point for any analysis of the public finance. Tiebout’s “Pure Theory of Local Expenses” is focused on the local public finance.

and therefore can increase efficiency of the programs. Also. Some goods are most efficiently delivered at the national level (e. Briefly. the Theorem states that under the given conditions. The third function is closely related to Oates “Decentralization Theorem”: “For a public good–the consumption of which is defined over geographical subsets of the total population. provides some space for redistributive role of sub-national governments. On the other hand. water supply). Central government can more easily redistribute the national income or wealth. defense) while other which have local character can be better suited to meet the needs of the local community (fire protection. the fact sub-national governments are in most countries responsible for providing the social assistance gives. Centralized provision of these service would deny their local character.g. as it usually has broad-based taxes available for this. The underlying condition of the theorem emphasizes the importance of the optimal size of the jurisdiction for providing a 4 . Allocation Function. and for which the costs of providing each level of output of the good in each jurisdiction are the same for the central or for the respective local government–it will always be more efficient (or at least as efficient) for local governments to provide the Pareto-efficient levels of output for their respective jurisdictions than for the central government to provide any specified and uniform level of output across all jurisdictions” (Oates 1972). the mobility of the taxpayer from the jurisdictions with unfavorable taxes to those with less redistributive policies weakens the sub-national government potential for redistribution. thus resulting in welfare losses and inefficiencies. This function in Musgrave’ tripartite division explains how different levels of government provide mix of private and public goods to satisfy the needs of the consumers. This implies at the same time that central government must some tax handle suitable for achieving that task of stabilization. diversification of the outputs for different communities as demanded by the residents will increase welfare. Distribution-which is also assigned to the central government.competition cannot perform this function.

particular public service. while the same time transfer of assigning of own-revenues increases the accountability on the local level. Locally elected politicians can focus better tailor the bundle of local services for the citizens. as fiscal decentralization strengthen the voice of local communities and opens the space for citizens’ participation in decision-making process. 1977). In transition countries of Central and Eastern Europe. Therefore. and therefore enhance the efficient utilization of the scarce resources (Ebel and Yilmaz). In some countries fiscal decentralization is seen as the way for increasing the accountability and legitimacy of the government. Decentralization leads to enhancing democratic values at the local level by allowing citizens to take active role and assume responsibility for the local government 5 . Fiscal Decentralization Countries around the world are decentralizing their governmental structure in an effort improve the overall efficiency of the economy by devolving service delivery and taxation to the lower tiers of government. provided it function well. Ebel and Wallich 1995). The question of mobility of tax payers in this case is closely related to vertical and horizontal fiscal equity in the country as well as minimum service provision (Oates. those countries musth “catch-up” with the decades-long practice of western countries. decades of state dominance created a strong impetus for decentralization initiatives (Bird. Proportion of countries with some form of democratic government rose from 28% in 1974 to 61% in 1988 partly as a response to the ongoing globalization and integration of national economies with increasing confinement of the powers of nation-states that it entails (Dabla-Norris 2006). The set of government that is closest to the citizens can adjust budgets to the local preferences. Local tax bases are more accessible to the sub-national governments.

as well as allocative efficiency. How one value decentralization depends on the point of view: bottom-up decentralization generally stresses political values-improved governance in the sense of increased responsiveness and citizen’s participation. This approach emphasizes political dimension of the decentralization. regardless of how country’s public sector is arrangedthere are at least two tiers of government even in the unitary states. This can 6 . In the transition countries. which makes inevitable to have some sort of intergovernmental fiscal relations. fiscal decentralization can also play role in privatization of the state owned enterprises and poverty alleviation (Bird. Who does what?-the question of expenditure assignment 2. top-down approach however is characterized by the central government’s pursuing some national policy through fiscal decentralization. decentralization is about intergovernmental arrangements amongst the different types of governments. as it is said the better use of local knowledge and more efficient and equitable service delivery would presumably result with more support for the government.actions. The process of decentralization must give answer to the following questions (Bird and Vallincourt 1998): 1. Ebel and Wallich 1995) In any of the cases. How is the imbalance between the revenues and expenditures for sub-national governments that results from the answers from the first two questions to be resolved?-the question of vertical imbalance 4. Who levies what taxies-the question of revenues assignment 3. To what extent should fiscal institutions attempt to justify for the differences in needs and capacities among different governmental units at the same level of government?-the question of horizontal imbalance. or equalization.

Before we move to discuss transfer system as the component of fiscal decentralization and its importance in Federation of Bosnia and Herzegovina. Fiscal decentralization is not a panacea for organizational issues in a country. Reducing the role of the public sector is another alternative to the decentralization. Badly designed regional development policy or corrupt central government will create pressures for more decentralized policy decision-making. If the central government does not change its policy. Vito Tanzi (Tanzi 2001) identifies at least two alternatives to the fiscal decentralization: improving current politics and reducing the role of public sector. because in Tanzi’s word “the growth of government in recent decades-which has been accompanied by a huge expansion of public sector activities in many countries-must have been partly responsible for increased demands for decentralization witnessed in recent years”. executing certain function on its behalf. Devolution refers to a situation in which not only implementation. but also authority to decide what is done is in the hands of local government. it is important to mention valid alternatives. according to him at least part of 7 . it is likely that the pressures for more efficient and equitable government will intensify trough decentralization. Delegation refers to a situation in which local governments acts as agent for the central government. Decentralization lies on the continuum which depends on the degree of independent decision-making exercised at the local level (Bird and Villancourt 1998): Decocentration means the dispersion of responsibilities within a central government to regional offices or local administrative units. inefficient or inadequate.be for example “deficit shifting” to the sub-national governments or desire of the central government to achieve more equity or more of the social welfare. Often demands for decentralization are result of the citizen’s perception of central government policies as unjust. Therefore.

thus effectively creating a horizontal fiscal imbalance (Bird and Tarasov 2002 ). depending on governments efficiency or privatization and government’s sectoral specific policies. Smaller BiH entity (RS) has a unitary form.the government activities could be privatized. A unique character of the fiscal federalism in BiH has not created conditions for development of the transfers system in the post-conflict period. Until the recent tax reform. Bird and Wallich 1995). This will be done by analyzing expenditures and revenues assignments. or as it case in FBiH also at the sub-entity cantonal level. or the expenditures needs for providing standardized basket of service can be different. intergovernmental fiscal transfers are used to close the gap between the expenditure responsibilities and revenues-raising capacity. as well as legal framework for intergovernmental relations. claiming that it creates huge vertical and horizontal imbalances between the cantons and municipalities. First objective of this paper. 8 . Intergovernmental Transfer System in Federation of Bosnia and Herzegovina It is very rare situation that revenues assigned to the sub-national governments are fully matched with the expenditures needs of that level. two entities comprising Bosnia and Herzegovina. In those cases. resources available to the sub-national can vary significantly. are ethnically based administrative units with excessive revenue-raising powers assigned. or in other words to close vertical fiscal gap. while major spending responsibilities were kept either at the entity level (in RS). Republika Srpska (RS) and FBiH. At the same time. Fiscal transfers can also be used to influence spending patters of the sub-national governments or to stimulate local fiscal efforts (Ebel. with strong central government and no intermediate level of authorial. elaborated in Chapter 1 through III is to examine intergovernmental fiscal system in Federation of Bosnia and Herzegovina (FBiH).

the Federal Ministry also exercises a coordinating role. and thus is limited in its capacity to influence the fiscal sector. or in other words “equal treatment of equals” (Buchanen 1950) can only be achieved by using intergovernmental fiscal transfers. administrative duplication is strongest in the Federation where. Measure of the Minimum of GDP per capita to FBiH average. or 3. One of the main problems of FBiH fiscal system is its fragmentation to in fact ten small cantonal systems. municipalities in FBiH in 2003 constituted only 11% of all public spending in the entity. This very low for in comparison with RS and shows that municipalities in FBiH are radically underfunded (GAP.7% of the GDP pc of the average. represents a huge social. Maximum to Minimum Ratio (MMR) of GDP per capita for ten cantons comprising FBiH reveals that the ratio between the poorest and richest canton is 2. in addition to the cantonal authorities.2% of FBiHs GDP. The same report further notes in the health care sector. Another measure. In FBiH this was not the case. UNDDP (Human Development Report for BiH 2005) states that there are huge differences in the level of education expenditure amongst administrative units (cantons).8:1.State of Bosnia and Herzegovina had very expenditure responsibilities assigned to it. Decentralization inevitably has a result some degree of inequality between the richer and poorer jurisdictions. political and economic problem. which compounded with the inability of FBiH to actively pursue any equalization policy. Equalization requires a consensus that social citizenship and solidarity among all citizens apply with equal force nationwide as opposed to being region-specific (Boadway 2004). shows that Canton Una-Sana has only 66. 2005).These differences work against the uniform application of human rights and the modernization agenda. 9 . Vertical and horizontal imbalances in FBiH which are result of non-existing transfer system have reached worrying proportions. At he same time.

A myriad of cantonal revenues-sharing laws has been abolished and replaced with the a single law. This solution enabled FBiH entity to introduce for the first time in post-conflict era revenues-sharing mechanism incorporating some elements of fiscal equalization. under the newly formed Indirect Taxation Authority (ITA) . The revenues collected to the ITA’a Single Account are. new Federal Law on Distribution of Public Revenues (Official Gazette 22/06) employs distribution formula to allocate the revenues between cantons and municipalities. As of January 2006. Bosnia and Herzegovina introduced a Value Added Tax (VAT) as part of the reform of national tax system. ceded to the entity level. which should be done only on the economic basis. If this is not so. with gradual introduction over the period of six years. still allows for active policy role to be played. specifically focusing on its 10 . then fiscal transfer are used to restore the neutrality of the tax structure so that resources are distributed according to their productivity. subject of much political debate. to avoid distortion of the resources allocation. Though the mobility of capital and people is low in BiH. this type of distortion is present. based on the entity share of the processed VAT invoices. As second objective. especially between the cantons with urban amalgamation (for example Sarajevo or Mostar) and those scarcely populated and remote cantons (Livno or Gorazde). Collection of indirect taxes and customs is centralized on the state level.So called Net Fiscal Benefit approach to equalization (Bird and Waillincourt 2004) state that tax structure need to be as neutral as possible. this paper will examine new system of intergovernmental transfers in FBiH. however. which despite the fact that FBiH is no longer in control of indirect taxes. Tax policy has been also transferred to the state level. Unlike with the previous solution when each canton had its own revenue-sharing law. thus effectively leaving entities with very little power in the fiscal domain.

and then we will use statistical method of regression to determine its correlation with fiscal capacity and expenditure needs of cantons and municipalities.equalization aspects. both in the light of theoretical literature and its practical suitability for FBiH conditions. In Chapter IV we will analyze new system. We will calculate per capita amount for the last year of transition period. This will be complemented by testing how newly introduced formula-based transfer treats sub-national governments with respect to equalization. 11 .

from deciding on local fees. Yugoslav Republics gained additional powers. Local voters controlled the work of councils through the regular “voters meetings” and consultations. The so called ‘self-management’ under which all enterprises operated as well as the other institution of the Yugoslav socialist system.1 The Tradition of Self-Governance Former Socialist Federative Republic of Yugoslavia had a long and unique tradition of local self-governance. the workers were represented in one of the two municipal councils. and chose to take Yugoslavia on a separate road to socialism. 12 . managers or profit sharing.CHAPTER 1: LEGAL FRAMEWORK FOR INTERGOVERNMENTAL FISCAL RELATIONS 1. though the war has severely influenced its functioning in the Daytonian Bosnia and Herzegovina. constituent nations in Bosnia and Herzegovina-Bosniacs. The self-management was first introduced in factories and enterprises. This tradition has been kept until today. Though this kind of Yugoslav “direct democracy” was taking place in a oneparty system. Self-management allowed workers in factories and enterprises to decide on all aspects of managing through the “workers councils”. On the level of municipalities. rents and apartment allocation. The other council was popularly elected. These councils had wide responsibilities. Croats and Serbs have learnt basic skills of participation in local self-governance. and the council would be disbanded if one-third of local residents voted for non-confidence. has been developed after the WWII when Tito rejected soviet model. had the power to decide on investments. were transferred more responsibilities. The councils for example. With the constitutional changes in 1974. but later it became a hallmark of the Yugoslav socialism as it integrated into the socio-economic life of the whole country. to the taxation of the companies and deciding on their business plans. and units of local self-governance-municipalities.

Peace talks held in Dayton in November 1995. Eventually. Federation of Bosnia and Herzegovina (FBiH) through negotiations was allocated 51% of the territory 1.2 Legal Framework Bosnia and Herzegovina emerged after the war as a heavily decentralized country. Federation of Bosnia and Herzegovina had been formed 18 months before the Dayton Peace Accord (DPA) was signed. composed of two entities. Two Bosnian “constituent nations” Croats and Bosniacs agreed in 1994 in Washington to establish a Federation. judicial and legislative authorities military forces and other attributes. effectively creating a third territorial unit. to join the neighboring states. In the new Constitution. Republika Srpska (RS) has 49% of the pre-war territory of BiH. were naturally more directed toward reaching the peace. Therefore. Very strong secessionist forces at that time in Bosnia and Herzegovina were driven by a simple maxim: to legalize what has been won in the war. In 2000. A small town of Brcko in northern Bosnia was a subject of dispute of parties. 13 . The smaller entity. Bigger entity. Since at that time it was not possible to predict whether Bosnia and Herzegovina will continue to exist as a state. 1 In fact. in other word whether Bosnian Serbs will secede into the separate entity. DPA has ended the war by recognizing the second entity. FBiH entity was envisaged as the fully functioning state. Bosnia and Herzegovina was envisaged as decentralized asymmetric federation. there was not too much of desire or opportunity to create a state functioning on the principles of economic efficiency and social equity of its citizens. The Dayton Peace Accord (DPA) marked the beginning of the new era for the centuries old country. and if conditions permit. than to find optimal solution for the fiscal federalism in the new country. but the previously established structure remained unchanged. an international mediator decided to give Brcko the status of special administrative district in Bosnia and Herzegovina.1. with executive.

so that all competencies not assigned to the state level. foreign policy. immigration and asylum. only entities were entitled to borrow). fiscal 14 . an intermediate level-cantonal was introduced in the Federation. This was necessitated by the deep mistrust between the ethnic groups. Figure 1. politically. They have very distinct administrative organizations.Both entities are administratively. While Republika Srpska has kept a form similar to the socialist BiH. and until the introduction of State VAT fiscally. Those included competencies over monetary policy. independent from the central government. Governmental Structure of Bosnia and Herzegovina as from Dayton Council of Ministers Federation of Bosnia and Herzegovina Republika Srpska Cantons (10) Municipalities (79) Municipalities (56) Central Government of Bosnia and Herzegovina (Council of Ministers-CoM) had very narrowly defined functions in the new Constitution. product of war. for which especially Croats had aversion (Fox and Wallich 1997). but also it was caused by till lively memory of Yugoslav interregional equalization policy. at the same bringing three nations of a ‘divided house’ to live together. These quasi-federal arrangements reflected the Bosnian reality in 1995. with two levels of government. are the function of the entities. proved to be a one of the main ‘system errors’ of the new structure. Macroeconomic stabilization. and debt service (though in the case of the last. and were the only way for maintaining the sovereignty of the country. The assignment of responsibilities was negatively defined. Weak central government. however.

the fiscal power has been reduced. after ten years of reforms and enormous efforts invested into creating efficient institutional framework. obstruction or even irrational rejection. government and parliamentary representation. elected through an open and universal election. they will be analyzed separately. At the time when the FBiH was conceived. Cantons are created as ‘mini states’ with their own constitution. The topic of assignment of responsibilities is more elaborated in Chapter 2. They are a result of the efforts to reconcile the centrifugal forces in the society. Central authorities on the state level do not have any competencies over the territorial organization of entities or internal administrative structure.consolidation. privatization of state property. though with the recent changes in the VAT introduction. not only in the public sector. were some of the critical areas in which the lack of coordination was often translated into bad policy solution. but unfortunately in the everyday life as well. but just to briefly mention that cantons have exclusive competencies for example over health. which comprise the FBiH. Because of very different extent of decentralization of the entities. the ethnic questions remain dominant and firmly entrenched. The role that the ethnic division has played in the public sector should not be neglected. Even now. There are ten cantons. education or urban planning.3 Local governance Federation of Bosnia and Herzegovina The BiH bigger entity in fact has all characteristics of federally arranged state. security (police). and promote political stability in the ‘divided house’ by constitutionally guaranteeing division of power between the entity level and cantons. assigning of significant share of power to the sub-entity level was the only viable option for maintaining 15 . As Bird (2003) says “fiscal rationality may seem irrelevant when faced with symbolic meaning”. 1. The same can be said for any other policy domain. and fiscally strong Federal government.

508 256. Zenica-Doboj 5. The size.110.362. where it is stipulated that municipalities are the basic unit of self-government.276.2 1. FBH has introduced a number of consociational mechanisms.125 324. to ensure checks and balances in the system between the constituent people. Tuzla 4. while others have a dominant ethnic group.6 2.0 3.9 4934. Local self-government is mentioned in the Constitution of FBiH in section VI. Along with the decentralization of functions to the cantons.3 504. Central Bosnia 7. The lack of horizontal cooperation between cantons is often translated into duplication or underprovision of services. but also within the cantons. Table 1: Basic information for cantons in FBiH Canton 1. West Herzegovina 9. Bosansko-Podrinjski 6.402 2.885 401.00 of citizens of FBiH are still residing abroad as refugees.649. this matter is regulated on the 2 About 512.5 Ethnic composition Bosniack majority Croat majority Bosniack majority Bosniack majority Bosniack majority Croat majority Mixed canton Croat majority Bosniack majority Croat majority As it can be seen from the table.570 410. Further.401 1. bear impact on the provision of the public goods.189 4. Herzegovina-Neretva 8.343.1 26. which lists the main competencies of cantons and municipalities. Livno Total Federation Populat ion 288.935 41.031 82.9922 Area (km2) 4. Posavina 3.175 228. population and urban-rural division not only between cantons. federal cantons vary significantly in their size and population.6 3.436 496. 16 .401 34. Sarajevo 10. Una-Sana 2.649 83. such as vital national interest procedure in the Federal Parliament. and they are excluded from this figure.the integrity of the country.323. Two of the cantons are without ethnic majority.

For illustration. put the municipalities in an unfavorable position. varying from small detached parts of the pre-war municipalities which formed new ethnically congruent units. but legal acts such as municipal Statutes.basic level in Federal Law on Self-Governance. Another factor that might play a key-role that is examined in this thesis is the new system of intergovernmental transfers. They cannot be dissolved by the higher authority. as it transfers the local self-governance to the cantonal level. in building trust between the people. it comes as surprise that no government at any level has a ministry or governmental agency tasked with the affairs of local self-government. in the Federation of BiH. there are 79 municipalities and two cities-Mostar and Sarajevo. though cantons have to operate within the framework law. Municipalities differ significantly in size and population. but also partially because of the growing awareness of the importance of local level not only in delivering the services efficiently. but what is more important. especially in the early days of FBiH. with poor coordination. can be 17 . this has created ten different systems of local self-governance in FBiH. introduced together with the VAT on the state level. The situation had somewhat improved with strengthening of associations of municipalities and cities. Local councils are elected on open. At the moment. The plethora of sub-national laws regulating this area. to the big urban centers. suffice it here to say that often cantons violate the autonomy of municipalities by unilaterally changing the revenues sharing formulae or delegated responsibilities to municipalities. at least to the intermediate level. This framework law affirms the underlying notion of subsidiarity from the European Charter on Local Self-Governance. But the Law does not regulate this matter further. which joined can enjoy the economy of scale and externalities in service delivering. Effectively. and it stipulates that municipalities are independent within their own scope of competencies. with universal suffrage. direct election. Cities are consisted of several urban municipalities. For a highly decentralized country.

Municipalities are also free to associate and collaborate with other municipalities in the country and abroad. In general. Municipalities have different position in the intergovernmental system. joined with secession forces in Bosnian society. In Republika Srpska. Chief local executives (mayors and heads of municipalities) have been directly elected since 2004 in both entities. Although this intermediate level does have advantage of the economy of scale in providing some services and internalizing the externalities. as the political reality dictated the development not only of intergovernmental relations in FBiH. depending in which canton they belong. It is a product of the nationalistic expanding politics that erupted after the dissolution of Yugoslavia. 1. there was no political will to strengthen the position of municipalities.challenged by the cantonal authorities before the Constitutional Court of Federation. which makes it difficult to develop the accountability at grassroots level. and in accordance with the European Charter on Local Self-Government. this new level of authority is not historically or legally rooted in the Bosnian society. cantonal laws restrict the scope of supervision only to the tasks delegated by the cantonal authorities to the local level. only if such acts are against the Constitutions. Republika Srpska has not existed before the war as a territorial unit comprising Bosnia and Herzegovina. Cantons very often encroach on the powers of the municipal level.4 Local Governance in Republika Srpska The smaller BiH entity. It is an unnatural division imposed to keep the most of resources at the local level under the control of technocratic parties. It has a unitary form with strong central government and no intermediate level of authority. there was no need for decentralization polices because of the 18 . The decentralization of FBiH has stopped at the level of cantons. the intervention of the cantonal authorities should be kept in proportion to the importance of interests which it protects. Also. but in the whole as well.

But in case of this smaller BiH entity. which has profound consequences on the public sector functioning in that entity. compared to the federal level is much more detailed in description of competencies to the municipalities. The Law on Local Self-Governance. 19 . Similar to FBiH. The same conclusion for the position of municipalities in the intergovernmental system in FBiH can be drawn for Republika Srpska. and is given high importance as for example Art 5 proclaims local selfgovernment is one of the fundaments the constitutional arrangement of the Republic of Srpska is based on. Despite these provisions. This centralization is a deliberate policy of strengthening the “statehood” of Republika Srpska by concentrating power at the entity level. The question of local self-governance is addressed in the Constitution of RS in several articles. and that the borders of its autonomy are protected. the Law does not distinguish between rural and urban municipalities. Furthermore Art 66 stipulates that selfgovernment constitutes a basic socioeconomic relations of RS . the reason for centralization of power on the entity and cantonal level is not the unfinished decentralization as in the case of FBiH. It also lists a range of legal measures for protection of the autonomy on the local level. The prevalence of the ethnic criterion and national exclusivity were decisive in shaping the politico-administrative structure of RS. but it makes distinction between municipalities and urban amalgamation-cities. however. the RS Constitution does not explicitly guarantee the independence of selfgovernment units. and treats them more as territorial arrangements than a genuine devolution of power.high degree of ethnic homogeneity achieved by pursuing the politics of “one nation on one land” during the war.

if followed by the bail-out policy of central government. regardless whether political arrangement in the country is of unitary or federal nature. Here. is extensively discussed in the theoretical literature. Because of openness and small size of the local economy. The casting of the three “branches”. Canons of fiscal federalism do not leave much uncertainty about the proper aligning of the expenditures between the central governments and subnational governments. Debt and borrowing policy of the central government and subnational governments is often in the focus of intergovernmental relations. Another important aspect is the tendency of local governments to “free ride” on the publicly provided goods with spillovers from other jurisdictions. consisting of several tiers of government. and to engage in strategic games. Local governments might simply have too small capacity to absorb new investments. central government very often shifts the burden of deficit to the local governments 20 . However.CHAPTER 2: FUNCTIONS OF LOCAL GOVERNMENTS OF BOSNIA AND HERZEGOVINA IN FEDERATION The assignment of functions in countries with complex internal structure. stabilization and distribution between has been already discussed at the introductory part. I will add few important considerations not mentioned previously. allocation. The imprudent and narrow-sighted borrowing policy of the local governments can lead into destabilization of economy. efforts aimed at boosting local economy can actually end in some other jurisdictions.

The redistributive role of the local governments is becoming increasingly more important with decentralization of the provision of services. 21 . local government can reduce welfare losses occurring when the provision of public goods is centralized. There are three possible solutions to the problem: compensatory subsidies. in which the benefit area of the service. Economies of scale in providing some public goods can also have impact on the size of the local jurisdictions. This criterion requires that government assigns the functions to the lowest level of government. Consequently. expanding the jurisdiction boundaries to match the real scope of provision of services or exclusion of free-riders from accessing the services. Lower cost per unit of bigger jurisdiction can bring lower prices to the consumer and therefore increase the consumer’s welfare. Provision of goods by the local governments can spill-over the boundaries causing underprovision of services and free rider behavior of the beneficiary jurisdiction. there is a good argument reducing the number of local authorities to the acceptable level. congestion costs and information and decision costs. the rich and businesses between jurisdictions. What criteria should be used in determining the optimal size of the jurisdictions? Oates (1972) for example suggests the following criteria: individual preferences. spillovers or externalities. In a decentralized setting with heterogeneous preferences. economies of scale.by assigning them competencies which are not followed by appropriate revenues. Although it would be optimal from the point of view of fiscal federalism to have as many local authorities as the number of public services provided. The redistribution function on the local level is possible only if there is limited mobility of the poor. decision-makers on local goods and jurisdictions of tax payers’ are the same (McLure and Vazquez). The most important criterion in assigning the expenditure functions to the local governments is efficiency. the costs of participating in the decision making process would be too high.

Transfer of Police to State level pending successful negotiations Police Internal Affairs/Justice and Police. But very often the existing political tiers of government are not the “optimal” ones according to the efficiency criteria. Monetary policy? Refugees and displaces persons Justice. The result was the state with extremely weak central governments. forthcoming). Here. and asymmetric decentralization of two entitles of which it consists. the success of decentralization can be measured by the extent it fulfills the tasks set by the government. because the debate is about distribution of power between existing political tiers. Transfer of Police to State level pending successful negotiations Local Police 22 . After all. The three nations had different views about the functions of which should be assigned to the different tiers of government. Refugees and Asylum Policies Immigration. International Seciruty and Police Internal Affairs/Justic e and Police. Those de facto existing political tiers and centrifugal forces which emerged during the conflict in BiH. economic arguments are not central to the debate. have set the limits within which new function assignment scheme could have been developed. but the weights attached to each of those criteria in the final addition are prominently those of politics (Dafllon.Economists do have a key-role to play in describing and evaluating the economic criteria. Table 2: Assignment of expenditures in Bosnia and Herzegovina Entities Federation of BiH Expenditure Assignment State Immigrati on refugees and asylum policies Immigrati on Monetary Policy Internatio nl and Interentity Criminal Law enforcme nt Federation Canton Republika Srpska Municipalities Republic Municipalities Immigration.

Intra-entity System and Interentity Refugee Programs State Tranmissi on Regulatio n Pension System Regional TV and radio Intra-entity regulation Regulates intra-canton Intra-entity Social Assistancejoint Social Assistance joint Pension System Social Assistance Energy Intra-Entity Regulation Intra-entity regulation Roads Reformed to State level Highway Roads Regional Roads Local Roads Highway Roads Local roads Defense Universities Teachers salaries Education Secondary and primary education Federal Health Insurance Fund Primary and Secondary Health Care Health Insurance Funds Pre-school education Primary schools partially maintenance School buses Ambulance services Universities Teachers salaries School buildings Pre-school Primary school partially maintenance Health Care Primary and secondary Health Care Republic health Insurance Fund Ambulance services Sanitation Water and Pubic Utilites Housing and Spatial Plannin Sweage Treatmen Housing Policy 100% 100% 100% 100% City planning Housing policy City planning 100% 100% 23 .Communicati ons Public Transportatio n Socila Safety Net and Welfare State Inter-entity Regulator regulations y Agency Regulates National Trans.

6 100.1 27. sports.7 100 25.9 24.0 17.3 16.0 65. Table3: BiH Consolidated Budget 2000.3 8. and it was without any tax handle at its disposal before introduction of VAT.6 0.4 8.6 0.2 34.9 25. street lighting Joint Responsibilities 100% Joint Joint responsibilities responsibilities 100% Concurrent responsibility Concurrent responsibility State Government had very few expenditure functions assigned to it.5 19.3 3713 937 1272 294 1211 1428 862 115 451 22 71.5 2. o/w: Federal Cantons Municipalities Public Funds Repubika Srpska o/w: Central Government Municipalities Public Funds Brcko 100 25.3 5. when the competencies were shifted to the state level. Sport. Recreation.9 24. Parks.2 7.2 8.7 33. street lighting Museums Theaters Joint Responsibilitie s Culture. parks. Until the recent reforms of the defense system.3 6. All functions which are not explicitly assigned to the state level belong to the entities. Source: World Bank Million KM 4695 25 3452 892 1174 231 1154 1199 784 107 309 20 Revenues % of Total 100 0. estimate. parks. Street Lighting Fire protection Libraries Environment al and use of natural resources Museums.9 34.4 100. Theaters Culture.0 31.0 6.0 4.7 2.0 60. This is reflected in the share of the subnational governments in the overall public expenditure. the central government practically did not have any major spending responsibilities.4 % of Entity Total State Federation.9 32.5 73.4 % of Entity Expenditures Million % of KM Total 5233 100 69 1.Culture.5 16.6 25. sport.6 23.0 25.6 24 .

Expenditure. This level of authority had a broad range of competencies assigned to it. which reflects Bosnian ethnic post-war reality. one might conclude that Bosnia and Herzegovina is one of the most decentralized countries in Europe. Similar to this. Source: World Bank 25 20 15 10 5 0 Swit zer la nd Un it ed S tate d Ca n ada Ger man y FBiH Comparative intermediate Gov. the share of municipal expenditure still remains to be extremely low. if we exclude budgets of municipalities and measure federal and cantonal budgets as a share of the consolidated budget. the notion of subsidiarity from the European Charter on Local Self-Governance was one of the elements used. If we for example take only the Federation and compare it with other federal countries. assignment of functions to the cantons also followed the pattern of 25 rlan d Bra zil Ge r m an y Unit ed S tate Sou s th A fri ca Spa in M ex ico Spa in Swi tze .The decentralization in FBiH has stopped at the cantonal level. all functions not directly assigned to the entity level are the competencies of the cantons. Only 7. But the element with the most weight attached to it certainly was the ethnic criterion. However. Figure 2: FBiH comparative share of municipalities federation countries.9% of the entity aggregate budget is executed on the municipal level in Federation. Source World Bank 70 60 50 40 FBiH India Sou th A fric a Can ada Arg entin a Aus tr alia Bra z il FBiH Aus t ra li a 30 Mex ic o 20 10 0 In the Federation of BiH. In designing cantonal borders.

highways and railways. it had exclusive competencies over the defense and fiscal policy (including tax administration and tax policy). The absence of any horizontal equalizing policy can be attributed to the bad memory of the former state fiscal system. Until recently. Other factors such as the socio-economic cleavages in the form of the need for distinction of mother language. 26 .1 Functions exclusively assigned to Federation level The Federation of BiH entity in fact was created as a typical federal state. but with recent establishing of the state ministry of defense and introduction of VAT on the state level. concurrent and overlapping. production and distribution of energy. Extra budgetary funds such as Pension Fund and Road Fund are constituted on federal level. it has lost part of its competencies. disabled and their families is also part of the federal government functions.preserving the resources on territory in the hands of the ethnic group. The functions assigned to the authorities can be divided into exclusive. We will use this division to examine how functions are assigned in Federation of BiH. religious factors (although this is overlapping with the ethnic factors) and the still fresh memory of the unsuccessful former Yugoslav redistribution mechanisms. Categorical social assistance for war veterans. Still. with checks and balances mechanisms and some elements of the consociational federalism. 2. the Federal government has retained exclusive competencies over the economic policies. have all had an appealing effect in assigning functions the cantons.

2. the border of the cantons and new municipalities which emerged has been not taking into account economies of scale in providing services and spillover effect. 27 . Source: USAID GAP 2% 9% Education 11% Public Order and Security 41% General Public Services Social W elfare other 13% Housing Culture Defense 22% 2% 0% The broader definition of the subsidiarity principle was used in assigning the expenditure responsibilities to cantons. In most cases. Too strong a federal government would not have enabled for the specific ethnic interest to be realized.2 Functions assigned to canton and functions delegated to municipalities Cantons have a wide range of functions assigned to them. which further regulates municipal responsibilities and sharing of competencies between these two levels. Figure 3: Average cantonal expenditure by functional category (2002-2003). In this sense. Cantons can delegate some of the functions to municipalities. it is constitutionally mandated to do so. education policies implementation. housing. tourism and local businesses. the boundaries between cantons were drawn to accommodate the ethnic criteria of keeping the control over the resources and providing the services to the “proper” ethnicity. social assistance. and it bore a negative message from the past socialist redistributive policies. and in case that a municipality has ethnic majority other than that of the canton. Each canton has adopted a Law on Local Self-Governance. It includes health care. cultural affairs.

This fragmented system of social protection caused huge disparities in the level of social assistance. Better-off cantons (e. especially on tertiary level. and teacher’s salaries. which has the function of pooling the risk of the cantonal funds and introduces the economy of scale in the health care system of the Federation. either federal or the state one. the arrears of unpaid entitlements in those cantons have been already accumulating for years. Social protection is also responsibility of the cantons. cantons have retained all the competencies: educational policy in general. though the spillover effect is significantly present increasing the tax burden of the local tax payers.Health care funds exist on the cantonal level. this has not occurred so far. Gorazde or Posavina). though federal government provides “categorical” social assistance and unemployment benefit. because the cantons cannot restrain students from other jurisdictions in capturing part of the benefit. This was partially offset by establishing the Federal Health Care Solidarity Fund. This has caused underprovision of services and misallocation of the public funds. Though it has been constituently guaranteed that cantons can shift responsibilities to the federal level. Though mobility of population is relatively 28 . academic curricula and research. elderly and displaced persons and refugees) than the worst of cantons (Cantons 10. Sarajevo) with higher taxable base and revenue raising capacity provide their citizens with significantly higher social assistance (for orphans.g. As a result of the unfunded mandate. Some cantons (Canton 10. Herzegovina and West Herzegovina) have responsibilities for school maintenance and pupils transportation. Present here is also the inability of cantons to internalize the spillover effect in providing the educational services. The solution would be to shift the financing responsibility to the upper level. in all three levels of education. In the area of education. while financing is provided by cantons. The delivery of the service is delegated to the municipal level.

municipalities have exclusive responsibilities in urban planning. internal affairs. 2.4 Functions assigned exclusively to municipalities As it is provided by the Constitutions and Laws on Local Self-Government. but all functions not explicitly assigned to the federation are the responsibility of cantons. in which the prevailing criteria were of ethnic character. The Federal government has concurrent responsibilities with cantons and municipalities in the health policy implementation. financing of the social assistance should be done by the federal level. Therefore. libraries. The municipal level not only in the FBiH. 2. municipalities in FBiH have been severely restricted as decision-makers in any of these fields. education. cantons can not provide the redistributive effect which Federation would have as a bigger territorial unit.low in BiH. environmental protection and social protection. but in the whole country as well. students transportation.3 Concurrent responsibilities The Federal Constitution provides that the Federation and cantons can exercise joint functions in certain areas. as in the case of education. has been seized by the post-war political setting. but actual delivery of services needs to be retained in municipalities. Regardless of legal provisions. parks and museums and other responsibilities delegated by cantons. provision of local utilities (delivered by the off-budget municipal enterprises). 29 . and it is even more pronounced by the weak ownrevenues assigned to the municipalities. not the economic efficiency or citizen’s welfare. pre-school education.

30

CHAPTER 3: REVENUE SOURCES
3.1 Reasons for decentralizing revenues. The question of decentralization of the revenue assignment is much less clear-cut than for the expenditures. One of the arguments mostly used is that of accountability, which means that subnational governments will be more responsible to their constituency. This will result with more efficient and prudent use of the locally raised money (Boadway and Shah, forthcoming). The central government can use its assigned fiscal weight to affect the subnational governments spending priorities. Another important consideration is the uncertainty which local governments face when the central government decides unilaterally to change the funding of subnational governments. This will affect the predictability of the revenue stream for the SNU and their long term budgeting capabilities. On the other side, decentralization of the taxing powers can seriously compromise the efficiency and the economic unity of the country. Decentralization can distort allocation of labor, capital and businesses, and it can lead to wasteful tax competition between subnational governments. Different redistribution standards between the states can significantly jeopardize the national equity objectives. Administrative costs of tax collection can also increase because of reporting to several layers of authorities. Modern federations assume great spending responsibilities, for which they need broad-based tax handle. If the states are left with narrow tax base, they might be tempted to use it too excessively to the detriment of the whole system.

31

Proper assignment of taxes needs to follow certain rules, if it is to be successful. In modern federations, governments employ a mix of broad-based taxes, that spread the burden of tax raising across large number of taxes, which keep any tax rate low. In the federal economy, there is also a question of how those taxes should be allocated among the levels of governments. If, for example, the constituent land is given limited tax sources, then the tax rate in that state might be set too high from a point of view of a desired tax mix . There are several principles which need to be observed when deciding on the assignment of tax to lower governments (Boadway and Shah, forthcoming): Efficiency of the common internal market may be jeopardized by the different taxing

of the same transaction in constituent states. This can lead to distortion of business decision, which would be based only on tax differences. Firm operating in more than one jurisdiction faces increased administrative costs when working with two different tax structures, and taxation of mobile factors. National equity is usually understood as an intention to treat all citizens equally for the

redistributive purposes. This is often seen as the task of the central government, as only the central government can ensure that citizens in all regions are treated equally. But the taste of the states can differ in that regard. If the redistribution is viewed as the central government, then the instruments suitable for redistributing, such as income and wealth taxes should be under the central government control. Administrative and Compliance Costs can be reduced by joint collection of state and

federal taxes, both on the sides of the government and taxpayers. The tax system should be as simple as it can be, compatible with achieving other goals of the system.

32

more jurisdictions are required to finance their expenditures. as the accountability is fostered by the close scrutiny of the electorate. Revenues sources should be matched with the expenditure needs as closely as possible. 33 .- Fiscal and Political Accountability principle states that fiscal accountability is greater.

This had as a consequence huge disparities in the revenues of the subnational governments. before the reform of the taxation system. In the peace agreement.These principles have been significantly compromised in case of revenue assignment in Bosnia and Herzegovina. most notably between cantons and between municipalities. CoM was given only some minor fees (such as passport and diplomatic).2 Situation before the introduction of VAT 34 . Asymmetric and decentralized solution for revenue assignments left the CoM without any real tax leverage. The Central Government (CoM) practically did not have any taxation power. until the recent introduction of the VAT on the state level. while Republika Srpska’s contribution was 1/3. 3. FBiH contributed 2/3 to the State budget. until the VAT introduction. was done by transfers from the entity level. without any own source revenues. Financing of the State expenditures. The Council of Ministers or the Federal government did not have any active policy aimed at decreasing those disparities.

with 80% going to the canton and 20% to the municipality in most of the cantons. but tax rate and tax base is regulated by the Federal government. and shared with the respective municipalities. Figure 3: Structure of cantonal revenues for 2003. but the potential of this tax is still not fully understood by the subnational authorities. a revenue sharing in FBiH was regulated by the Law on Allocation of Public Revenues. but the rate and the tax base are determined by the Federal government. Property and property transfer tax is shared between the cantons and municipalities. The customs policy is harmonized across entities by the CoM. Federation Entity was exclusively assigned custom and excise revenues. The most important shared tax was Sales tax. Appendix A contains sharing ratios for all taxes before introduction of the VAT. a general turnover tax. Personal income tax (PIT). Source: GAP 35 . or better to say of place of work. The tax is regulated by cantons. due to the free-trade agreement with neighboring countries.Prior to the introduction of the VAT. and corporate income tax revenues from the companies owned by the Federal government. ensuring that the tax stays in the canton/municipality of origin. However. has passed a Law on Revenues Sharing which regulates sharing of revenues for respective canton and its municipalities. with the exception of Sarajevo. which is assigned 100% to cantons. Corporate income tax is assigned both to the Federation and to the cantons. Each canton. customs entirely accrue to the entity governments. in a form of the wage tax also accrued to the cantons. The importance of customs is declining however. It is again based on the derivation principle.

except for the user charges which are collected and appropriated by the off-budget companies. and on the other the potential of the property tax as the most buoyant and stable local tax is still underutilized not only in the FBiH. Source: GAP 36 . which does not allow for development of a genuine local tax effort. Municipalities prefer to rely on the shared tax. but in the whole BiH as well (GAP 2005). these charges and taxes on the level are extremely fragmented.Municipal (or local) taxes are the taxes over which the lowest tier of governments has the right to regulate tax base and /or a tax rate. Figure 4: The Structure of Municipal Revenues by Canton. Local taxes have not been used adequately to finance municipal expenditures or to re-allocate resources on the local level. On the one side. Very few of these taxes are regulated exclusively by cities/municipalities.

having in mind that that share of the taxes assigned to municipalities differs significantly from canton to canton. Figure 5: Total per capita revenues of cantons in 2003. which was 8. which compounded with the derivation based taxation further exacerbates these disparities. Source-GAP 37 . The magnitude of disparities between the cantons is illustrated in the next chart. Horizontal fiscal imbalances are also huge in the Federation. None of the cantons (perhaps with exception of Canton Tuzla) has introduced the mechanism for fiscal equalization. municipal revenues from all sources amounted to 268 million of KM of all public spending in FBiH. More importantly. By far the richest canton (Sarajevo) has three time bigger per capita revenue than the poorest canton (Central Bosnia). This does not come as a surprise. Fiscal capacity of the cantons varies.340 million KM (see figure 2 in Chapter II for comparative world overview). municipal revenues in 2003 represented only 3. This all suggests that municipalities in the Federation are under-funded. and that system is in serious vertical imbalance (GAP 2005).2% of FBIH’s GDP.100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3% 13% 8% 8% 2% 11% 0% 12% 2% 4% 9% 2% 4% 1% 11% 0% 34% 33% 2% 4% 19% 2% 14% 27% 28% 28% 13% 6% 4% 9% 3% 5% 5% 23% 35% 26% 6% 4% 21% 4% 4% 24% 22% 23% 3% 14% 1% 23% 16% 3% 30% 34% 1% 23% 13% 1% 4% 7% 29% 25% 32% 1% 11% 40% 17% 2% 0% 26% 0% 2% 7% 24% 41% 21% 14% 7% 14% 9% 5% 12% 10% 8% 16% 2% 11% 15% 8% other grants fees & charges asset income citizens taxes sales taxes property taxes wage taxes 1 2 3 4 5 6 7 8 9 10 ALL In 2003. There are serious disparities in per capita revenues between municipalities and cantons.

400 1.168 157 173 385 total municipalities Even in the case of Tuzla Canton. But the Federation has no available tax revenues that could be used for this purpose. Source: GAP 38 . Disparities caused by the poor fiscal capacity of the municipalities cannot be eliminated unless there is a proactive equalization policy.000 800 600 400 200 0 1 2 3 4 total cantons 5 6 7 8 9 10 113 408 489 210 148 114 396 497 92 90 359 478 513 339 255 191 1.600 1. where the five poorest municipalities were assigned larger share of revenues.200 1. Figure 6: Estimates of Disparities in Per Capita Municipal Revenues: Canton 2. 3 & 5. the disparities still remain to be large.1.

members of which are the Entity Ministers of Finance. Starting from January 2006. State Ministers and their deputies. New Agency-the Indirect Taxation Authority (ITA) was established on the state level. and all indirect taxes in the country now flow in to the Single Account. customs. which was one of the requirements for accomplishing the tasks from the European Union Feasibility Study for Bosnia and Herzegovina.3. CoM has initiated a major reform of the taxation system. the sales tax was replaced with 17 percent of VAT.3 Tax System Reform-A Policy Window for Fiscal Equalization In 2003. excise and road fee) to the Single Account. Figure 7: New Structure of Indirect Taxation System in Bosnia and Herzegovina ITA Steereing Board 39 Fiscal Council of BiH Brcko District Budget SINGLE ACCOUNT Republika Srpska Budget Indirect Taxation Authority (ITA) FBiH Budget Council of Ministers . that were harmonized with the EU Sixth Directive. as well as Entity and State Prime Ministers. in accordance with the Law on Single Account. ITA started with collecting indirect taxes (the sales tax. Fiscal Council-a new body for intergovernmental coordination of fiscal and budgetary police was established in 2005. with the competences of collecting all indirect taxes in both entities and Brcko District. A framework Law on System of Indirect Taxation (LSIT) and Law on Value Added Tax (VAT) were passed. In 2005.

The amount to be distributed to the entities can vary in the future. as according to them. and the fact that the Law on VAT does not envisage exemption or zero rate. 1. amounting up to 70% of the cantonal income and 21% of municipal. there is an urgent need to reduce the presence of politics and resolve this issue on the expert level. Therefore. KM of indirect taxes and customs in the first five months of 2006. depending on this highly politicized decision. but there is a need for developing a mechanism for allocation of what is left to the sub-entity governments. the derivation principle can no longer be applied for allocation of revenues in the FBiH. as of 1 January 2006. 40 . having in mind that the tax rate of 17% has been set higher than it would be the neutral tax rate replacing the sales tax. which is realistic. This is partially offset by the improved tax collection and fiscal compliance. ITA has justified its existence by collecting. It depends on the number of the processed VAT invoices from entities. The state has a priority in being financed from the Single Account revenues. except for exports.39 bill KM collected by the three separate tax and custom authorities. KM of indirect taxes and customs. but it has been the subject of much of political debate recently. which is inherent to the VAT. These revenues represent a huge portion of the sub-entity income.5 bill. The plan for this year is to collect 3. the federation. which is comparably much higher than the amount of 1. Consequently. cantons and municipalities could face uncertainties in the amount of income from the Single Account.LSIT does not oblige ITA to trace the origin of the revenues below the entity level. a procedure which the smaller BiH entity sees as biased and unjust. Still. The sharing ratio between the entities and the Brcko District is defined in the LSIT.55 bill. invoices from the FBiH are given priority.

CHAPTER 4: NEW INTERGOVERNMENTAL TRANSFER SYSTEM FEDERATION OF BOSNIA AND HERZEGOVINA 4. vertical fiscal imbalances FBiH are significant.1 Theoretical Framework IN As it was already discussed in chapter II. Still. Absence of any kind of information about the municipal expenditures and very few available for the cantons. it can be said that the municipalities are uderfunded. Horizontal disparities between cantons and between municipalities also pose a serious obstacle to the economic convergence and creation of a single economic space in BiH. 41 . make the task of quantifying the imbalance very difficult. while the most buoyant taxes are assigned to the cantonal level.

when the subnational governments are allocated responsibilities in providing services. Fourth. and at the same time central government can influence spending patterns of the SNU. New transfer system in FBiH has taken historic (year 2005) information on cantonal and municipal revenues as starting point. equalization policy of the government can also be implemented by assigning the ownsource revenues to the SGU. There are following types of intergovernmental transfers (Bird and Tarasov 2002): Revenues sharing. but the most buoyant revenues are kept at the central level. or there are revenues transfers to fill the gap. Third.The intergovernmental transfer system can be introduced for four good reasons (Bahl 1999). First is the question of vertical imbalances. The question of precise measuring of the vertical imbalance is not easy to resolve. and they reflect the diversity of the resources and economic potential of the subnational governments units (SGU). but more typically it is done through transfer system. SNU can keep certain percentage of the tax collected within their territories. especially in the conditions of constrained data availability. trying to increase their share in the public revenues through new transfer system. There are two solutions to this problem: either sub-national governments are given more revenue-raising powers. 42 . Second. transfer system can be used for fiscal equalization between the sub-national jurisdictions. The revenue is shared based on its “derivation”. Transfers can be used to correct these anomalies. externalities occur when the SGU decided to underspend on the service with significant spillover effect. or it can be divided strictly of per capita basis. Mobility of the people and capital from less productive to more productive regions increase efficiency. and fixed percentage is returned to the jurisdiction of origin. but the fiscal system should be designed to have minimal impact on the allocation of factor of production. Under this arrangement. Horizontal inequalities are natural occurrence.

Because they are unconditional. Grants used for equalization purposes are most frequently unconditional grants. SGU have substantial policy discretion over spending it. and it can be open-ended or capped. Matching grants can be designed very specifically or for the whole sector. Matching grants are conditional grants which require a specific contribution by the SGU in a particular expenditure area. rate of matching of central government can vary depending on the central government desire to influence spending in certain area. 43 .- Unconditional (general purpose) block grants have no strings attached to it.

as it was the case in FBiH Government. Though there were not too many centrally determined expenditure mandates for municipalities. each SGU receives a share of tax colleted within its boundaries. it is more difficult for the central government. as richer municipalities and cantons were receiving proportional larger amounts of tax. This was very much case in FBiH municipalities and cantons. FBiH Government did not have tax capacity to equalize between cantons and municipalities. revenue sharing is stable and predictable source of income for SGU. Ad-hoc transfers are the least desirable type of transfers. It hardly ever results with the grants allocated on the sound fiscal principles. This approach opens the door for the political manipulation and buying favors for the grant allocation. On the other side. 44 . to influence the fiscal area. local population would not hold local officials responsible for quality of services provided. Revenue sharing distribution scheme are inherently not equalizing.- Cost reimbursement is a scheme through which central government reimburse local governments for certain approved costs. as the tax being centrally collected and tax rate and base centrally determined. These types of transfers are recommended when central government relies on local government for implementation of certain types of programs. It allows them to plan and forecast future revenues with certainty. The distribution of grant is left to the discretion of the central government or one of its agencies. as the all major taxes were either assigned or shared with the cantons. except in rare cases. local officials did not use this freedom in spending the revenues to increase accountability and improve quality of living. Another problem with this approach is that it discourages autonomy and accountability on the local level. but on the other side. Under the shared revenue scheme for grant distribution. This type of grant allocation scheme was operating on the cantonal level in FBiH before introduction of VAT.

and finally conditionality. should be designed to reflect objectives of the grant program.Another common approach used in distribution of pool of revenues is formula based transfers. data necessary to calculate the formula. Using formula for allocating grants between the SGU generally improves the transparency and reduces discretion in deciding about grant allocation. Flexibility of formula allows for changes as the needs for public expenditure change. Four main components of the formula are: elements of the formula. 45 . cost associated with administering the system. as all know exact criteria according to which distributions are made.

46 . However. this approach is data-heavy and requires well elaborated procedure how to cost expenditure of SGU. Using historic expenditures obviously has the risk of not incorporating possible changes in expenditure patterns or inflation over time.Grant allocation formula might in the first place reflect difference in expenditure needs across the SGU. These indexes try to capture some of the factors which determine the cost differences in delivering standard basket of services. as inclusion of too many factors reduces transparency and increases costs of collecting data. Lagged expenditure values are the simplest and in most cases available data for quantifying expenditure needs. these weights are often determined on ad-hoc basis. and should be updates regularly. One of the problems with the index-based approach is the political pressure for inclusion (exclusion) or weighting of some of the factors that might be beneficial (or harmful) for specific SGU. every year of two. Expenditure needs can also be measured bottomup. subject to political pressure. because of differences in needs (for example percent of school aged children or retired). Third and more widely used approach is estimation of some type of weighted index of relative expenditure need. However. incidence of poverty or unemployment or geographical conditions. Data used in formula should come from a official agency. or other factors such as illiteracy or unemployment. Different regions in the country differ in their cost of providing standardized basket of public services. by calculating costs of current expenditure obligations of SGU. to include special needs of young and elderly. Countries use various indicators of expenditure needs. The weights which ought to represent relative contribution of each factor to the overall measure of need can be easily calculated using some statistical method. Formula should include limited number of factors. Factor could be demographics.

Another widely used measure for fiscal capacity is Gross Regional Product (GRP) which is more comprehensive measure than the level of per capita level of personal income. also can influence level of collected tax.Revenue capacity of the SGU government can be defined as the potential revenue that could be raised from the tax base assigned to the SGU. Different proxies of revenue capacity have been used in countries around the world. However. taxpayers compliance. In this approach. pool of revenues is allocated in proportion to some allocation factors that together represent a proxy of SGU fiscal capacity or fiscal need. as the SGU which collects more revenues would receive less of transfers. second best approach is to multiple factors as elements in the formula. Using actually collected revenues might provide SGU with negative incentives. Particularly poor or depressed region might still need additional transfers. if and average level of effort is applied to the tax base. ceteris paribus. in majority of the transitional and developing countries. Two SGU with the same fiscal capacity may collect different tax amount as the result of applying different tax rate or because of different enforcement efforts invested in collecting revenues. and then each of them is assigned weight. In this case. because it includes incomes generated within regions irrespective of worker or producer residence. as the formula might not capture all extreme conditions in these SGU. SNU unit will receive its share in proportion to that factor. Finally. For those SGU. local fiscal capacity can be safely measured by actual or forecasted level of shared revenues and transfers (Boex and Martinez-Vazquez 2004). a number of factors are selected. In the absence of clear and unambiguous measures for quantifying expenditure needs and fiscal capacity. 47 . where the SGU have limited tax autonomy and bulk of their come from tax sharing. determining hwo imprant is each of them in final allocation. Level of collected revenues or lagged revenues from the previous year is used very often. but the actual revenues can provide the SGU with perverse incentive to decrease tax effort. it will be necessary to include special weights for equalizing their fiscal capacity and expenditure needs.

3.48% for financing of cantonal functions.2% for financing function of entity level. Both entities and Brcko district will receive revenues from ITA’s Single Account according to the processed invoices from their territories.68 0.42% for financing municipal level functions. The formula is based on a number of weighted factors which try to capture differences in expenditure needs and revenue capacity of cantons and municipalities.4. FBiH will distribute: 36. Table 4: Weights for cantons and municipalities used in allocation formula Weights Area Population Elementary School Children Cantons 0.13 Development Index 0.05 0.06 0.07 48 . using the for the first time formula for distribution of revenues from to sub-national level. 8.57 0. Of this amount. and after the revenues are transferred to the state budget for financing CoM functions. 51.9% for Road Fund.24 Municipalities 0.2 New Formula Based Allocation Mechanism in FBiH Government of FBiH has passed a new Law on Allocation of Public Revenues (Official Gazette 22/06).20 Secondary School Children 0.

9*HCs + 0.2 for municipalities with below 80% of average. formula contains a weight for special spending needs of Sarajevo canton.8. All data used in formula are collected by Statistical Agency of FBiH. and are the best possible data obtainable at the moment. unclear what method was used in calculation of particular weights attached to formula factors.3*NCs) Year 3 (2008): Cs = (0. and gradual introduction of percentages according to new formula: Cantons Year 1 (2006): Cs = (0.5 *NMs) 49 .5 for the municipalities covering the costs of elementary schools. Two cantons.8 for municipalities with below 20% of the FBiH average collection of those taxes. This solution is fully understandable having in mind magnitude of current horizontal fiscal disparities on one side. It is calculated as the average of the collected sales tax and income tax for respective municipality for 2005. At the moment it is not possible to obtain any reliable information on municipal expenditures which could be used for calculation of weights.2 for municipalities with over 60. and on the other level of investments and long-term expenditure in better-off cantons and municipalities. to 1.1*NMs) Ms = (0. and 1. Formula has a factor of 1.7*HCs + 0. are also given a special weight of 1.9*HMs + 0. Gorazde and Livno. either using regression or simply as historic information. Phasing-in period combines percentages of sales tax collected prior to the introduction of new system.3*MCs) Ms = (0.1*NCs) Year 2 (2007): Cs = (0.7*MCs + 0.5 *NCs) Municipalities Ms = (0. Weights for the fiscal capacity are in the range between 1. New Law envisages six years phase-in period for implementation of the system.In addition to this.000 of inhabitants.5*MCs + 0. which had the smallest revenue from the sales tax in derivation-based system.5*HCs + 0. however. Index of development actually measures fiscal capacity factor of the municipality. which is 2. It is.

3*HMs + 0. 50 . HMs – Historical share in the sales tax in FBiH of canton and municipality.1*HCs + 0.3*HCs + 0. Ms – Percentage of the share in the pool of indirect taxes in the FBiH for canton and municipality. HCs.Year 4 (2009): Cs = (0.9*NCs) Year 6 (2011): Cs = (NCs) Ms = (0. respectively.1*HMs + 0.7*NCs) Year 5 (2010): Cs = (0. and. respectively.9*NMs) Ms = (NMs) Cs.7*NMs) Ms = (0.

and possible re-aligning of functions between tiers of governments in FBiH. cantons and municipalities. RS and Brcko District Distribution of revenues between entities and Brcko District has been subject of much debate recently. in 2006 cantons will receive 1. when officials from RS claimed that distribution mechanism is unjust and this entity was losing millions of KM every month.NCs.934 bil. However. municipalities will have at its disposal significant share of the public revenues in FBiH. which allocate 66. then amount available for distribution in FBiH is 1. and apply them to the amount forecasted amount for 2006.77% to FBiH. Applying percentages for allocation between FBiH level. 2006.76% to RS and 3. if we take percentages for June 2006. This will call for evaluation of the assignment of functions to municipalities. collected to the Single Account of ITA. Any changes in intergovernmental relations should reflect the role of municipalities as the closest tier of government to the citizens. KM of indirect taxes will be collected 3. Comparing to 2005 level.95 bil KM. NMs – Percentage of share the according to new system for cantons and municipalities. but also potential threat of low capacity on the local level to implement newly assigned functions.008 bil KM and municipal level 164.46 to Brcko District. State budget forecasts 566 mil of indirect taxes to be transferred for 2006 from Single Account for financing central government functions and service of foreign debt. respectively. KM to be allocated between FBiH. 3 ITA press statement from June 5.9 mil KM. The pool of indirect taxes available for distribution in FBiH is determined in percentage of the indirect taxes. in the first place VAT. At the end of phase-in period. municipalities will receive 72% more and cantons 2% more of indirect taxes. This leaves amount of 2. 29.5 bill. ITA’s estimation is that in 2005 about 3. 51 .

we have run simple LSE regressions to determine the correlations between the dependent variable . we have selected GDP per capita and PIT per capita of cantons and municipalities.42) Transfer2007 = 96. we have used population. We have also tested how system will function at the end of phase-in period.65) We have not been able to find any statistically significant correlation between per capita transfer and population at either 5% or 10% of significance.11 + 0.52 + 0.575*PITpc 3.95 Transfer2007 = 43.67 + 0. while Appendix contains calculated per capita amounts of transfers to cantons and municipalities for 2006 and 2007 (t-statistics is given in parenthesis): Cantons: Transfer2006 = 44. and as indicator of expenditure needs. PITpc and population.95) Municipalities: Transfer2006 = 32.78 + 0.4. and correlated them with GDpc. and we have reduced number of observations from 79 to 71. and several indicators revenue capacity and expenditure needs – independent variables. As indicator of revenues capacity. Sarajevo municipalities were given as one sum. taking all Sarajevo municipalities as one.3 How good new system performs? To test how well new formula based transfer system does the job. The results of regression are given below. We have for that purpose calculated per capita amounts in 2011.74 3.102*GDPpc (3. Here are the results: 52 .423*PITpc (1.amount of transfer per capita for cantons and municipalities.118*GDPpc (3.

053*GDPpc (-1.98 – 0. 53 . formula will provide municipalities will bigger revenue raising capacity will receive smaller per capita amount of transfer. at the end of transition period.82) Again. This trend is visible throughout six year period for municipalities.23) Municipalities: Transfer2001 = 82.107*PITpc (3. which shows that. but what can be concluded for municipalities is that system in the final year achieves horizontal equalization.3 8+ 0. but formula for cantons even after six years period still does not equalize based on revenues capacity. coefficients for population were not significant at 10%.Cantons: Transfer2011 = 267. Transfer per capita have negative correlation with the revenues capacity indicator-PIT.

54 . But. but on the other cantons were by Dayton design put in a position of fiscally strongest. After ten years of stalemate. The disparities between the cantons. This was not by chance: in the fiscal sphere. The reform was more than necessary having in mind that post-Dayton relations between the tiers of government in FBiH have not been adapted to the changing socio-economic situations in the country. State of BiH has been completely deprived of any role in fiscal sector. without any major reform processes of fiscal system. newly introduced formula based mechanisms has finally changed the relations between the municipalities. this was a deliberate policy or “system error” of the Dayton: On the one side. the primary task for cantons was to retain ethnic control over the financial resources. but also on the intra-cantonal level. FBiH Government did not have sufficient fiscal power nor was there a political will to equalize between obviously growing disparities.CONCLUSION New system for allocation of public revenues in FBiH has marked a milestone in the intergovernmental relations in FBiH. without any active policy for equalization pursued by the FBiH government or cantons. have threatened to compromise social equity of the FBiH citizens and economic convergence of FBiH. Until recent introduction of VAT. cantons and FBiH level.

For the first time. derivation based system will be replaced with unbiased and simple formula. The formula uses simple and verifiable data for calculation of transfers and it allows for easy modifications. Formula captures the expenditure needs differences across the municipalities and cantons.New system for allocation of public revenues incorporates both expenditure needs and fiscal capacity indicators. and hopefully better local governance. which will enable municipalities and cantons for more stable budgeting. transfers per capita vary negatively with PIT per capita indicator on municipal level. which almost certainly will take place in the following years. 55 . as well as fiscal capacity differences – in the last year of transition period. This is the indicator that formula is performing well in correcting horizontal imbalances.

This is partially helped by the increased compliance and tax collection. improve their accountability by opening channel for communication with citizens and for citizens active role in local government affairs. by assigning additional responsibilities to municipalities. it will be necessary to accompany present reforms of fiscal sector with parallel projects of capacity building on the local level. and this is purely political issue. but that there should be genuine devolution of power to the local level. The first and foremost task will be to improve financial management in municipalities and cantons. This requires that new law is adopted in the course of the fiscal reform.Though the formula represents somewhat an enigma for cantonal and municipal authorities. Of special importance will be regulation of how municipalities and cantons access capital markets. and to introduce program and performance budgeting and multi-year budgeting. allowing local governments access to capital markets. poorer local governments in FBiH will have at their disposal significantly bigger revenues than comparing to the present system. 56 . at the end of six years phase-in period. train local officials project preparation and management. In that sense. If this happens. The increased flow of revenues for local governments might provide incentive for realigning of the intergovernmental relations in FBIH. but at the same time issuing upper tiers of government from bailing-out municipalities and cantons. The conditions are already created which enable some municipalities to borrow even now. inherent to VAT. and this will become even more realistic as the situation with local finances improves. but gradually even before. it will be necessary to direct reform so that municipalities are not assigned only mandated functions.

57 . Only in this way growing disparities between two BiH entities will be possible to eliminate. New ministry. This study will then need to be expanded to include results for FBiH after the system has been in function for some time. possible to predict future political developments in BiH.If the role of local governments becomes more important. and through that process additionally strengthen integrative forces in the society. and that we will not have to wait for a long time for this to realize. It is not. will need to be established to coordinate efforts in this area and to harmonize different policy solution in entities. monitoring and analysis of local governance performance. or if political reality permits on the state level. either on entity level. of course. We hope that politicians. but we believe that in the same way it was uncompressible that there would be some model of fiscal equalization introduced in FBiH. there will be a need for central data collection. decisionmakers but common people as well have learnt a lesson in the case of FBiH. in the same way we hope that at some point in the near future there will be a fiscal equalization scheme for whole BiH. but also to analyze possible new BiH-wide fiscal equalization scheme.

Appendix A: Shared tax between cantons and municipalities before VAT introduction 58 .

799 1.51 Distribution of transfers for 2011: New formula applied 100%.095 12.743 17. in KM 342.404 17.44 855.90 3. in KM 331.23 350.821 3.Appendix B: Cantons Distribution of transfer for 2006.972 1.55 447.62 Distribution of transfer for 2007.247 12.92 315. Cantons Una-Sana Posavina Tuzla % of FBiH Distribution Pool 10.499 1.52 389.82 329.84 17.013 500.68 360.017 8.10 325.00 408.613 392.50 818.782 Per capita amount of new transfer.15 269.97 315.203 Per capita amount of new transfer.83 346.03 424.91 Independent variables used for regression.830 8.43 315.275 2.768 2.62 341. Cantons Una-Sana Posavina Tuzla Zenica Gorazde Central Bosnia Herzegovina-Neretva West Herzegovina Sarajevo Livno % of FBiH Distribution Pool 9. 59 .733 1.92 534.385 33.578 Per capita amount of new transfer.37 8.714 8. in KM 374. Cantons Una-Sana Posavina Tuzla Zenica Gorazde Central Bosnia Neretva-Herzegovina Wesz Herzegovina Sarajevo Livno % of FBiH Distribution Pool 9.426 34.538 1.55 413.

205 28.525 3.Zenica Gorazde Central Bosnia Neretva-Herzegovina West Herzegovina Sarajevo Livno 14.39 476.10 60 .110 3.50 620.627 2.10 378.04 376.122 9.74 691.603 8.890 367.03 386.

in KM 2120.436 496.9 2430 2851 4376 3011.8 2862.401 34.885 401.8 2411.6 Population 288.4 2749 3019.649 83.402 61 .935 41.2 5957.031 82.175 228. 2007 and 2011 Canton Una-Sana Posavina Tuzla Zenica Gorazde Central Bosnia Neretva-Herzegovina West Herzegovina Sarajevo Livno GDP per capita.508 256.Appendix C: Municipalities Distribution of transfers for 2006.570 410.

02 72.379 0.364 0.Table continued Municipality % of FBiH Distribution Pool for 2006 0.419 0.338 0.733 0.60 36.60 80.66 101.20 84.313 0.481 0.80 51.243 0.09 41.377 0.43 75.009 0.51 55.36 53.322 0.24 61.22 40.37 32.11 67.109 1.51 54.55 69.841 1.60 70.263 0.495 0.013 0.941 0.301 0.34 76.96 80.58 42.91 48.357 1.208 1.61 56.093 0.35 51.92 44.013 1.73 76.78 124.696 0.38 100.088 0.263 0.02 71.723 1.823 0.34 77.94 101.15 30.016 0.26 93.50 85.28 58.29 75.18 4.727 2.88 45.15 29.112 0.151 0.14 68.015 1.596 0.211 0.30 50.897 2.917 2.48 52.39 65.202 1.183 0.40 59.187 0.50 73.03 110.68 47.60 57.12 123.013 0.412 0.57 32.062 1.902 1.74 80.536 0.755 5. in KM 73.093 2.10 102.473 0.893 Per capita amount of transfer for 2006.312 1.979 0.32 65.547 8.223 0.26 57.577 0.67 38.666 0.42 69.755 1. in KM 51.37 42.64 107.848 2.162 1.59 1.19 37.94 89.79 85.529 1.750 0.576 1.253 0.229 0.13 87.108 1.318 5.49 136.23 136.674 0.304 1.98 112.53 123.22 0.691 0.787 Per capita amount of transfer 20011.842 0.94 67.12 70.03 0.697 2.875 1.731 0.75 118.541 1.10 40.396 1.85 69.268 0.476 0.996 1.85 54.987 0.80 93.84 113.76 68.55 72.65 61.44 69.33 65.26 65.175 0.274 0.628 0.344 0.032 0.938 4.73 96.67 55.035 0.39 55.65 94.072 0.442 0.29 58.76 29.87 % of FBiH Distribution Pool for 2007 0.83 112.612 9.634 1.934 1.32 47.06 64.30 69.197 4.60 62.82 177.921 0.028 0.90 83.66 59.74 51.79 62.08 69.89 49.222 0.78 59.026 0.88 64.32 105.26 74.444 0.99 1.02 72.255 2.85 54.347 1.98 66.37 75.76 72.111 2.566 0.92 64.99 19.463 1.61 71.49 79.259 0.80 72.85 65.00 68.227 0.90 112.192 0.55 68.71 4.43 40.73 70.181 0.957 1.16 28.53 72.77 120.718 1.976 0.342 0.04 37.468 1.92 56.989 0.513 1.295 1.85 105.82 87.40 76.61 55.619 2.78 36.83 45.383 0.932 5.334 0.09 41.36 24.425 0.212 1.812 0.82 95.74 75.42 55.55 31.73 59.426 1.891 1.60 25.41 93.324 1.61 66.232 2.617 0.051 1.627 2.636 1.18 56.124 2.00 72.08 68.956 0.035 0.432 0.545 0.00 66.95 28.51 123.303 0.33 59.033 0.738 0.06 82.58 89.015 0.456 0.66 61.348 0.16 40.572 1.682 0.62 58.105 0.95 70.72 89.013 1.019 0.273 1.33 68.328 0.623 1.139 1.46 37.46 .707 0.30 33.789 0.997 0.93 67.49 88.01 72.533 0.298 2.74 76.50 71.65 96.91 49.71 68.42 39.52 54.53 81.66 0.99 62.37 68.269 18.38 48.80 22.17 62.64 77.869 62 Municipality Kresevo Bihac Novi Travnik Bosanska Travnik Krupa Vitez Bosanski Petrovac Capljina Buzim Citluk Cazin Jablanica Kljuc Konjic Sanski Most Mostar Velika Kladusa Neum DomaljevacProzor Samac Ravno Odzak Stolac Orasje Grude Banovici Ljubuski Celic Posusje Doboj-Istok Siroki Brijeg Gracanica Sarajevo Centar Gradacac Hadzici Kalesija Ilidza Kladanj Ilijas Lukavac Novi Grad Sapna Sarajevo Novo Srebrenik Stari Grad Teocak Trnovo Tuzla Vogosca Zivinice Bosansko Breza Grahovo Doboj-Jug Drvar Kakanj Glamoc Maglaj Kupres Olovo Livno Tesanj Tomislavgrad Usora Vares Visoko Zavidovici Zenica Zepce Foca Gorazde Pale Bugojno Busovaca Dobretici Donji Vakuf Fojnica Gonji Vakuf Jajce Kiseljak Per capita amount of transfer 2007.92 70.727 2.88 44.82 73.647 0.106 0.057 0.282 0.96 % of FBiH Distribution Pool for 20011 0.50 70.344 0.509 0.565 0.61 58.93 79.96 36.29 81.494 0.504 1.52 8.90 122.856 0.55 53.835 0.578 0.62 72.10 63.587 0.91 40.225 1.494 1.834 2.487 1.922 0.465 1.83 73.613 7.13 69.74 60.97 71.916 0.74 51.51 42.84 30.17 178.067 1.86 54.423 0.295 0.87 133.80 45.601 0.043 0.666 1.00 154.331 0.40 31.55 76.85 46.43 45.27 39.018 1.387 0.66 1.533 0. in KM 56.87 107.261 0.945 2.436 0.35 1.012 1.62 71.24 18.53 72.034 0.58 69.48 66.148 16.19 39.28 130.53 67.08 79.825 0.842 0.344 1.

63 25.20 48.179 34.102 127.13 113.998 46.60 57.412 43.096 51.31 75.14 18.788 25.33 64.934 40.77 52.95 63 .92 56.374 53.394 131.97 35.823 47.400 10.450 46.80 48.97 55.966 45.55 49.84 33.245 23.41 55.896 14.673 19.Independent variables used for regression: Municipality Bihac Bosanska Krupa Bosanski Petrovac Buzim Cazin Kljuc Sanski Most Velika Kladusa DomaljevacSamac Odzak Orasje Banovici Celic Doboj-Istok Gracanica Gradacac Kalesija Kladanj Lukavac Sapna Srebrenik Teocak Tuzla Zivinice Breza Doboj-Jug Kakanj Maglaj Olovo Tesanj Usora Vares Visoko Zavidovici Zenica Zepce Population 60.252 51.596 61.27 52.911 15.519 14.07 33.57 35.54 30.065 8.876 28.51 65.929 7.95 35.06 35.948 38.52 77.85 95.646 30.550 12.485 16.076 11.43 38.980 PIT per capita 102.13 29.51 48.23 25.301 39.514 7.16 44.551 13.804 4.42 44.741 4.82 27.020 17.99 41.66 66.68 43.56 16.163 20.

34 80.563 1.683 16.42 33.29 148.727 16.82 27.381 38.434 16.30 25.097 37.37 62.54 48.665 23.88 52.459 24.77 48.27 33.90 73.10 243.678 16.294 21.786 5.74 49.000 2.20 112.525 32.334 15.64 39.154 111.81 59.43 126.575 2.45 57.36 368.753 55.811 1.259 4.350 13.462 119.13 46.906 23.590 24.848 31.80 51.27 39.84 69.444 11.365 19.291 15.40 53.43 48.27 76.31 38.78 51.32 52.13 70.683 45.25 93.892 29.07 65.66 70.883 73.943 3.351 20.140 12.64 39.005 662 14.97 27.078 70.30 57.418 27.58 74.115 11.724 24.958 48.16 129.00 63.Foca Gorazde Pale Bugojno Busovaca Dobretici Donji Vakuf Fojnica Gonji Vakuf Jajce Kiseljak Kresevo Novi Travnik Travnik Vitez Capljina Citluk Jablanica Konjic Mostar Neum Prozor Ravno Stolac Grude Ljubuski Posusje Siroki Brijeg Sarajevo Centar Hadzici Ilidza Ilijas Novi Grad Novo Sarajevo Stari Grad Trnovo Vogosca Bosansko Grahovo Drvar Glamoc Kupres Livno Tomislavgrad 1.718 4.187 20.53 239.28 64 .144 28.72 33.49 66.

Andrew Young School of Policy Studies.. 2004. CESifo Economic Studies. Closing the Gap: Fiscal Imbalances and Intergovernmental Transfers in Developed Federations. Fiscal Federalism and National Unity. Principles and Practice. Andrew Young School of Policy Studies. 1999. BIRD. J. 2004. Fiscal Decentralization in Croatia-Problems of Fiscal Equalization. BAHL.R. Urban Institute and World Bank. 1998. The Journal of Political Economy. I. Washington. Intergovernmental Transfers: The Vertical Sharing Dimension. 2005. 50 (1). Intergovernmental Fiscal Relations in Central and Eastern Europe: A Sourcebook and Reference Guide [CD-ROM]. Andrew Young School of Policy Studies.. Intergovernmental Fiscal Relations: Universals Principles. Georgia: Georgia State University. WP 00-02.B.BIBLIOGRAPHY ACKERMAN S.. and WALLACE. BIRD. 1995. F. 152-165. WP 04-10. BIRD.. DC: World Bank.. EBEL R. 25. M. R. Asymmetric Fiscal Decentralization: Glue or Solvent.. and VAILLANCOURT. and TARASOV. 65 .. eds.. Occasional Paper No. BIRD.D.. Paper prepared for the Sixth Annual Meeting of the Latin American and Caribbean Economic Association (LACEA).R. Expenditure-Based Equalization Transfers. 2002. M. The Theory and Practice of Equalization. M. and VAILLNCOURT.. eds. Georgia: Georgia State University. M. 2003. M. Fiscal Federalism for Emerging Democracies: Lessons from Switzerland?. Fribourg: Swiss University of Fribourg. R. Cambridge: Cambridge University Press.R. Comparative Government. 2004. M. A. 2001. Georgia: Georgia State University. DC: Urban Institute. BIRD.R.. 1995. 211–254. 2005. Washington. BIRD. and WALLICH C. BIRD. F. R. and BRONIC.. BAHL. Georgia: Georgia State University.R. Fiscal Decentralization in Developing Countries. BAJO. WP 03-09. Andrew Young School of Policy Studies. I.. Intergovernmental Transfers in Developing and Transitional Countries.. Andrew Young School of Policy Studies...R. A. M. BLONDEL. 1974.D. WP 04-19. M.. ADAMOVICH. BOADWAY. Local Applications. 89(1). New York: Harvester Wheatsheaf.R. and EBEL R. Does Federalism Matter? Political Choice in a Federal Republic. 2000. Decentralization of the Socialist State: Intergovernmental Finance in Transition Countries. Zagreb: Institute for Public Finance. Georgia: Georgia State University. S. and HOSP G. WP 02-02. R.

D.. R. 1990. and MARTINEZ-VAZQUEZ. Washington... A. (forthcoming). Comparative Federalism in Theory and Practice. 1950. New York: Holt. WP 04-21. Cape Town: M.. J. The Assignment of Functions to Decentralized Government: From Theory to Practice. Subnational Government Structure and Intergovernmental Fiscal Relations: An Overlooked Dimension of Decentralization. DC: World Bank. BURGESS... Northampton. S. DUCHACEK. MA: Edward Elgar. The American Economic Review. WP 04-01. ELAZAR.M. 40 (4). 2004. Federalism: An Overview. Nijhoff. G. I.. Exploring Federalism.. and GAGNON. BOEX J. M. and SHAH. 2002. DE WILLIERS. BOEX.. CORDIERA-GUERRA. 2003. Aldershot: Avebury. Fiscal Federalism: Principles and Practices. Georgia: Georgia State University. New York: Harvester Wheatsheaf. BUCHANAN. 66 . Andrew Young School of Policy Studies.. 2004. 1970.G.D. and MARTINEZ-VAZQUEZ. S. forthcoming. ELAZAR. 2005. eds. M. D. Fiscal Policies in Federal States. E. D.. BURGESS. Aldershot: Ashgate. Designing Intergovernmental Equalization Transfers with Incomplete Data: Concepts. Pretoria: HSRC Publishers.. 1987.. Equalization Grants and Local Expenditure Needs. WP 04-11. Andrew Young School of Policy Studies. Andrew Young School of Policy Studies. Cheltenham: Edward Elgar. 583-599. J. Comparative Federalism: The Territorial Dimension of State. (forthcoming). BRANLEY. R.. 1993. VAZQUEZ-MARTINEZ J. The Design of Equalization Grants: Theory and Applications. Practices and Lessons. Comparative federalism and federation: competing traditions and future directions. Local public Finance in Europe: Balancing the budget and controlling debt. J. and YILMAZ. G. and HOFMAN B. New York: Routledge. BOEX.. J. Concept of Fiscal Decentralization and Worldwide Overview. A. D. B. In: AHMAD. eds. Ensuring Inter-regional Equity and Poverty Reduction. 2002. BRAUN. Rinehart and Winston. DAFFLON. and BROSIO. and TIMOFEEV A.Tuscaloosa: University of Alabama Press.. Andrew Young School of Policy Studies..BOADWAY. EBEL. Georgia: Georgia State University. B. Federalism and Fiscal Equity. Handbook on Fiscal Federalism. DAFFLON. 2004.. J. Evaluating Federal Systems. 1995. Georgia: Georgia State University. 1994.. B.. Georgia: Georgia State University. Washington DC: Urban Institute..

Government of FBiH. Fiscal Decentralization.. C. 29/06. Working Paper. E. Official Gazette No. MARTINEZ-VAZQUEZ. Council of Ministers of BiH. R. M. Sarajevo: USAIDSIDA. N. Law on the Local Self-Governance. 2006. 6/95. The Dialectics of Decentralization: Economic Reform and Regional Inequality in Yugoslavia.. Stabilization of Local Governments. Budapest: OSI. FOX W.. A. LIJPHART. Budapest: LGI. 11(4). 1997. and WALLICH. 1975.. Law on Local Self-Governance. 1999. Law on Value Added Tax. New Haven: Yale University Press. Law on the System of Indirect Taxation. Georgia: Georgia State University. C.. Sarajevo: Official Gazette No. Government of FBiH. LANG.. 1996.P. ed. Council of Minister of BiH. Economic Growth. Rethinking Federalism. T. GAP (Governance Accountability Project). INMAN. ed. R. Fiscal Federalism in Bosnia and Herzegovina: The Dayton Challenge. Government of FBiH. 26/96. D. Andrew Young School of Policy Studies. Government of FBiH. (forthcoming).. 1997. Policy Briefing Book. 44/03. Patterns of democracy: government forms and performance in thirtysix countries. 43-64. J.. 09/05. Sarajevo: Official Gazette No. HORVATH. Banja Luka: Official Gazette No. Washington DC: World Bank. Law on Allocation of Public Revenues in FBiH. 2001. Cheltenham: Edward Elgar. 35/99. Cantons and Road Funds..FOX W. 22/06. The Journal of Economic Perspectives. and Democratic Governance. Law on Allocation of Public Revenues in FBiH. Instruction for Calculation of Shares of Local Self-Government Units. 309-335. Sarajevo: Official Gazette No. KANDEVA. R. World Politics. 1997.L. Sarajevo: Offical Gazette No. 2005. and WALLICH.. Fiscal Federalism in Bosnia and Herzegovina: Subsidiarity and Solidarity in a Three Nation State. In: EBEL. Sarajevo: Official Gazette No. 1995. in the Revenues from Indirect Taxes. and McNAB R. 2006. 1995. Subsidiarity and Solidarity: The Role of Intergovernmental Relations in Maintaining an Effective State. Government of RS. eds.. 27(3). Decentralization: Experiments and Reforms.R. and BIRD M. 67 . 1999. WP 97-7. and RUBINFELD D.

2003... 37(3). 100-131. DC: World Bank Institute. 93-98. 1972. The American Economic Review. and LEVTCHENKOVA. 11(4). 1964. 1997. D.H. 2006. Comparative Economic Studies. 1981. Fiscal Federalism. ed. SEARLE.R. J. Hants: E. What is Decentralization? Washington. 2002. Lexington. W. Natural Resources and Fiscal Equalization. 2005.E. OATES.. PETERI.. ed. Zagreb: Friedrich Ebert Stiftung.. Northampton: Edward Elgar Pub. significance. J. MA: Heath-Lexington. MARTINEZ-VAZQUEZ. Grants and Fiscal Competition. W. Budapest: LGI. 1991. Public Finance in Developing and Transitional Countries: Essays in Honor of Richard Bird. J. G.. A. OATES. RONDINELLI. Federalism: Origin.R.E. Georgia: Georgia State University. MILICEVIC. An Essay on Fiscal Federalism. MUSGRAVE A. 65-72. W. 1991..E. Macroeconomic Stability and Growth. WP 04-15. Public finance in theory and practice. W. and MUSGRAVE B.. State and Problems of Local Self-Government in Bosnia and Herzegovina. Journal of Economic Literature. B. New York: Harcourt Brace Jovanovich.. 71(2). N. WP 05-06.MARTINEZ-VAZQUEZ. 1965.. Andrew Young School of Policy Studies. E. Studies in fiscal federalism. OATES. 2004. 2004. W. New York: McGraw-Hill. OATES. The Political Economy of Fiscal Federalism. W. The Journal of Economic Perspectives. Essays in Fiscal Federalism... R.. C. and McNAB. On Local Finance and Tiebout Model..E.. The Assignment of Revenues and Expenditures in Intergovernmental Fiscal Relations.. eds.R. operation. Fiscal Decentralization. Elgar. Boston: Little Brown. E. NORRIS-DABLA. McLURE. Georgia: Georgia State University. 48 (1). Westport: Greenwood Press. and MARTINEZ-VAZQUEZ. Fiscal Capacity Equalization and Economic Efficiency. MUSGREVE. Andrew Young School of Policy Studies. J. and ALM J.. MUSGRAVE A. Mastering Decentralization and Public Administration Reforms in Central and Eastern Europe. S. WP 04-16. OATES. E. 1977. Andrew Young School of Policy Studies. 68 .. Revenue Sharing. RIKER. Devolution. Aldershot. Washington DC: World Bank.P. 2005. Georgia: Georgia State University... 1120-1149. 1989. The Challenge of Fiscal Decentralization in Transition Countries. PETCHEY.

R.. and SHAH. Macroeconomic Implications of Fiscal Decentralization.: McGill-Queen's University Press. Journal on Ethnopolitcs and Minority Issues in Europe. SPAHN. 1985. P. Banja Luka: School of Economics. Intergovernmental Transfers: Funding Rules and Mechanisms. 2001.SEARL B. 2003. Pitfall on Road to Fiscal Decentralization. WPS 2717. 3. G. 1995. R. 2001. Comparing Federal Systems. S.. TANZI. SHANKAR. Kingston... A Pure Theory of Local Expenditures. Georgia: Georgia State University. WPS 3282. S. A. SHAH. Budapest: LGI SMITH B.. TOMAS. SLUKHAI. 2004. V.. and the Promise. Ont.L. V. WP 04-12. 416-424. Georgia: Georgia State University. Fiscal Architecture and the Analysis of Public Expenditure Needs and Revenue Capacity. and HULL C. Andrew Young School of Policy Studies. Bridging the Economic Divide Within Nations. 1996.. Fiscal Decentralization in Developing and Transition Economies: Progress. WALLACE. 69 .. 2000. SMITH. D. The Impact of Equalization on Service Delivery. 2005. Canadian Public Policy. Federalism: The multiethnic challenge. Dilemmas and Compromises: Fiscal Equalization on Transition Countries. C. STROSCHEIN. Washington DC: World Bank. Brasilia. R. Fiscal Federalism and Economic Governance: For Better or for Worse? Paper prepared for International Conference on Decentralization. Andrew Young School of Policy Studies. 2004. WATTS.. WP 01-11 Andrew Young School of Policy Studies. 1956. UNDP. 99-115. 2004. problems. TIEBOUT. TANZI. SHAH. Washington. 22(2). A. 1999.C: International Monetary Fund. Intergovernmental Fiscal Relations and Macroeconomic Governance. S.ed. London: Longman. 2003. SHAH. 1997. Washington DC: World Bank.. 2001.. Washington DC: Carnegie Endowment..C. Georgia: Georgia State University. On Fiscal Federalism: Issues to Worry About... A.M.. A. National Human Development Report: Better Local Governance in Bosnia and Herzegovina. . Decentralization: The Territorial Dimension of the State. What Belgium Can Teach Bosnia: The Uses of Autonomy in ‘Divided House’ States.B. UNDP: Sarajevo.. Conference on Fiscal Federalism. London: Allen&Ubwin. A Fiscal Need Approach to Equalization. WP 0417. The Journal of Political Economy. ed. 64(5).

Oxford: Oxford University Press.. The World Development Report 1999/2000. World Bank. Washington DC: World Bank. 2001.World Bank. Decentralization in Developing Countries: Challenges and Road Ahead. Washington. Bosnia and Herzegovina: From Aid Dependence to Reliance. 1999. 2002. DC: World Bank. Report No 24297-BiH. Fiscal Self- 70 . The World Bank.