Equalization of Financing between Urban and Rural Local Governments: The case of Albania

Abstract This chapter discusses the Albanian model for the equalization of financial disparities between urban and rural municipalities, especially after the 2014 Territorial and Administrative Reform (TAR). This reform reduced the number of local governments, merging 373 rural and urban entities into 61 larger municipalities. It aimed to streamline and harmonize service provision across regions and municipalities, but challenges persist due to the limited financial resources of local governments. The chapter explores the country’s intergovernmental financial framework, including recent reforms, which enhanced municipal responsibilities and financing. Despite reforms Albanian municipalities are heavily reliant on intergovernmental transfers, with unconditional grants playing a crucial role in equalizing financial resources. While the stability and allocation of the unconditional grants has improved since 2017, rural municipalities still struggle due to higher service costs and lower fiscal capacity compared to urban centers. There are also major differences between larger urban areas and the capital, Tirana. The chapter concludes that while Albania has made strides in decentralization, further reforms are necessary to address the ongoing fiscal inequalities between urban and rural local governments, underscoring the need for more robust equalization and financing mechanisms to bridge the gap between urban and rural municipalities.