Sergiu Gherghina Department of Political Science Goethe University Frankfurt

Transcription

1 The Multi- Faceted Challenges of Fiscal Capacity in Eastern Europe Clara Volintiru Department of Political Science London School of Economics and Political Science Sergiu Gherghina Department of Political Science Goethe University Frankfurt Introduction An extensive body of literature refers to structural constraints of fiscal consolidation in post- communist countries. In this context, increased attention has been dedicated to the consolidation process of the public administration system (Dimitrov et al 2002, Grzymala- Busse 2002/2007, D Arcy 2012). However, less emphasis was laid on country specific variation in fiscal capacity between the local and central levels of public administration authorities. This paper aims to partly fill this void and investigates the role of national and international institutional determinants in guiding fiscal policy in Moldova and Romania. Both countries go through a sinuous process of decentralization in parallel with slow democratization (Moldova) or consolidation of democracy (Romania). It accounts for a large array of factors that can affect the fiscal capacity of an administrative unit from public policy design, to party politics, and down to institutional distortions. It provides an in- depth analysis of Romania and Moldova based on evidence of fiscal revenues and expenditures in local public administrations for the period It also uses process- tracing, interviews, and analysis of official documents to account for the evolution of the institutional framework in these two neighboring countries. The evidence supports the argument that tax policy decision- making is largely constrained and determined by administrative institutional capacity. Consequently, the paper brings a dual contribution to the existing literature on the politics of taxation in the EU. It compares and contrasts the effectiveness of fiscal administration in the two countries, and accounts for structural challenges of fiscal capacity including distortions such as tax evasion or avoidance. 1

2 The first section of the paper reviews the literature on political and administrative sources of organizational reform and formulates two testable hypotheses. The second section discusses the challenges of fiscal capacity in the two examined countries. Next, we refer to the strength of party organizations in the two countries. The fourth section presents the administrative and fiscal reforms in the two countries. The conclusions summarize the main findings and discuss the broader implications of this study. Political and Administrative Drivers of Organizational Reform Policy ideas, and actors beliefs and interests are foundations to the formation and evolution of an institutional setting (Steinmo 2003). When looking at the fiscal capacity of an administrative system, we must account for structural constraints (i.e. time and timing of political institutions formation), as much as we have to account for agency (i.e. political actors interests and policy solutions). Within this conceptual setting, the issue of effective tax administration is analyzed in this paper from the perspective of the motivations and actions of governing political parties, in our two case studies Romania and Moldova. As such, we disentangle between an effective tax system judged from the perspective of its fiscal output performance, and an effective tax system judged by the output of its performance within the broader political and administrative reference system. In other words, we look at the institutional framework that supports tax collection and public spending from the lens of the organizational political objectives of the ruling parties. There is a wide- raging agreement in the academic sphere that tax policy should be seen as an evolving process that mirrors broader institutional and political interactions (Steinmo 2003, Genschel and Schwarts 2011). Still, much of this positioning accounts for political actors short- term motivations, which range from policy- related objectives such as implementing a specific tax policy mix, to pragmatic objectives such winning elections. Expanding the conceptual dimension of this latter political target category, our focus is on the medium- term motivation of consolidating the party network, and its territorial organizations. We therefore consider administrative and fiscal decentralization 2

3 reforms to be as much responses to various political crises, as they are policy measures designed to answer fiscal challenges. Intra- Party Division of Power The scientific debates around the ideal types of parties cadre, mass or cartel reveal two ways of structuring the organization: hierarchy vs. stratarchy. On the one hand, Michels (1911) portrayed political parties as monolithic organizations in which the power is located in a single place in the hands of a strong oligarchy. In light of these features, the party is a hierarchical organization in which a few people decide what happens in the party. On the other hand, the idea that power in a political party cannot be located in a single place (Carty 2004) generated the model of stratarchical organization. According to this, the party organization includes a few units enjoying various degrees of autonomy in their particular activities. However, these are interdependent: local units mobilize the voters and recruit members (and candidates), whereas the central units ensure the general integration of the organization and formulate the party policy (Eldersveld 1964; Katz and Mair 1995). Bolleyer (2011) mentions the federation as a type of structure characterizing the new parties in Western Europe. Such a structure emphasizes the role of territorial units with respect to the locus of power, basic organizational principle, logic of representation, and logic of competence distribution across levels. Even the stratarchical structures presuppose some hierarchy in the distribution of power and resources between party units (Bolleyer 2011). In their activities, central elites are likely to channel the internal organization. For example, they set the rules according to which the local branches undertake their activities and are expected to invest resources in local infrastructures (Carty 2004). Panebianco (1988) argues that a suitable indicator for party organization is the degree of development of its central organization. This distribution of power within the party organization is labeled centralization and refers to the extent to which the national level of party organization controls the regional and local levels in conducting politics and enforces its decisions on subnational organs (Harmel and Janda 1982, 59-60). 3

4 However, a clear division of power between party units and their subsequent autonomy does not reflect the complexity of the organization. It is also important how these subunits interact and their degree of interdependence the feature of systemness in Panebianco s words (1988). To this end, the three faces of parties proposed by Katz and Mair (1993) fulfill a double task: better capture the power divisions and connections between party subunits and clearly outline features of every subunit. The party in public office includes the representatives of the party in legislative or government, the party in central office is the national leadership of the party, and the party on the ground refers to the territorial units. The relations between these three layers took different forms focusing especially on the relative size of membership, officeholders, and activists from the central office (Koole 1994; Ignazi 1996). The structure of organizations and intra- party division of power reflect the party layer where decisions are taken within the parties, i.e. central office vs. party on the ground. On the one hand, the centralized decision- making process means that the central office leads the show being actively involved in the selection politics of the party, program drafting, and enforces its decisions upon sub- national units. On the other hand, a decentralized decision- making means that local organizations are relatively autonomous in their activities, rely on their own resources, and provide feedback to the central office. The autonomy of local branches can hardly be total as it may negatively influence the coherence of the party. A tightly organized and highly disciplined political party is very likely to behave as a unitary actor in elections and coalition negotiations (Katz 2002, 87). At the same time, parties must send homogenous messages to voters to persuade them to acknowledge the party s the capacity to represent their interests. A party with highly autonomous local organizations can be perceived as a less unitary actor, unable to draft and promote national level policies given the existence of multilevel competition within the party. In this respect, there is a thin line between rigidity and unity in the eyes of the electorate. The perception of rigidity occurs most often when national organizations dominate the activities of local branches and impose policies that do not mirror citizens needs. The unity of the party is not influenced if the autonomy of the local branches indicates patterns of competition and cooperation between the decision- making levels in 4

5 the party. If that is the case, the effect is positive and enhances the idea of intra- party democratic procedures. It also provides the sense of responsiveness to various challenges (e.g. government at the national level, people s needs at the local level). By looking at the political drivers of organizational reforms, we account for the intra- party power struggles between the center and the periphery. As such, we assert that the more powerful local government (LG) leaders are with respect to the central party leadership, the more likely it is that the ruling party will pursue decentralization reforms, decreasing the administrative functions of the central government (CG) structures. While the correlation between the political and administrative levels of centralization has been previously explored (Hutchcroft 2001), this conceptualization has not been systematically tested in the rich empirical setting of the Central and Eastern Europe (CEE) new democracies. Given the constraints of the transitional circumstances, the decision to maintain or reject the legacy of the previous regime (e.g. ideological affiliation, organizational structures, or personnel networks) influences political parties electoral success, their evolution and organizational approach in the future (Panebianco 1988; Grzymala- Busse 2003; Van Biezen 2003/2005). Essential for the present analysis is how the newly established political parties developed or maintained close ties with the state, being seen to originate as parties of the state (Van Biezen 2005). In these circumstances we can talk of a process of cartelization, which involves the development of strong ties between parties and the state, as well as a tendency of inter- party collusion (Katz and Mair 1995/2009). The cartel party thesis is structured around the use of state resources for the purpose of limiting political competition and ensuring electoral success (Katz and Mair 2009). In a process of self- enforcement, political cartels usually weaken the opposition, consolidating a favorable setting for the exploitation of state resources (Grzymala- Busse 2007). Most of the literature dealing with the cartel party thesis (Katz and Mair 1995; Kopecky 2006; Van Biezen 2004/2008; Van Biezen and Kopecky 2007) focuses on the symbiotic party- state linkages 5

6 involving both an increased reliance of parties on public funding, and increased levels of regulation of party activity. As such, in the context of new democracies, when we look at the evolution of reform measures in the administrative and fiscal sphere, we must account for the underpinning elements of power struggle within and between political parties. This is because within the prescriptions of the cartel party model, the latter will seize all institutional reforms as means to consolidate their hold on power, whether through increased prerogatives, or additional funding. While increased revenues for LGs do not directly translate in revenues for the party organization, by accounting for informal linkages this paper asserts that the more revenues the LGs gain from the CG, the more powerful the ruling party s organization in that territory can become. In this sense, there is a circular relationship as powerful local party bosses can apply pressure to advance decentralization reforms on the central party leadership, and subsequently, if successful, they will become even more significant as their administrative functions and attributions grow. On one hand, existing academic research engages with the limitations of state consolidation and tax compliance in newly democratized countries (D Arcy 2012). On the other hand, we witness a consistent flow of studies concerned with the limitations of organizational reforms (Hutchcroft 2001, Van Biezen and Hopkin 2006, Bezes et al 2013). Still, we see no connection between these administrative and political processes of decentralization in new democracies, and the potential limitations on fiscal capacity. Consequently, our central argument is that political and administrative rearrangements can have an impact on the tax administration and public spending at the subnational level. The expectation of normality in having strong ties to the state, means that any layer of the political organization will strive to obtain as much institutional power as possible. Thus, throughout CEE we can trace an evolutionary path of LGs that accounts for ever increasing functions and prerogatives on their behalf, over the past decades. This process has been generally correlated with the multi- level governance reform process driven by the EU integration (Hooghe and Marks 2001, Piattoni 2009/2011), or by the political devolution process present mostly in Western Europe (Bogdanor 1999, Hough and Jeffery 2006). From this 6

7 latter subnational political and administrative restructuring a new string of party politics literature emerges dealing with multi- level parties and territoriality (Hopkin 2009, Hopkin and Van Houten 2009, Fabre 2010). Hypotheses According to earlier studies, on the basis of these two distinctive, yet converging phenomena multi- level governance, and multi- level parties, we can observe within the subnational sphere a regionalization process that would ultimately lead to something very similar, if not identical to administrative devolution. This paper argues that is trajectory is not entirely certain, and based on empirical evidence from Eastern European case studies, we support that it is fact a continuous process of power negotiation between the center and the periphery as to what organizational reforms are driven by the political and administrative forces at play. Thus, we expect that the more developed the local party organizations are, the less likely it is that they will concede powers to regional authorities. As such, we diverge from traditional multi- level party models, as we look at local party organization, which have a much weaker bargaining power on their own, than regional strongholds might have in Western democracies. In contrast, the smaller local administrative units are much better consolidated in post- communist countries, as they have a direct genealogy to previous territorial administrative structures, in which the interpenetration between the political and administrative spheres was very high. Thus, territoriality within statewide parties in Eastern Europe will depend very much on a synchronous, not an isolated consolidation of power of local party bosses. In light of these arguments, we can formulate two empirically testable hypotheses: H1: The more organizationally developed a political party is, the more significant the intra- party power relations are to the process of administrative decentralization. 7

8 H2: The more powerful local organizations are in relation to the central party leadership, the more likely it is that once in power the political party will pursue decentralization reforms, enhancing the fiscal revenues of local governments. When looking at administrative autonomy, or enhanced power, we have to account for the fiscal capacity that is also being shifted from the center to the periphery. One of the main elements of decentralization reforms is the fundamental linkage between responsibilities (e.g. public service delivery) and their source of financing (e.g. tax collection). As the empirical evidence in this paper will address, the objective of LGs to derive enhanced powers from the CG goes only as far as they can ensure additional funding as well. Even more so, most of the LG leaders are suspicious of a prolonged reliance on CG transfer, and strive for changes in the tax system that will allow them direct collection of revenues. It is at this nuanced level of connection between administrative functions and fiscal capacity that the political power struggles can prove to be a determinant element of equilibrium or institutional destabilization. Multi- Faceted Challenges of Fiscal Capacity There are significant similarities between Romania and Moldova, in terms of common historical lineage, cultural heritage, and political evolution as new European democracies. Still, significant differences should be noted for the purpose of the present analysis, both in terms of political evolution, as well as in terms of contemporary institutional design. From the point of view of the political evolution, the Moldavian party system continued to be marked in the post- soviet period by a powerful presence, and electoral performance of openly Russophile parties, such as the Moldavian Republic Communist Party (PCRM) led by Vladimir Voronin. This in turn drove further the institutional and policy distinctions from Romania. As Romania progressed towards the West, and ultimately became a member of the European Union in 2008, it tailored many of its institutional, and policy reactions on western models. This institutional consolidation and procedural modernization made Romania a benchmark for neighbouring Moldova, especially in the form of anti- corruption agencies (Volintiru 2014). 8

9 While many of the drivers of diverging institutional evolution for the two countries reside partially with their geopolitical influences, there are still significant structural differences. For the present analysis, focused on the relationship between fiscal policy choices and institutional design, we considered the economic performance of each of our case studies, and their consequential reliance on fiscal revenues. Our evaluation shows that over the past decade, Moldova recorded on average a 75% reliance on fiscal revenues in the state budget, while Romania records a smaller average of 59% for the same period. We admit that a decrease in the total share of fiscal revenues, in a post- communist country, can be influenced by certain landmarks of the process of marketization (i.e. privatising or selling of state assets). According to the European Bank for Reconstruction and Development (EBRD), we see that throughout the past decade, Romania and Moldova scored relatively close throughout the Transition Indicators, especially in such areas as trade and small- scale privatisation. Still, Romania sets off towards a higher performance in the field of large scale privatisation, government enterprise restructuring, and competition policy. While in both countries the level of enterprise assets transferred in private hands ranges between 25% and 50%, the faster pace of Romania s privatisation process and enterprise restructuring suggests a potential for higher non- fiscal revenues in the state budget. The Romanian case study presents much more opportunities for this non- fiscal type of revenues, as it is a bigger economy, with significant state assets at the time of transition. Still, much of the privatisation process occurred in the first decade after the collapse of the old regime. In attempting to see the structural, and not the contextual elements of comparison, we must also acknowledge the fact that the Romanian private sector has had a much sharper development than the Moldavian one. Overall, leaving aside many of the economic asymmetries between the two countries, we consider the fiscal dependency ratio to be relatively close in value, and as such, we turn our attention to the political drivers behind fiscal policies. One of the main arguments of this paper is the fact that the gradual process of decentralization, or the consolidation of multi- level politics has an 9

10 influence on the structure of the fiscal transfers and tax collection policies. As such, we argue that the more decentralized a governing party is, the more pressure for administrative decentralization will be. The administrative decentralization process in turn will require additional funding for local governments, which usually necessitates changes in the fiscal policy as well. While these causal sequences are not necessarily changing the overall level of taxation in a given country, the way tax collection is distributed between central and local governments can create additional costs in terms of time and information (Kirchler 2007). In this sense, we can synthetize our enquiry process as comprising of the following sequences: political decentralization, administrative decentralization, and finally a form of fiscal decentralization which relates to the transfer of certain fiscal prerogatives from the central government to the local government. The comparison of our two case studies Romania and Moldova, allows us to disentangle the contextual factors that facilitate the aforementioned sequencing. The Romanian case reflects all three phases, as some of the main political parties have developed strong party branches, which in turn allowed them to push for increased powers at the local government level. As such, we see a constant increase of local governmental attributions, going through the traditional phases of delegation, and then moving forward with de- concentration reforms, in such fields as education, primary hospital care, or social services. For over half a decade the Romanian public administration reform appeared to be stuck in- between regionalization tendencies (which would have opened the path of political decentralization, in development regions), and decentralization tendencies (which only increases the budgetary exercise of smaller existent administrative units). Apart from a rejection from the Romanian High Court of the administrative decentralization legislation, in 2013, this is the process that has caught momentum and policy support in this case study, and it seems it is moving forward in a sectorial- based manner. In contrast, despite successive administrative reforms, in Moldova we see no change in the budgetary distribution of resources between the central government and the local governments. We argue that the main reason the Moldavian fiscal policy remained relatively unchanged by administrative 10

11 reforms is that their driver was not the strengthening of local party branches, as in the Romanian case. Therefore, the tax collection and fiscal expanses in Moldova changed over the past decade only in reaction to harmonization efforts within the Eastern Partnership (EaP), or through functional reviews of the World Bank. Fiscal decentralization is attractive for more developed local governments, as it gives them increased leeway to use and manage the collection of their own revenues. The potential to optimize the collection of local revenue through the process of fiscal decentralization is much higher in the case of more developed constituencies, as opposed to less developed ones. Still, from this point of view, if we look at the situation in Romania, we can see that only the capital city and its suburban area can be considered more developed regions. The vast majority of the local governments in this country preside over poorer, or at least economically heterogeneous areas. As we will further analyse the specific dependency ratios, as total shares of autonomous revenues (i.e. own revenues), we can comfortably assess that fiscal decentralization in its full meaning is not a realistic option either in the Romanian case, or the Moldavian case. Romania maintained a relatively stable administrative structure, despite continuous pressures to reform the sub- national administration. It is still divided in 42 counties (județe) out of which one is the capital city of Bucharest. Each county has an elected adminsitrative structure (i.e. county council, county council president), as well as a civil service composition. Furthermore, each county has a Prefecture, which is led by Central Government appointees, even though the prefect and under- prefects should be senior civil servants since This double system serves mainly as an informal composition of checks and balances aimed at maintaining an institutional functionality, as well as central control. In practice it is poorly meeting both requirements. From the functional point of view it is a relatively ineffective adminsitrative arragement, as there is significant overlap between the prefect and county council presidents (Stan and Zaharia 2011), with the latter being advataged by larger institutional structures, and higher fiscal and budgetary prerogatives. Moving down along the multi- level Romanian administrative structure, we find the municipalities and cities whose 11

12 leadership is also derived through electoral competition, mirroring 1 the system of the county councils, at a smaller scale. Moldova went through successive waves of administrative reform. A first relevant phase for the present research was the administrative restructuring from 2003, when the 9 counties (județe) in which this country was structured were redrawn in 32 districts (raioane). The county- based organisation, deployed in- between 1998 and 2003 was the most similar format to that of neighbouring Romania, which is also traditionally divided in counties (județe). Before that, in- between 1991 and 1998, at the time of the collapse of the USSR, Moldovia was structured in its historically most dispersed territorial administrative units 40 districts and 10 cities. As asserted throughout this paper, the more divided the administrative units are drawn in a country, the more likely the fiscal mechanisms will be highly centralised. The smaller size of the territorial divisions creates a weak base of autonomous management of fiscal policies, and collection system. Both Romania, and Moldova follow the EU guidelines of constructing wider development regions that can support a multi- level governance progression. As such, we find 8 development regions in Romania, comprising of multiple counties each, and 3 development regions in Moldova, comprising of multiple counties, as well as two distinctive territorial units the separatist province of Transnistria, and the autonomous province of Gaugazia. The increase of administrative prerogatives of these development regions would support the further development of regionalisation, which would in turn create a propitious setting for deeper fiscal decentralisation. Still, beyond structural funding from the European Union, the development regions are of little relevance for any other policy reforms in our two case studies. 1 Before the general elections in 2012, the county council presidents were indirectly elected; since 2012 the county council presidents were directly elected like the mayors, and the current legislative reforms on the Romanian electoral system seem to push forward a return to the previous system of indirect election, which would return more power to the central party leadership. 12

13 The Strength of Local Party Organizations This is the section where feedback from workshop participants is welcome. In essence, we have several possibilities to assess decentralization / strength of local organizations: 1) Pick several criteria: decentralization of candidate selection, budget in the party, party manifesto. 2) Conduct interviews with party elite from various layers (central office, party on the ground) to understand how this works. 3) Conduct an expert survey (political scientists) regarding the strength of local organizations in Moldova and Romania 4) Combine any of the measures mentioned at points 1, 2, or 3. Administrative and Fiscal Reform Directions and Constraints in Romania and Moldova The high reliance of LGs on Central allocations, especially in a EU driven tendency of prioritising national, integrated projects, makes them much more easily manageable with clientelistic leverage mechanisms, than if their autonomy would have been higher. The local officials are highly determinant elements in the clientelistic system, as it is them that are the main drivers of electoral mobilisation. As such, it is much easier for the central party leadership via central government, to capacitate them in a stick and carrot system of compliance, rather than to create a genuine alignment of interests and goals. This is especially true in the growing instability of the Romanian political scene, which sees high levels of party switching, and coalition changes. The present research is structured across three layers of empirical assessment on the administrative transformations, and their implications on the fiscal system of collection, and expenditures in each of the two case studies. As such, we look at the sinuous decentralization processes with consideration for their constraints in terms of fiscal autonomy on the part of local governments. These latter institutions potential to support their attributions on their own revenues is very much at the core of this project s research puzzle. As we see a 13

14 noticeable budgetary dependence on central allocations it becomes harder to assert the utility of administrative decentralization in the two case studies without political and/or functional considerations. The evaluation of the fiscal autonomy of the two case studies was principally focused on the analysis of budgetary data of the local governments in Romania and Moldova. While this data is available for the recent period in both countries, in an extensive, and granular form, we face significant challenges in homogenizing the existent data bases. For example, one of the conceptual and methodological impediments is the widespread variation between the declared budgetary data which is usually taken into consideration in most of the existent data bases, and the actually executed budget, subjected to multiple transfers, and rearrangements. This type of shifting character of local governmental budgets in Romania and Moldova offers reasons to question the plausibility of a de facto fiscal decentralization (i.e. budgetary autonomy) in the near future. As such, both the expenditure and collection process are both relatively volatile, at this level of administration. In Romania, Local Governmental Budgets mainly comprise of: own revenues, allocated shares of personal income tax (PIT), and central governmental transfers (earmarked or non- earmarked). As such, budgets are constituted only partly based on their own incomes, the rest of their funds, usually averaging to more than 50%, being received from the central government. Given this reliance of local budgets on the central allocations, a continuous lobby activity has to be made by Mayors and County Council Presidents. If we look at Local Governments (LGs) financial situation for the entire post- communist period, we can discern an enormous reliance of these institutions on central allocations. In terms of national average, we can see the lowest level of autonomy in income, in 2004, when only 19.21% of LGs budget was constituted from their collection of taxes. Beyond the reliance on central transfers, we also see a decrease of the available financial resources for investments. By looking at the non- earmarked revenues (NER) on capital expenses in Romanian LGs over the past decade, we see that after 2008 their levels have remained generally the same (see Figure 1). 14

15 This can be mainly attributed to the general economic downturn of the financial crisis, but the little room to manoeuvre on the part of local officials makes them even more reliant on central transfers than before. In contrast, the non- earmarked revenues for capital expenses in Moldavian LGs have steadily decreased over the past period, for which there is available data (see Figure 2). In this context, we can see that the headroom provided to local governments from the part of the central budgeting process records a diverging tendency: while in the case of Romania, we see an equilibrium level of national transfers to local budgets, in Moldova we see a steadily decrease of such open use transfers. While this category of data on its own is not sufficient to assess the fiscal collection capacity of local governments in each of the two case studies, it is telling of the centralizing tendency in the Moldavian case. Figure 1. Non- Earmarked Revenues (NER) for Capital Expenses in Romanian LGs Source: World Bank dataset 15

16 Figure 2. Non- Earmarked Revenues (NER) for Capital Expenses in Moldavian LGs 120.0% 100.0% 100.0% 80.0% 81.9% 79.9% 69.8% 79.7% 66.1% 60.0% 56.3% 56.3% 40.0% 20.0% 0.0% Source: World Bank dataset The non- earmarked revenues are designed to cover those expenditures that are not predetermined by law, or central budgetary allocation. In other words these are generally those expenses that are decided at the local level, based on their priorities and needs. From the perspective of efficient institutional processes, it is in fact good to have investment capacity at the level of the LG, as this is where many of the bottom- up needs would be best evaluated (e.g. infrastructure damages), and more swiftly resolved than through centrally planned programmes. Still, the non- earmarked investment expenses are usually the form through which local governmental authorities represent their political power in reference to the central party leadership. In the Romanian case study, both our analysis on Discretionary Governmental Funds (Volintiru 2013), as well as our analysis on current non- earmarked revenues shows an important influence of the political positioning of the local party official (i.e. mayor, or county council president). It is often the smaller administrative units that are most dependent on political favouritism, as their autonomous budgets can be as low as 5%. The 16

17 budgetary empirical evidence shows in contrast the much better positioning of larger, and richer LGs, such as the subdivisions of the capital city of Bucharest, and other cities in Romania, whose own income is generally the same as the transfers from the centre. Thus, the relative power of the local party leaders in these constituencies is much higher. Because of this, in such cases we see fewer lump sum transfer, like those from Governmental Discretionary Funds, as much as we see infrastructure, or housing developments. Conclusion This paper looks at the fiscal capacity at level of central and local governments in the selected case studies. The two countries Romania and Moldova, are similar in the sinuous decentralization path, at present certain historical and cultural resemblances. Moreover, there are similarities in terms of their current institutional architecture, especially in the context of a process of reform and modernization. Still, the fact that face noticeable constraints in terms of fiscal capacity, especially at the local governmental level, where a bigger burden of administrative responsibilities is envisaged to be gradually transferred is the core puzzle of this research endeavor. We argue that it is the dynamics of the political parties, and their internal distribution of power that affect to a large extent the process of administrative decentralization. In this context, we infer that the more decentralized the power within a ruling political party is, the more administrative and fiscal attributions will be placed in the hands of local governments. 17

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