Federalism, sub-national financing and aid effectiveness

Jack Eldon and Catriona Waddington, October 2007

Federal systems pose specific challenges in aid effectiveness, but to date little has been written about the interplay between aid instruments, poverty reduction and federalism.

Development partners need to understand fiscal federalism (the instruments and systems used to raise revenue, and allocate and spend funds) if they are to effectively support federal government systems. In particular, intergovernmental financing is a key tool for supporting the health and education sectors. Intergovernmental fiscal transfers (IGFTs) can be used to encourage the delivery of effective social services; ensure common minimum standards; and re-distribute funds from richer to poorer regions. The success of federal nations depends largely on the development of efficient fiscal federalism and IGFTs – but development partners often use aid instruments which bypass these system-wide considerations.

Using examples from Ethiopia, Nigeria and Pakistan, this paper explores the extent to which development partners make, or could make, effective use of IGFTs.