The Impact of Intergovernmental Transfers on own Local Revenue Generation: A Comparative Study between Uganda and Egypt

Abstract

The literature of fiscal Decentralization emphasizes how the design of intergovernmental transfer  systems has a significant implication on the behavior of local governments. The empirical results  about the relationship between central transfers and the incentives they create for revenue  mobilization are differ from country to country and depend on the structure and type of transfer  system in each country. Given the lack of financial data at the local level, this type of study rarely  involves developing countries. Using a unique and rich financial, socio-economic, demographic  and political data on Ugandan and Egyptian local governments, this paper contributes to the new  generation of fiscal federalism literature by assessing the fiscal incentive effects of two types of  transfers: general purpose transfers (unconditional) defined by a formula and specific purpose  transfers (conditional) allocated on an ad-hoc basis. The findings support the existence of a  positive incentive effect of unconditional and conditional transfers in Uganda, but a negative  incentive effect in Egypt, suggesting that the transfer system in Egypt suffers from a defect that  does not make it able to create incentives for local governments to mobilize their revenues.