François Vaillancourt, Ph.D., Economics Department, Université de Montréal, 3150 Jean Brillant, Montréal, QC H3C3J7, Canada and Bernard Dafflon, Ph.D., Economics Department, Université de Fribourg, Pérolles 21, Bd de Pérolles 90, Fribourg, 1700, Switzerland.
Decentralization will have a greater chance to succeed if the design of the overall system of inter governmental relations, including intergovernmental finance takes into account the unique circumstances of each country such as its geography, history and demography. Hence it is not usually appropriate to import as they are institutions from other countries. However, it can be instructive to compare the various national arrangements, such as those implemented for equalization, analyse which problems they address and what are their objectives and examine the policy tools chosen. Despite national particularities and specific answers in policy implementation, case studies show that common issues, questions and difficulties are present in all national schemes. This paper organises them in a coherent reference framework, which distinguishes the economics of equalization, contrasting them with the issues which need political decisions. Concretely, what we observe is "equalization" based on vertical and /or horizontal "solidarity" between and within the government layers. There are economic choices that result in coherent equalization schemes, but how much equalization and what sort of equalization is not an economic issue; it is intrinsically a political choice.
This paper is divided in four sections. Section one retraces briefly the history of equalization and explores the rationale for fiscal equalization: why do fiscal differences lead to equalization? Section two considers revenue equalization. It addresses three issues: the measurement of the revenue differentials, how much equalization, equalization formulas. The third section focuses on expenditure needs equalization. Three issues also arise in this case: (i) how to determine "standardized" expenditures; (ii) how to measure disparities in needs; (iii) how to measure disparities in costs? Section four concludes; it takes advantage that two of the oldest users of equalization schemes, Canada and Switzerland, both recently re-examined their system of intergovernmental transfers and modified it. We show how the analytical scheme developed in the previous sections is capable of explaining the major similarities and differences between both reforms.