Unconditional Intergovernmental Transfers to Finance Decentralization in Albania

The Government of Albania embarked on a comprehensive program to decentralize decision-making powers with the passage of the Law on Organization and Functioning of Local Governments in 2000. A centerpiece of the policies undertaken to implement that legislation was an unconditional transfer program which, using a formula- based allocation mechanism, transferred substantial financial resources to the local communes and municipalities beginning in 2002. This paper describes that system and its evolution. It illustrates how the transfer was designed to take into account the transition from a centralized system to a decentralized arrangement for provision of local public services and how the formula has undergone some "fine- tuning'' while retaining its simplicity. Analysis of the outcomes reveals how it has achieved its mandated objective of equalizing resources across local governments; however, it does so while running the risk of substantially discouraging local governments from mobilizing resources of their own.