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During and after the Great Recession, many local governments were compelled to declare fiscal emergencies, lay off workers, and cut services while others weathered the recession without needing to take such actions. The empirical models show the relative importance of fiscal reserves, debt, and revenue composition in predicting local fiscal distress. Volume 38 , Issue 1. The full text of this article hosted at iucr. If you do not receive an email within 10 minutes, your email address may not be registered, and you may need to create a new Wiley Online Library account.

If the address matches an existing account you will receive an email with instructions to retrieve your username. Evgenia Gorina Search for more papers by this author. Craig Maher Search for more papers by this author. Marc Joffe Search for more papers by this author. She can be reached at egorina utdallas. He can be reached at csmaher unomaha. He can be reached at marc publicsectorcredit.

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View access options below. You previously purchased this article through ReadCube. Institutional Login. Log in to Wiley Online Library. Purchase Instant Access. View Preview. Learn more Check out. However, if low interest rates are achieved by artificially holding down rates, the result may be 'financial repression', meaning that the development of the financial sector will be inhibited.

This will discourage formal savings and so will limit the funds that financial institutions can lend as credit. Rural people are often 'at the end of the line' for the delivery of credit by formal financial institutions. As a result, the rate of rural investment tends to be slowed, with negative implications for SARD. Such policies tend to reduce the domestic producer prices for export products and to push up the domestic prices on imported items. These impacts will affect commodities and sectors differentially, and it is impossible to say for sure what the effect on SARD will be.

However, in so far as export taxes are imposed on agricultural products, rural incomes will suffer. The damage may happen directly and also through the effects on prices of domestically produced food as producers switch away from production for export. Because SARD is partly about sustainable rural livelihoods, interventions that reduce rural incomes also damage sustainability.

Import duties on agricultural inputs, or restrictions on their importation, are likely to have a similar effect, except in the case of inputs such as agricultural chemicals that cause serious environmental and human health risks. In a global setting, a more open foreign trade framework, with fewer taxes and restrictions on imports and exports, is usually held to be good for sustainable development. The case for free trade is that it will allow production to take place in accord with the economic principle of comparative advantage.

That in turn would mean that less resources and other inputs would be needed in aggregate to attain a given level of production, which should be good for everyone and for the environment. However, as discussed above in sub-section 4. The environment too may suffer if, for example, free trade makes it possible for rich countries to export some of their pollution problems to poor countries.

So far as exchange rate policy is concerned, some countries, concerned about the impact of negative external balances on their international purchasing power, have sought to maintain a high official exchange rate by limiting imports. Experience and economic logic both suggest that such policies are likely to be unsuccessful in the longer run.

However, while they are in place, they turn the domestic terms of trade against those sectors of the economy that produce tradeable goods, including agriculture. And the distortions induced can be massive, far outweighing any subsidies that may be offered to farmers such as bounties on fertilizers. Clearly, such distortions can be devastating for SARD. In many less developed countries, the proportion of the labour force in such employment is small, so that wage policies have limited impact on either overall wage levels or SARD.

The same may not be true for the industrialized countries. However, wage policies may affect the allocation of labour between sectors. Moreover, if large differentials between urban and rural wages result, they may lead to an unwanted acceleration of rural-urban migration, with concomitant problems of urban congestion and pollution. Also of concern is the issue of rural unemployment, whether overt or hidden, existing in some countries. In countries where social welfare programs are not well developed, under-employment or unemployment among rural or urban workers is a serious threat to sustainable livelihoods.

While solutions may be sought in the medium to longer run by encouraging economic growth and the development of labour-intensive industries, in the short run, relief measures may be needed. Such works can be used to conserve or enhance the resource base, for example through afforestation programs or public works to control soil erosion.

Aspects of employment policy relating to human resource development are discussed later. In part, this is a matter of creating an environment that is 'friendly' towards private investors.

State strategies for detecting fiscal distress in local governments

Too many barriers for the entry of foreign investors will deter the international flow of capital, as will too strict rules on the repatriation of profits. Similarly, both economic instability and social unrest will deter all investors, foreign or local. On the other hand, investments can be devastating for SARD if investors do not have to pay for negative externalities they cause e.


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Clearly, measures need to be in place either to prevent such negative externalities, or to make investors pay for them. The importance of avoiding interventions that cause financial repression and so deny would-be investors, especially those in rural areas, access to credit markets has already been discussed. Because public funds are always limited, direct government investment should be allocated to areas where market failure leads to underinvestment. Such areas include investments in human capital i.

Building human capital for sustainability is likely to require substantial government investments in health services, education and training. Similarly, public investments may be needed in open access resources such as many fisheries and some forests, as well as in state-owned resources such as rural infrastructure. See Bromley and Cernea for a discussion of the different types of resource property regimes.

For SARD, an appropriate proportion of such improvements needs to be directed to rural areas where these services are typically very inferior to those in the cities. Common property and open access resources important for SARD may include fisheries, forests, and water supplies. Some state property, such as public roads, also has open access characteristics. Because individual private investors are seldom able to capture for themselves all the benefits from investments in open access resources, there is often a need for intervention.

Governments may need to step in either to undertake those investments that are socially profitable but privately unprofitable, or to create institutional arrangements whereby externalities are internalized to enable private investors to earn an appropriate return on their capital. Examples of the latter type of policy intervention include the privatization of water supply agencies and the letting of contracts for the construction and operation of toll roads. Government investment decisions need to be based, so far as possible, on a careful assessment of the social benefit of each investment.

The methods for undertaking such project appraisals are well known, and have been extended in recent years to try to take proper account of environmental impacts Edwards-Jones ; World Bank However, as discussed earlier, performance measures based on discounted cash flow may need to be used as part of a multi-criteria analysis that also includes other aspects such as inter-generation equity see section 8.

In less developed countries, where government funds are typically very limited, foreign aid, including concessional loans, may be used to help make good any shortfall in the level of public investment needed for SARD. It is clear that, at least in the long run, population growth must be slowed and perhaps reversed if sustainability is to be attained.

Fiscal Health for Local Governments - 1st Edition

Even in the shorter run, population growth presents challenges for many less developed countries. Substantial investments are needed in order to expand both food production and the provision of services such as education and health in line with the increasing numbers. Sustainable development is therefore made all the more difficult in such cases. The trouble is that some of the more reliable birth control measures are not acceptable in all societies. This tends to make the whole subject of population policy a difficult one for policy makers.

Yet there are other means of approaching the topic than by a head-on confrontation with sometimes strongly held ethical values. Policies that improve the education of girls and the status of women, including the employment prospects for younger women, will usually lead to a reduction in fertility.


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  • Moreover, when the status of women rises, they are more likely to take more control of their own fertility, no longer relying on the decisions of their male partners, local health workers or religious leaders. More generally, there is evidence that birth rates tend to fall as child mortality is reduced, urbanization spreads and living standards rise. The policy interventions to promote such outcomes are seldom contentious, and will slow population growth.

    That said, it is held by many to be a desirable policy to make sure that no woman is denied access to the means to limit the frequency with which she conceives, regardless of religious or other taboos that dictate what methods are available to her to attain that end. Population policy also extends to measures to affect the geographical distribution of people.

    Governments can influence the rate of migration to urban areas, chiefly by manipulating, wittingly or otherwise, rural-urban real income differentials. Policies to concentrate public investment and service provision in the cities will accelerate rural-urban migration, and vice-versa. Similarly, governments can adopt policy measures to try to influence the distribution of the rural population, for example through land settlement schemes such as the Indonesian transmigration programs.

    A second consideration in setting taxes, however, relates to the distribution of income and wealth. Taxing the rich and stripping them of some of their assets to meet the needs of the poor of this generation, or to invest for the benefit of poor people in the future, can obviously be one way of attaining the goal of sustainable development. Unfortunately, it is seldom politically feasible on any substantial scale!

    However, where wealth or income comes from economic rents that result from public investments, such as increased value or productivity of land due to public infrastructure construction, it may be more acceptable to tax away at least a part of those gains. Policies can also be adopted that specifically target the poor, such as famine relief programs, food for work schemes, or provision of free or subsidized services. Most industrialized countries have extensive social welfare programs in place to help the disadvantaged, such as the sick, the old or the unemployed.

    Because such programs are very expensive, in most less developed countries they are of much more limited scope, or are even totally absent. The argument for policies designed to achieve a more equitable distribution of income is not that the poor cause more resource degradation than the rich, and so must be helped out of their poverty.

    Indeed, the contrary is often the case, given the much higher levels of consumption of items such as fossil fuels in rich countries. Rather the aim is to make possible a reasonable standard of living for today's poor. Then they can have the means to provide a more sustainable future for their children, for example by providing them with good nutrition, sound health care and a good education.

    While the general economic and social policies outlined above may be very important for SARD, they mostly fall outside the area of responsibility of agricultural professionals. The policy areas discussed next, on the other hand, relate specifically to the rural sector and will, in many cases, lie within the competence of ministries of agriculture. A tarmac road that lowers travel time and reduces vehicle running costs, also lowers the costs of marketing agricultural produce and reduces the delivered cost of farm and household requisites.

    Similarly, an irrigation system raises the productivity of farmland while a telephone system lowers transaction costs in agricultural marketing and improves efficiency by giving producers better access to price information. While public investments in rural infrastructure are important for SARD, so is the provision of systems and funding for the maintenance of existing infrastructure.

    Without the latter, investments in infrastructure may be wasted or may yield lower benefits than they should. One of the most significant impacts on sustainable development of the crisis in Africa in the s was the serious deterioration of all types of infrastructure because of lack of maintenance. Because provision of infrastructure is usually expensive and because opportunities are many and funds restricted, major policy questions arise as to which infrastructure projects are to be given priority.

    In such a situation, proper investment appraisal is important. Such appraisals should obviously account for environmental impacts of the proposed project. In planning a new road, for instance, proper attention to alignment and to such design features as the control of storm-water run-off may add little to costs but may reduce the environmental harm considerably.

    Yet, as noted earlier, improvements in human capital have been the source of most of the gains in the productivity of agricultural land and labour in the past. Given that the land frontier has been reached in most countries, and that areas available for farming and forestry are likely to decline, policies to enhance rural human capital need to be given high priority.

    Local Fiscal Distress: Measurement and Prediction

    The provision of universal education and health services in rural areas are two main ways of improving the agricultural human resource base. Usually, neither of these will be the responsibility of agricultural planners. However, the training of agriculturalists and the dissemination of agricultural knowledge to farmers and others is usually a matter in which agricultural ministries have some responsibility. Policy interventions here, therefore, relate to the provision and operation of training facilities, and programs to extend that training into rural villages.

    The scope, organization and orientation of agricultural extension also need to be considered. The existing extension service may not be up to the task of promoting SARD. The skills of the personnel may need to be upgraded to provide them with better understanding of sustainable farming methods. Given the increasing recognition of the importance of people's participation in attaining SARD, those extension services that have been used to a 'top-down' approach may need to undergo dramatic reform.

    The role of the mass media in promoting SARD should also be considered in reviewing policy. More sustainable farming practices may be promoted using media such as radio which, along with other promotional methods, may be a relatively cheap and effective way of changing attitudes and values about rural resource use. Policy issues relate to how the development of such improved and sustainable technologies is to be encouraged.

    At issue in the public sector will be the level of funding for agricultural research and the allocation of those funds between research organizations, commodities, disciplines and projects. The merits of a farming systems approach versus a more traditional disciplinary division of activity needs to be examined. Whatever approach is taken, mechanisms for setting research priorities that are relevant and responsive to the needs and circumstances of rural producers need to be in place. The research done also needs to be reviewed regularly to ensure that funds are being used wisely and well, and that progress towards the intended goals is being attained.

    That means determining the allocation of funding for agriculture faculties of universities and for agricultural colleges. It also raises the question of whether research training in various sub-disciplines is to be provided in-country or using overseas universities that may be better equipped for the task. In many less developed countries, the retention of trained research staff may be a problem, given the international mobility of good scientists. Measures such as bonds and incentive payments may need to be put in place to secure the proper staffing of research programs.

    Instruments here include possible government support for private or corporate research organizations, perhaps by raising levies on agricultural sales. Attention also needs to be given to property rights legislation, such as patents laws and plant variety rights, in order to give innovators the opportunity to profit from their investments.

    The detailed consideration of such agricultural research policy and management issues as those broached above is outside the scope of these guidelines. ISNAR has published a number of relevant guides e. Producer prices may be driven down by restricting or taxing agricultural exports, by subsidizing imports, or by directly taxing sales.

    In the past, at least, governments in less developed countries have typically sought to drive farm prices down to keep food prices low. Often, the aim was to benefit urban dwellers and to restrain the growth of urban wages. Governments in industrialized countries, on the other hand, have typically sought to push farm prices up to satisfy farm lobby groups. Recently, there has been increasing recognition that both types of distortion cause mis-allocation of resources and are therefore not conducive to SARD. While any inefficiency in resource allocation can be damaging for SARD, there are some specific negative impacts of distorted agricultural prices.

    Low agricultural prices threaten SARD by discouraging the growth of farm production and by making it difficult for rural people to earn sustainable livelihoods. Investment in agricultural resources, such as land improvements, will be dampened under a low-price regime. High prices, on the other hand, lead to uneconomic use of inputs, some of which, such as chemicals, may be damaging to the environment.

    High prices may encourage the too intensive use of marginal lands. They may also prompt socially unprofitable and unsustainable but privately profitable investments, such as unsuitable clearing of forest and woodland, or draining of wetlands, for agricultural use. The first is in hazard reduction. Major natural disasters, such as cyclones, severe floods, or fires, can have significant negative impacts on the resource base. Land may be irreversibly damaged by sudden erosion, land slips or inundation. Similarly, assets such as crops, trees, animals, and land-based improvements such as fences, terraces, irrigation works, roads and villages may be damaged or destroyed over large areas.

    Policy makers need to give attention to justifiable measures to prevent or limit the impacts of such disasters. Instruments include the construction of protective works such as levee banks or fire breaks, and the establishment and maintenance of disaster warning systems. The invasion of agricultural systems by serious pests, diseases or weeds is another potential hazard that can be minimized by proper quarantine measures and by having in place plans to control outbreaks before they spread.

    Man-made disasters, such as wars and civil unrest, can produce damage at least on the same scale as many natural disasters. In these cases, both prevention and mitigation of consequences are obviously more difficult. The second type of policy intervention is needed after a disaster, whether natural or man-made, has happened. For the damaged systems to recover with minimal threat to sustainability, governments perhaps along with international agencies may need to implement various forms of disaster relief.

    Relief measures adopted may include emergency food supply, provision of materials for replanting crops, supply of replacement breeding animals, and help with reconstruction. They also often participate in agricultural input supply, provision of rural credit, and in marketing agricultural production. In regard to all such participation, the policy question to be addressed is whether government agencies are as efficient and effective in the attainment of SARD as private enterprise would be.

    Fiscal Health for Local Governments

    Governments are increasingly moving to privatize these types of functions in the belief that the answer to the question is in the negative. However, it is unwise to be too dogmatic on the issue. There may be cases where public ownership can be advantageous.

    For example, governments can typically get access to capital at lower rates than private businesses. Arguably, therefore, they are better placed than the private sector to make the long-term investments needed for sustainable production in, say, forestry. Thus, direct government participation in production and marketing in agriculture needs to be looked at on a case-by-case basis, and not judged in any doctrinaire fashion. Unfortunately, it is not easy to identify and implement appropriate remedial measures - if it were, the problem of poverty would have been solved long ago. Sustainable reductions in poverty will surely require the integrated and effective implementation of a wide range of policy initiatives under all or most of the headings in this section of the guidelines.

    To illustrate what may be entailed, Box 7 contains one suggested list of the policy measures needed to assist the rural poor to attain sustainable livelihoods. Box 7. As discussed in subsection 3. Moreover, progressive reductions in the numbers of poor people who often go hungry are necessary for sustainable development, to reduce suffering and to provide better opportunities for them to live healthy, productive and fulfilled lives. Food and nutrition policy goals include security of food supply, safe and good quality food and adequate and healthy diets for everyone. To a large degree, these goals are consistent with the broader objectives for SARD.

    Sustainable agricultural production will mean increased food supplies and increased income-earning opportunities, leading to reductions in poverty and malnutrition. In some countries, however, specific measures to improve the food security of the poor and malnourished may be needed. The appropriate policy interventions here are the same as those mentioned in relation to the previous topic of sustainable livelihoods.

    A focus on food security also means correcting any imbalance in the proportion of agricultural research and extension efforts directed to food crops, rather than to export or industrial crops. In the past, there has been a tendency in some countries to neglect roots, tubers, plantains, traditional legumes, oilseeds, vegetables and fruits, which are commonly eaten but which less frequently enter domestic and international trade. Promoting the increased production of some of these crops may lead to better human diets and more sustainable production systems.

    The reason is that such crops can provide alternatives to the intensive production of the main staples or export crops. More attention may also need to be given to post-harvest systems for all food crops that are affected by significant losses and quality degradation. Measures to improve the quality and safety of food have direct beneficial effects on health and nutritional status. They include establishing and enforcing food laws, support for consumer organizations, and education to improve food quality, safety and preparation.

    Measures are needed to prevent the contamination of food with agro-chemicals, or by pests including micro-organisms, as are procedures to detect such contamination in locally produced or imported foods. Widespread nutrition and diet education, delivered through formal schooling and the mass media, can promote good eating habits and healthy lifestyles, so reducing the incidence of nutrition-related diseases.

    Especially important for SARD are improvements in child nutrition to make sure that children grow up able to fulfil useful roles in the society of the future. Typically, most land is held in private or communal ownership, fisheries are in public or communal ownership, or are open access, and most water resources are in public ownership.

    All four types of policy interventions are likely to have impacts on sustainability, efficiency and equity. Moreover, particularly for the first two, where there is change of ownership, the full impacts of a particular policy may be difficult to predict and may not necessarily be positive for all three criteria. By their very nature, changes in property rights are likely to make some individuals better off and others worse off, meaning, as noted earlier, that such policies are often politically sensitive and divisive.

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    A change to property rights may be justified when present rights are leading to degradation of an open access or common property resource through over-use. The intervention may range from assistance with the creation or strengthening, of an organization of users which has the right to manage the resource, to privatization or nationalization of the property.

    While the modern tendency is more in favour of the former than the latter, case-by-case consideration of likely implications is required. In Burma and Nepal, forests previously in communal ownership were nationalized with the aim of limiting over-use. The result was an increase in illegal cutting of timber since the dispossessed communities no longer saw the forest as 'theirs', and government enforcement of cutting restrictions was weak. In South Asia, the transfer of irrigation tanks at the time of independence from the control of local rulers to village councils or other democratic bodies generally resulted in a decline in standards of maintenance.

    Land settlement schemes are a particular case of the transfer of property rights from public to private ownership, although seldom is the full freehold title to the land given to the settlers. On the other hand, it is increasingly common for governments to sell off property rights, such as the privatization of water supply utilities in Britain. Very inequitable access to resources may exist when a few individuals own disproportionate shares of a resource.

    Such situations may be incompatible with SARD and may require a reallocation of ownership. Dispossessed owners may or may not be compensated and, if compensated, may receive full or partial compensation. The most familiar example of policies of this kind is land reform carried out under such slogans as 'land to the tiller'. Experience shows that radical land reform is difficult to implement because of the power and influence of the land-owning class.

    Moreover, the benefits are often not as great as the proponents hope, at least in the short to medium term. However, these are not reasons for doing nothing when the existing ownership pattern is not sustainable. Box 8. Where existing land tenure arrangements are not conducive to SARD, revised legal frameworks can help in the establishment of the necessary conditions for what is called 'primary environmental care'.

    Primary environmental care fosters natural resource management by building on local skills, local resources and forms of cooperation, and participation to empower local communities. Legal revisions need to be directed to granting rights, access and security of tenure to farmers and pastoralists so as to foster responsibility and farsightedness, and the application of appropriate regulations to prevent pollution and resource degrading activities. Under this program, land tenure conditions have been established for widespread action at the local level.

    It follows the enactment of land tenure reform in , to ensure fair access to land and resources and to encourage greater local involvement in managing and restoring degraded land. The program is carried out in four stages and now involves about villages, most of which are in the first two stages. First, a village-level committee is established after discussions and training. The committee works with program staff to define and demarcate the village boundaries. A resource inventory is then made. The last two stages involve negotiating and finalizing a contract between the government and the village committee about the investment level for better productivity and: management of village resources.

    Problems that still need to be resolved include better allocation of formal powers in the village committees and ensuring representation in the committees of all land users, including migrant farmers and herders. In addition, more efficient ways to map, produce resource inventories, and plan land improvements must be found as the current procedure is still too lengthy. Policies to improve the efficiency of use of public or open access property resources include the introduction or variation of prices charged to users, or the imposition of quotas on use.

    For instance, rights to use common grazing land, forests or fishery resources may be restricted to avoid over-use. In some cases, former curbs on use of common property may have broken down under pressures such as those resulting from population growth and increased commercialization. As a result, policy measures may be needed to strengthen former rationing institutions or to establish new ones.

    For example, limits may be set on the number of fishing operators in a given fishery and on the size and nature of each operator's catch. Water policy issues relate mostly to the private utilization of public, open access or communal resources.