Sunday, May 30, 2010

Urban Finance

In order to have a strong developed economy, countries must also have strong local economies. Cities are the economic development engines for the future, and as such, the US should encourage sound urban financial policies for cities around the world. For better part of the past half century, counties have engaged in the various processes of fiscal, administrative and political decentralization, which brings government closer to the people it serves. Fiscal decentralization, or the “transfer of expenditure responsibilities and revenue assignments to lower levels of government” is one key way to promote independent local economies, which are responsive to the needs of urban dwellers.

Concurrent with these trends is the raise of urbanization. For the first time in history, more of the world’s population now lives in cities. As such demands will increase, and therefore state and local governments will be call upon to provide additional services, such as adequate infrastructure for their residents.
In order to better manage rapid growth, cities will need more capacities to encourage economic development, provide safe, livable communities and improve the quality of life. Local officials in many countries will, among other actions, need to improve their financial households. This is a basic first step before accessing greater financing for urban infrastructure and other municipal services.

Unfortunately, many local governments, especially in the developing world, are perceived to not have sufficient capacities to manage these new financial responsibilities. The US should aim to help provide capacity-building activities to local officials, in addition to working with national governments to change incentives structures.

Municipalities generally have three different sources of funding through which they finance their operating and capital planning budgets: 1) own-source funding which comes from local taxation, fees and charges, 2) intergovernmental transfers which are funds transferred from the central to the local level and 3) money that cities borrow, such as through bonds or other forms of credit.

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