The Impact of Fiscal Decentralization. Jorge Martinez-Vazquez

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      The Impact of Fiscal

      Decentralization

      Issues in Theory and Challenges in Practice

      Jorge Martinez-Vazquez

      Asian Development Bank

      © 2011 Asian Development Bank

      All rights reserved. Published 2011.

      Printed in the Philippines.

      ISBN 978-92-9092-323-7

      Publication Stock No. RPT113308

      Cataloging-In-Publication Data

      Martinez-Vazquez, Jorge

      The impact of fiscal decentralization: Issues in theory and challenges in practice.

      Mandaluyong City, Philippines: Asian Development Bank, 2011.

      1. Fiscal decentralization.I. Asian Development Bank.

      The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.

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      Acknowledgments

      This Policy Note transcribes the main content of the presentation that Professor Jorge Martinez-Vazquez, Andrew Young School of Policy Studies, Georgia State University delivered at the Asian Development Bank headquarters in Manila on 7 October 2010, at the invitation of the Governance and Public Management Community of Practice. The work was completed under the overall strategic direction of Sandra Nicoll, director, Public Management, Governance and Participation Division of the Regional and Sustainable Development Department, and Bruno Carrasco, director, Public Management, Financial Sector and Trade Division of South Asia Department. Tariq H. Niazi, principal public management specialist, provided substantial inputs and technical editing of the Note.

      Introduction

      Over the last several decades, a revolution has been occurring in many countries around the globe, with the devolution of fiscal and political powers to subnational governments. This trend could be as influential for good governance and for improving the lives of ordinary citizens as major institutional transformations of the past century, such as decolonization in Africa and Asia or the transition from planned to market economies in the former Soviet Union and the People’s Republic of China (PRC).

      Due to decentralization, many subnational governments have become key public sector actors. As such, their roles have grown, and expectations placed on them have increased. As countries continue to abandon centralized governance, it becomes increasingly important to know the impact of decentralization on a number of economic issues including growth and development; reducing poverty and achieving the Millennium Development Goals; advancing public services, such as education and health; and achieving greater macroeconomic stability with lower unemployment and inflation. The fundamental question is whether the ongoing decentralization trend is helping or hurting with these issues. The impact of devolution on a gamut of fundamental institutional issues, such as country unity versus separatism as well as the level of corruption, should also be scrutinized.

      This policy note explores (i) why countries choose to decentralize their governance; (ii) what economic theory expects from decentralization; and (iii) what is known about the impact of decentralization on a relevant list of economic and political variables, as well as what conclusions are appropriate.

      The Causes and Basic Theory of Decentralization

      Countries begin decentralization processes for different reasons. Some are searching for a more efficient—and leaner—public sector, while others are disenchanted with the performance of planning and centralized policies (e.g., socialist economies). There are often grassroots demands to achieve democratic ideals. On the other hand, some movements are designed to contain or to appease centrifugal forces, ethnic conflicts, and/or separatism, and to diffuse social and political tensions by allowing local cultural and political autonomy. There may even be some political opportunism using decentralization for electoral objectives and/or just a desire to not be left behind in this popular form of institutional reform. While governments do not generally decentralize to pursue greater macro stability and economic growth, decentralization may impact upon these.

      “Decentralization” generally means the devolution of decision-making powers. A related concept is “deconcentration,” in which operations are decentralized, but decision-making powers are not devolved. For example, many observers state that Bangladesh is a deconcentrated system, in which local governments are still subject to the control of central authorities, as opposed to a decentralized one, in which local governments have autonomy to set their own priorities and decide how best deliver public services. In addition, decentralization does not necessarily denote an erosion of central control nor of powers over issues and processes with national dimensions.¹ Instead, it has political, administrative, and fiscal dimensions that are replicated more or less completely in different vertical spheres (i.e., regional and local).²

      In recent years, there have been multiple extensions of the traditional theory of fiscal federalism (or the organization of intergovernmental fiscal relations) first developed by Oates in 1972. Viewing government as a benevolent agent, he created a decentralization theorem, which states that in the presence of diverse preferences and needs, provision of services from a decentralized government will lead to increased citizen welfare. This occurs because decentralized government leads to information advantages and more flexibility in adapting to citizens’ needs and preferences, as emphasized earlier by Hayek (1945). СКАЧАТЬ