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Fiscal Decentralisation in SEE

in the Context
of the Global Financial Crisis

Prof. Dr. Paul Bernd Spahn


NALAS Round Table, Tirana International Hotel,
23 November 2008, Tirana, Albania
The origins of the crisis

They are basically financial:


Large macroeconomic imbalances
Excessive household and government
indebtedness in the „rich“ world
Securitisation and distribution of risky
debt („toxic“ assets) at a global scale
Distortion of asset prices and lack of
transparency via „structured“ products
The collapse

These and other factors (off-


balance operations, accounting,
faulty risk assessment) led to a
pyramidal global credit expansion
It entailed asset price bubbles
triggering collapse once they burst
The breakdown of the financial
system now exhibits „real“ effects
Real economic effects
The rich world is already in recession
Unemployment, foreclosures, corporate
bankruptcies, falling prices
Coordinated countervailing policies
Other economies will be dragged in
Through reduced FDI, liquidation
of local assets, weaker net exports,
lower remittances, exchange rates
No country can escape certain economic
and social consequences
How does this affect local
governments?
The transmission channels are:
Direct (mainly at the macro level)
Indirect (affecting municipalities)
Higher unemployment and social
needs at the community level
Pressure for increased spending
Difficulties of investment financing
Need of deferring maintenance
Fiscal shocks

Fiscal shocks work through


Loss of own revenue
Budgetary shocks of higher-level
authorities transmitted via grants
Reduced borrowing capacity
Need for refinancing
(re-valuation of collaterals)
What should and can local
governments do?
Make conservative budget estimates
and budget provisions for
emergencies
Intensify the dialogue with the
grantor government to secure an
orderly budgeting process
Discuss possible stand-by
arrangements, also with banks
What should and can local
governments do?
Review debt agreements and assess
risk exposure (forex!) reducing it
where possible
Enter into dialogue with large local
firms, notably public enterprises, to
identify possible budget risks
Engage in pro-active measures to
cope with those risks
What should and can
local governments do?
Avoid dismissals of staff if possible
Prepare a catalogue of investive
projects that could be implemented
rapidly in support of national
Keynesian policies
Connect with citizens and explain
what you expect, what you are
doing, and why you are doing it
A chance to strengthen the
role of local governments
Any crisis offers chances for change
The central government will rely on
local governments to bring policies
rapidly to bear on the economy
This could and should intensify the
intergovernmental dialogue
It could also lead to strengthening
fiscal autonomy of municipalities
„Finally, in cases like Macedonia,
where old municipal debt is still acting
like a ball and chain on the overall sector,
and indeed probably the economy as a whole,
this might be a good moment to demand
-- once again -- that the government help
in clearing the books“ (Tony Levitas)
Thank you very much
for your attention