Rationale for Decentralization
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Contributor: World Bank
Author: Decentralization Thematic Team
Contact: Jennie Litvack

Rationale for Decentralization

Much of the decentralization which has taken place in the past decade has been motivated by political concerns. For example, in Latin America, decentralization has been an essential part of the democratization process as discredited autocratic central regimes are replaced by elected governments operating under new constitutions. In Africa, the spread of multi-party political systems is creating demand for more local voice in decision making. In some countries, such as Ethiopia, decentralization has been a response to pressures from regional or ethnic groups for more control or participation in the political process. In the extreme, decentralization represents a desperate attempt to keep the country together in the face of these pressures by granting more autonomy to all localities or by forging "asymmetrical federations." A variation on this theme has been decentralization as an outcome of long civil wars, such as in Mozambique and Uganda, where opening political opportunities at the local levels has allowed for greater participation by all former warring factions in the governance of the country. The transition economies of the former socialist states have also massively decentralized as the old central apparatus crumbled. In many countries, decentralization simply has been happened in the absence of any meaningful alternative governance structure to provide local government services. In some cases (particularly in East Asia) decentralization appears to be motivated by the need to improve service delivery to large populations and the recognition of the limitations of central administration.

Although the main reason for decentralization around the world is that it is simply happening, there are a multitude of design issues that affect the impact of different types of decentralization on efficiency, equity and macrostability. In this regard, there is a growing body of literature examining the economic rationale for decentralization.

Economists justify decentralization on the grounds of allocative efficiency. The rationale is that decisions about public expenditure that are taken by a level of government closer, and more responsive, to a local constituency are more likely to reflect the demand for local services than similar decisions taken by a remote central government. The secondary, also important benefit in that people are more willing to pay for services which they find to be responsive to their priorities, especially if they have been involved in the decision making process with regard to delivering the services. One argument asserts that a primary economic rationale for decentralization is to improve the "competitiveness" of governments and enhance innovation -- hence the likelihood that they will act to satisfy the wishes of citizens.

A number of issues, both theoretical and practical, complicate the view of whether decentralization is a good or unfortunate economic strategy. At the macro level, an important concern has been that decentralization may make stabilization policies more difficult to implement, and indeed, may itself lead to destabilizing levels and composition of overall public expenditures and public debt. Another perspective on this, however, is that decentralized systems can be designed to avoid destabilizing effects and ensure correct incentives. Some of the "decentralization" in the 1980s, for example, was actually an offloading of fiscal imbalances by central governments to subnational governments. Under these circumstances, it is not surprising to see a strong association between decentralization and fiscal imbalances at lower levels. Another macro level controversy for which evidence is inconclusive is whether decentralization retards economic growth.

Concerns about equity -- interjurisdictional and interpersonal -- have been central to the discussion of decentralization. Some jurisdictions are better endowed with resources than others, perhaps because of size or location. In addition, historical circumstances (e.g., apartheid) may have created local. Thus, an intergovernmental fiscal program may be designed to shift resources to disadvantaged areas to ensure that all citizens enjoy a minimum level of service, regardless of location, or receive enhanced assistance to accelerate amelioration of deficits, because of location. The allocation of poverty program grants to subnational levels should be analyzed within a particular country context since lack of transparency, or inadequate specificity in transfer design, sometimes results in wealthier areas receiving more resources than poorer areas.

It is usually argued that ultimately central governments are responsible for ensuring interpersonal equity, but local governments also play very important roles in implementing central distributional programs and in determining a host of tax, expenditure and intra-locality transfer schemes. Where local economies are intrinsically open and many resources, especially key human resources, are mobile, only limited success should be expected from jurisdictionally focused distributional programs.

The specific services to be decentralized and the type of decentralization will depend on economies of scale affecting technical efficiency and the degree of spillover effects beyond jurisdictional boundaries. These are issues that need to be taken into account in the design of a decentralized system. In practice, all services do not need to be decentralized in the same way or to the same degree. In an important economic sense, the market is the ultimate form of decentralization in that the consumer can acquire a tailored product from a choice of suppliers. The nature of most local public services limits this option and establishes a government role in ensuring the provision of these services, but it does not automatically require the public sector be responsible for the delivery of all services. Where it is possible to structure competition either in the delivery of a service, or for the right to deliver the service, the evidence indicates that the service will be delivered more efficiently. Although uncommon in practice, local governments have successfully competed for the right to provide certain local services. In an array of local public services in any particular country, a mix of solutions from deconcentration to managed competition/privatization is likely to co-exist.

Although politics are the driving force behind decentralization in most countries, fortunately, decentralization may be one of those instances where good politics and good economics may serve the same end. The political objectives to increase political responsiveness and participation at the local level can coincide with the economic objectives of better decisions about the use of public resources and increased willingness to pay for local services. At least five conditions are important for successful decentralization:

  • the decentralization framework must link, at the margin, local financing and fiscal authority to the service provision responsibilities and functions of the local government - so that local politicians can bear the costs of their decisions and deliver on their promises;
  • the local community must be informed about the costs of services and service delivery options involved and the resource envelope and its sources - so that the decisions they make are meaningful. Participatory budgeting, such as in Porto Alegre, Brazil, is one way to create this condition.
  • there must be a mechanism by which the community can express its preferences in a way that is binding on the politicians --so that there is a credible incentive for people to participate;
  • there must be a system of accountability that relies on public and transparent information which enables the community to effectively monitor the performance of the local government and react appropriately to that performance- so that politicians and local officials have an incentive to be responsive; and,
  • the instruments of decentralization --the legal and institutional framework, the structure of service delivery responsibilities and the intergovernmental fiscal system-- are designed to support the political objectives.

Fulfilling these goals (or at least having local governments improve upon the central government’s record) is a tall order, but achievable.

Successful decentralization is closely related to observing the design principles of: finance following [clear assignment of] functions; informed decision making; adherence to local priorities; and accountability. However, applying these principles in practice has not proven to be simple. Country circumstances differ, often in subtle and complex ways, consequently the policy and institutional instruments that establish decentralization have to be shaped to the specific conditions of individual countries.