Decentralization: Concepts, Rationales, and Evidence

Decentralization: A Comprehensive Overview

Introduction to Decentralization

• Decentralization involves devolving power from the central government to local entities like counties, districts, or villages.
• It shifts decision-making and responsibilities from the center to local units, which then decide on and implement policies, and sometimes raise funds for implementation.
• Centralized systems have power radiating from a single center, while decentralized systems feature multiple nodes responsible for their administrative, fiscal, and political operations.

Components of Decentralization

Political Decentralization

• Shifting political power from the central government (president, congress, legislature, bureaucracy) to local governments.
• Examples include electing local representatives who make decisions within their local government.
• In the United States, this is evidenced by electing a president, members of the House and Senate, but also state governors, legislators, and city council members.

Administrative Decentralization

• Transferring responsibility for implementing public functions to lower levels of government.
• For example, interstate freeways in the U.S. are built and maintained by the federal government, while local roads and streets are managed by state or local entities.

Fiscal Decentralization

• Shifting the authority for raising revenue to local levels.
• Central governments still retain the ability to tax, but taxes are also collected locally.
• In California, residents pay taxes to the federal government, the state, and the county (e.g., property taxes).
• In a system that is politically and administratively decentralized but not fiscally, the central government collects money and sends it to local units, which have less power due to central control of funds.

Summary of Decentralization Components

• Political decentralization: who decides what the government does.
• Administrative decentralization: who implements government actions.
• Fiscal decentralization: who collects the money to pay for government actions.

Reasons for Decentralization

Bringing Decision Making Closer to the People

• Empowering people by allowing them to select representatives who make decisions at the local level.
• Local decision-makers are better informed about the needs and preferences of their constituents.
• Avoids the "one size fits all" policy approach of centralized government.

Increasing Accountability

• Local populations can more easily monitor and hold accountable their locally elected leaders.
• It is easier to attribute outcomes to the behavior of local politicians.
• Smaller communities can better mobilize collectively to sanction poorly performing politicians or reward better ones.
• Collective action problems are easier to overcome in smaller communities, enhancing accountability.

More Even Spending Across Regions

• Politicians in a centralized system might focus on satisfying a slim majority (e.g., 51% of the population) and neglect other regions.
• Decentralization incentivizes politicians in each locality to make investments in their areas, leading to more balanced development.

Providing Choice

• Decentralization allows local units to create their own package of policies and taxation levels, offering people a choice of where to live.
• People can sort themselves into jurisdictions that best match their preferences (Tiebout sorting).
• Example: California (higher taxes, more social services) vs. Texas (lower taxes, fewer services).
• Charles Tiebout's 1956 paper laid out the logic behind sorting, where people move to jurisdictions with optimal service delivery and taxation packages.

Fostering Competition Among Jurisdictions

• Competition among local units can incentivize better performance.
• If one jurisdiction offers low taxes, high services, and low corruption, people will move there from places with high taxes, high corruption, and poor services.
• This competition encourages decision-makers to improve their performance to retain their tax base.

Reducing Intergroup Conflict

• Decentralization can mitigate conflict by devolving power from a central authority.
• Case of Kenya: After the violent 2007 elections, a new constitution devolved power from the president to 47 newly established counties.
• This devolution provided consolation prizes for politicians who didn't win the presidency, lowering the stakes of elections and reducing ethnic conflict.
• The new constitution guaranteed counties control over 15% of the government's general revenue.

Drawbacks to Decentralization

Administrative Duplication and Waste

• Each local unit must duplicate administrative functions at the county, district, or province level, leading to inefficiencies and high costs.

Increased Corruption

• Local officials are more enmeshed in local social networks and may be more susceptible to bribery or corruption.
• Weaker press presence and less aggressive investigative reporting at the local level.
• National government finds it harder to oversee numerous regional offices.

Capacity Issues

• It can be difficult to find enough talented administrators to staff all the new local offices.
• Poorer countries may struggle to train and prepare enough administrators, leading to a drop in quality.

Adoption of Decentralization

• Despite the drawbacks, many countries have embraced decentralization, with over 75 countries attempting to transfer responsibilities to lower tiers of government in the past 25 years.
• The number of lower-level administrative units has expanded significantly, especially in the Czech Republic, Hungary, Brazil, Indonesia, and across Africa.

Does Decentralization Work? Evidence and Challenges

Challenges in Studying Decentralization

• Decentralization is a gradual process, making it difficult to compare outcomes before and after implementation.
• Implementing decentralization plans is challenging, especially in ensuring subnational units have the capacity to manage public finances and deliver services.
• There is often a gap between de jure (on paper) and de facto (in practice) decentralization.
• Poorest regions may lack the capacity to take on new responsibilities, creating a catch-22 situation.

Sequencing Problems

• Effective decentralization requires coordinating political, administrative, and fiscal decentralization.
• Regions with political power need administrative capacity to implement decisions.
• Regions with administrative power need fiscal power to raise resources.
• Regions with fiscal power need political power to ensure citizens trust that money will be spent effectively.

Mixed Results in Practice

• The literature testing whether decentralization works shows mixed results.
• Ideal experiments—randomizing decentralization across regions—are not feasible.

Case Study 1: Kenya's Constituency Development Fund (CDF)

• In 2003, the Kenyan government allocated funds to each MP to spend on poverty relief and development in their constituencies.
• MPs were expected to use their local knowledge to target the most needy people and ensure projects were targeted effectively.
• Data analysis of over 32,000 projects revealed that MPs did not consistently allocate projects to the poorest areas.
• Projects were more likely to be placed in areas that were easier to target, such as those with spatially segregated poor populations or those located near roads.
• The study suggests that the opportunity to help the poor, rather than the motive, drives whether they are well-served by the program.

Case Study 2: Village Size and Government Units in Uttar Pradesh

• A rule in Uttar Pradesh states that villages with over 1,000 people get their own local government unit (Gram Panchayat).
• Villages just above the threshold are compared with those just below the threshold to assess the impact of smaller government units.
• Villages above the threshold (with smaller government units) have better school facilities, access to toilets, pensions, ration cards, and India's NREGS work fare program.
• The findings suggest the positive impact of smaller, more localized government on service delivery.

Community Driven Development (CDD)

• CDD involves giving local communities direct control over the planning and implementation of local projects.
• Funding comes from external sources, but the community decides how the money will be spent.
• Projects are selected and overseen by a leadership group elected from the community.
• The approach aims to achieve sustainable and cost-effective results at the grassroots level.
• The World Bank has undertaken thousands of CDD projects with a total value of approximately 700,000,000.