Fiscal centralization posed problems for the countries as macroeconomic conditions existing in globally integrated countries are subjected to uncertainty as well as risk which necessitated reforms and the solution to the problem was in globalization and fiscal decentralization.
Globalization is defined as the agglomeration of the economies of different nations with the help of the establishment of trade relations between counties involving exchange of both goods as well as services and inflow of large corporate investments. Globalization also includes removing trade barriers within different nations and the process of globalization has been aided mainly by the immense progress achieved in the field of technology or it can be said that globalization in the contemporary society is the gift of advanced technology which has facilitated the development of the transport system within the nations that has resulted in better communication between nations. Globalization a has served as a stepping stone in the shift of the attention of the nations from centralized economy to its decentralization, therefore, it is clear that globalization and fiscal decentralization are interrelated.
The rise in international market consolidation serves to enhance the regional demand for protection against shocks. Globalization served to provide macroeconomic stabilization accompanied with dispersing of the risk involved between the regions. Fiscal decentralization can be achieved if the center along with the states is allocated the responsibility of public sector expenditures.
Fiscal decentralization became popular after the year 1990. However, Peru, Brazil, and Mexico had incorporated fiscal decentralization in their economy even before 1990. The former idea about decentralization included that advantages of decentralization were interlinked with the varied regional demands for publicly provided commodities. The entire procedure which leads to the substitution of the desire for decentralization with a proper decentralized policy takes into account the view that the countries that are totally centralized and whose citizens follow different religions, speak different language and follow different ways of life will be subjected to pressure from the different states to bring decentralization so that the states too are allowed substantial autonomy to make improvements within the individuals state or else the states will resort to harmful activities to gain decentralization like initiating civil war.
To achieve fiscal decentralization in the true sense the nations should re-examine their respective fiscal policies and look for the proper combination between total control of the central government on the one hand and decentralized governance on the other. Though several countries have followed the example of countries like Mexico, Peru and Brazil to bring in political decentralization yet there are many countries that carry on the old centralized system. Such citizens of such countries look up to the central government to make local services available. The states are left with very few choices to earn revenues for their own well being and the extent to which they can borrow has been fixed by the central government. The quantity of their public borrowings for infrastructural projects sometimes is not sufficient. The disadvantages of centralization also affects intergovernmental transfers as the economy fails to take care of regional fiscal equity and it even does not proper steps to initiate and maintain fiscal discipline. In the centralized system there is lacks transparency between the activities central government and the citizens of the country.
Globalization and fiscal decentralization will ensure the inflow of public sector incentives by the aid of transparency between the central government and the citizens and the countries will now be aided by the foreign organizations in the accomplishment of this job on account of globalization.
To achieve this fiscal decentralization the countries need to consider several factors like:
- Designing fiscal transfers to ensure regional fiscal equity and to create an enabling environment for innovative and competitive service delivery
- Designing institutional arrangements for intergovernmental fiscal relations to better coordinate policies
- Reassigning taxing responsibilities to ensure local revenue autonomy, accountability, and efficiency without endangering an internal common market
- Aligning operational capacity with the authorizing environment through the "accountability for results "framework of public management
- Clarifying roles of various levels of government in public service delivery
- Facilitating responsible credit market access to sub-national governments
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