Decentralisation, governance and economic development

In recent decades, there has been a renewed interest on the relationship between decentralisation and development. This is in part a consequence of a global trend towards devolution and decentralisation, most notably in the developing world. In most of these cases, the decision to redefine the relations between government levels was primarily motivated by the recommendations from international organizations such as the World Bank and the United Nations. These recommendations were based on the need to promote development through the rearrangement of fiscal, political and administrative relations between national and subnational governments and the urge of strengthening civil and democratic institutions. It is also clear that decentralisation strategies have been encouraged on the grounds of the benefits suggested by the theory of fiscal federalism: efficiency in public provision of public goods, intergovernmental competition and greater matching of local needs with provision. Moreover, the failure of centralised socialist regimes to generate conditions leading to sustained growth has also boosted this move towards decentralisation. The effect of this trend is that almost every country has adopted some form of decentralisation over the last decades based on the general presumption that it would provide a solution to many different kind of problems which centralised regimes had failed to address.

It does not follow however, even if centralised regimes have little credit on empirical (or anecdotal) grounds, that the more decentralised structures are bereft of such problems. While the transition to decentralisation may address several of the efficiency issues mentioned before, it creates new problems. For example, local capture of governments and inappropriate accountability systems may stand in the way of the decentralisation process and overturn the benefits of allocative efficiency. Other sources of complications include the existence of agency problems, information asymmetries, deficient monitoring of sub-national governments and problems arising due to vertical fiscal imbalances. These and other related topics form an important part of the recent and current research on fiscal federalism and decentralisation which aims to integrate political economy considerations in the traditional approach. These problems are specially relevant in developing countries where the political and institutional framework at the subnational level is often very weak. Learning why and how these problems arise and develop under different governmental arrangements and the consequences they have for development is essential in order to inform the discussion on these matters.

Looking at recent experiences, it can be seen that there has been little success with decentralisation programmes, specially among developing countries. Indonesia is the prime example of a full-scale decentralisation programme gone wrong. A highly concentrated country during the Suharto regime, the decentralisation process initiated in 1999 engendered a number of short-term imbalances and a widening of regional disparities. The reforms failed to address key issues such as the degree of real autonomy of local governments and the evident regional inequalities. Several Latin and Central American countries, including Argentina, Chile and Colombia, experienced mixed results following the decentralisation of public services -health and education- during the 80's and early 90's. While there were improvements in health and educational indicators, this came at the cost of soaring provincial debts. In most cases, provincial governments found extremely burdensome to cope with the delegated services leading to overspending and mismanagement. In all cases, the way in which the accountability relationships were delineated, determined the success or failure of the decentralisation programme. With the exception of Nicaragua and El Salvador, all the countries failed to ensure these accountability relationships and decentralisation brought along new problems. Some of these problems were also faced by a number of African countries where decentralisation reforms were implemented. Decentralisation in Uganda has been relatively successful although many challenges lie ahead, particularly the improving of technical capacities of local staff and the fight against bureaucratic corruption. Tanzania and Ethiopia have also underwent major decentralisation reforms but the effects have been limited by weak institutional capabilities at the local level.

Corruption in the public sector is one of the most important obstacles faced by any decentralisation programme. It affects development in several ways, the more obvious and direct being the allocation of resources away from productive activities. There are however more subtle ways in which corruption may distort incentives and modify the behaviour of economic agents bearing implications for development. Once recognised, it becomes clear that the implementation of decentralisation reforms should take into account the problem of corruption as a result of the new structural arrangements.

Another important caveat is that decentralisation is hardly a unidimensional concept. As noted above, many countries have embraced decentralisation as a means of promoting both democratic and development objectives. However, there are many ways in which decentralisation can be achieved. In this sense, while some countries have turned to a federal system of government, other countries have only decentralised certain types of expenditures, like healthcare and education services. In other cases, the decision has been to decentralise polities or merely administrative duties. While it is reasonable to argue that these different forms of decentralisation are likely to be related, there are reasons to believe that their effects may not always go in the same direction. In this case, it is essential to gauge the potential conflicts that may arise between the different levels and types of decentralisation.

In light of the recent experiences of several developing countries, it is clear that decentralisation is not likely to be without its problems. Deficient technical capabilities, pre-existing regional inequalities, local capture by powerful interest groups, coordination problems between levels of government and weak accountability are all factors that conspire to limit the effectiveness of decentralisation reforms. The fact that these conditions are often encountered in much of the developing world makes the challenge all the more difficult. For these reasons, it is vital that any major shift towards decentralisation takes into account the existing institutional structure in order to tailor the reforms to each particular case.

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