development. As reserves can now be built up, they need no longer fear any interruption in their planning programmes. They will also be encouraged to develop a proper attitude to economy and thereby to increase the efficiency of their administrations. Since any savings will be kept by the States and Settlements, this system will be more conducive to the better exploitation and fuller developments of the sources of revenue under their control. In this way, financial responsibility on the part of the States and Settlements will be insured; they will no longer be passive, but will make efforts, to help themselves.

However, the Committee which drew up this new system may have laid too much emphasis on surplus or balanced budgets for the States and Settlements. While the trend of prices and therefore of revenues can be said to be increasing in the long run, reductions in revenues resulting from the fluctuations in Malaya's export markets are by no means to be ruled out, and under such circumstances it is economically unsound and socially undesirable to practice balanced budgets. The fallacy of favoring balanced budgets at all times is obvious enough from economic literature. Thus, in bad years the States and Settlements should budget for a deficit, by drawing on reserves or by raising internal loans or by doing both. But the power to raise loans is still the privilege of the Federal Government only, despite the fact that the Committee had proposed that a Loan Committee be established to enable consultation and coordination to take place in these matters. It is difficult to find the reason why this recommendation was not adopted.

The Committee, in its deliberations for an equitable basis of distribution applying to all the States and Settlements, took into consideration not only general needs, as measured for instance by population (i.e. the Capitation Grants), but also the special needs of those States which required additional assistance for the purpose of economic development or of balancing their budgets (i.e. the Development Grants and the Special Transitional Grants). The total allocations, therefore, benefit the poorer States relatively more than the richer ones, whilst on the other hand the latter contribute much more revenue per capita than the former. It may be argued that those States which pay the highest per capita taxation should receive better treatment. But if the aim of federal public finance is the integrated development of the Federation as a whole, then this argument loses much of its importance. It is only by reducing economic inequalities that lasting national unity can be established.

The changes introduced by this scheme are expected to increase the State and Settlement revenues significantly. For instance, the total allocations to the States and Settlements for 1956, estimated at $189million, showed an increase of $26 million over the previous year, though admittedly this was partly the result of the overall increase in estimated total federal revenue between these two years.

With regard to the sources of State revenue, it is well to remember that the proceeds of 30 percent of the import duty on petrol and the Capitation Grant have been given constitutional guarantees, in consequence of which the States and Settlements have an independent

claim to them. Together with the special aid to the poor and backward States, these measures attempt to give elasticity to the finances of the States, and under this system the former rigidity of revenue allocation is eased for the first time. Furthermore, the onerous responsibilities of financing certain services, such as education and health, have, as mentioned before, been lifted from the States and Settlements.

Though no financial arrangements can be said to be satisfactory unless it has worked well in practice, it is evident that this new system has many advantages not found in the previous one. As its basis it has principles which will insure financial responsibility on the part of the State and Settlement Governments, without prejudicing the necessary requisites of financial autonomy which are such an important advantage of federalism. The essentials of federalism will therefore be preserved, and in as far as they are compromised at all, this is done in the national interest. In this way, sound balance is achieved between the forces of centralization and decentralization, which is the essence of any real federal system and the basis on which Malayan national unity can be built.

LESSONS OF THE ARGENTINE REVENUE SHARING

EXPERIENCE

BY HARLEY H. HINRICHS*

I. INTRODUCTION AND SUMMARY: REVENUE SHARING LESSONS

It is highly misleading, dangerous and foolhardy to attempt to transfer fiscal lessons from one socioeconomic milieu to another; however, to ignore international fiscal experience may be even more risky. History is no virgin; one is never quite certain who might use it to derive different experiences and gain different insights; but if one can't use history, what else is there?

With these caveats aside, what lessons, if any, can be drawn from the Argentine experience of fiscal federalism? These lessons, of course, may or may not be relevant to the United States; but these lessons, nevertheless, deserve to be recorded so that others may judge their value, if any.

In summary, the lessons of the Argentine experience of 1935-61— and their implications, if any, for the North American fiscal systems— can be briefly stated:

1. The socio-politico-economic milieu.-Argentina is a developing, Latin American constitutional federal republic only in freshman textbooks; in fact, it has been undeveloping, is European in every way but geographically, and is a constitutional federal republic only in the offseason. Argentina has a glorious history, a magnificent prospect for the future, but seems to be always temporarily indisposed at any given present moment. It is important to understand this initial stage-setting in order to view the drama of Argentina's experience with fiscal

federalism.

2. Revenue sharing has been associated with a declining public sector. The growth of revenue sharing in Argentina-the share of centrally collected revenues distributed to provinces and municipalities has increased from about one-fourth to nearly one-half in the past two decades has been associated with a decline in the size of the public sector. Local and provincial tax sources have become eroded and/or under-utilized as decentralized government units have found it easier to seek revenues through a greater federal share than through a determined nurturing of local revenue sources. This historical denouement casts doubt on the common assumption that revenue sharing may automatically increase the size of the public sector.

*Faculty of Economics, University of Maryland; this article is based partly on the author's experience on World Bank missions to Argentina in 1964 and 1966, however, the views expressed here are not necessarily those of the IBRD. Deep gratitude for constructive criticisms of this paper are herewith rendered to Murray Ross of the IBRD; Hans Wyss and Frederico J. Herschel were also invaluable sources of data and suggestions.

3. Revenue sharing has been associated with a weakening of provincial and local government units.-As decentralized governmental units have found themselves more and more reliant on the central purse for budgetary revenues, their own vitality and independence have tended to decrease. This Argentine result casts doubt on the common assumption that revenue sharing-in and of itself—is a sufficient force for shifting power within a federal system to state and local governments.

II. PUBLIC SECTOR SAVING

A. DETERIORATION OF SAVINGS IN RECENT YEARS

Public sector saving in Argentina has sharply deteriorated in recent years, becoming negative (M$N10 billion) in 1964. For 6 of the 8 years from 1950-57 public sector saving was about 5 percent of GNP; since then there has been a sharp secular decline in saving with the 3 years of zero or negative savings (1958, 1962, 1964), 2 years of meager savings at about 2 percent (1959 and 1963), and 2 years of saving at 4 percent (1960, 1961), years of economic resurgence coupled with improved tax administration. (See tables A 1-4 and accompanying charts.) (The public sector is defined to include the Federal Government, its decentralized organizations, the social security system, the federal district (Buenos Aires), provincial and municipal governments, and public enterprises. All except the public enterprises comprise "general government".)

TABLE A-1.-Gross saving and investment in the public sector

1 For comparability with earlier years, excludes accounts of certain decentralized organizations. ? Rough estimates for years after 1961.

'Disbursements on investment account.

GDP.

NOTE.-Details may not add to totals due to rounding.

Source: CONADE-Provincial and municipal data for 1961 and later are rough estimates.

1 Based on CONADE preliminary data: later data revisions result in no significant changes in trends and magnitudes.

TABLE A-2.-Public sector saving, 1950–65 (as percent of GNP)

NOTE.-1956 and before are calendar years; 1957 is Jan. 1-Oct. 31; 1958 and after is fiscal year Nov. 1-Oct. 31.

Source: CONADE; there are minor differences between this table and a similar one in the preliminary 5-year plan where GDP rather than GNP was used as the base. See the plan table No. 54 for comparison.