Pitfalls and Roadblocks in Fiscal Decentralization

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Pitfalls and Roadblocks in Fiscal Decentralization

• Dilip Mookherjee
• May 8 2007

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PITFALL NO. 1 CAPTURE AND CORRUPTION

• Concern of designers of both the US and Indian
  constitutions greater scope for elite capture in
  local governments compared with central
  governments
• Minorities of low socio-economic status could be
  more vulnerable in the absence of federal
  safeguards blacks in US South, scheduled castes
  in India
• Argument is based on greater heterogeneity and
  size of government at the federal level, and
  greater media attention, which renders special
  interest capture less likely

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PITFALL NO. 1 (contd) CAPTURE

• Functioning of local democracy is crucial to
  control capture and corruption requires informed
  and active civil society, often missing in poor,
  backward regions
• Expect that institutions of local democracy will
  vary widely across regions, hence
  decentralization will have uneven impact across
  regions, may increase inter-regional inequality
• Argentinian experience with school
  decentralization schools in poor, backward
  regions fell further behind, while those in
  better-off regions improved

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PITFALL NO. 1 (contd) CAPTURE

• Other examples Ecuador Social Funds projects in
  building latrines were less successful in
  communities with high inequality
• Poorer intra-village targeting of Food for
  Education program in Bangladesh in villages with
  greater land inequality similar patterns with
  respect to credit and employment programs in West
  Bengal, India

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PITFALL NO. 2 CAPACITY

• Second major concern lack of administrative and
  financial capacity in local government
• Related to low utilization of scale economies
• Quality of personnel ability to raise funds
  spending on capital projects requiring technical
  expertise insufficient exploitation of learning
  and accumulation of experience

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PITFALL NO. 3 COORDINATION

• Numerous interjurisdictional externalities that
  local governments do not internalize
• Divide responsibility for health, transport,
  education across different local governments, and
  central govt
• Race to the Bottom reason for concentrating
  tax collection at the central level, creates need
  for intergovernmental fiscal grants

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PITFALL NO. 3 (contd) COORDINATION/FREE-RIDING

• Hunger at local level for fiscal transfers from
  the central government inherent free-rider
  problem, overstate local need
• Soft Budget Constraint problem lack of
  self-sufficiency fiscal dependence
  macroeconomic problems from tendency to
  overspend e.g., Argentina
• Low incentives to enforce regulations in the
  national interest (e.g., environmental) and
  collect taxes that are shared with other regions
  problems in post-Communist Russia

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PITFALL NO. 4 CASH (UNFUNDED MANDATES)

• Converse to the soft budget constraint strong
  central governments harden budgets of local
  governments, limiting flexibility of spending to
  variations in local needs
• Probably the more common problem e.g., Brazil,
  Pakistan, China, India, S Africa
• Decentralization often used by central
  governments to limit spending on social sectors
  devolve responsibilities without corresponding
  devolution of finances and personnel

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PITFALL NO. 5 CALLOUSNESS (POLITICALLY
MOTIVATED TRANSFERS)

• Transfers of resources across regions often
  politically motivated
• Higher level governments try to retain discretion
  over inter-regional allocations, use them as
  instruments for political patronage and electoral
  advantage

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PITFALL NO. 6 CONSISTENCY (DE JURE vs DE FACTO
DECENTRALIZATION)

• Frequent contrast between rhetoric and reality
• Local governments may lack independent
  constitutional authority and can be dismissed by
  higher levels (e.g., Pakistan, China)

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PITFALL NO. 6 (contd) DE JURE DECENTRALIZATION

• De jure decentralization often not backed up by
  substantive devolution of funds, functions and
  functionaries (e.g., education, health functions
  not devolved, low fiscal transfers in most of
  India)
• May not allow local governments to be popularly
  elected do not allow political parties to
  contest elections (e.g., Pakistan, China, Uganda)
  
• Create confusion by failing to delineate
  responsibilities clearly between different levels
  of government (e.g., Ugandan health programs)

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PITFALL NO. 6 (contd) DE JURE DECENTRALIZATION

• Delays and failures in implementing statutory
  provisions, e.g., appointment of state Finance
  Commissions, Election Commissions in many Indian
  states, lackadaisical implementation of
  recommendations
• Insufficient effort to provide training and
  capacity-building for local government officials

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PITFALL NO. 6 (contd) DE JURE DECENTRALIZATION

• Do not clarify respective roles and authorities
  of elected members of local government and
  bureaucrats (e.g., problem in many central Indian
  states such as Uttar Pradesh)
• Do not provide local governments with authority
  to hire and fire bureaucrats, or design their
  personnel policies (with few exceptions, e.g., S
  Africa)

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PITFALL NO. 7 COMPREHENSION

• Some publicly provided goods are credence goods
  e.g., health
• Difficult for poorly informed citizens to
  evaluate medical treatments or to value
  preventive services esp. for children
• Increased reliance on local popular will may
  result in reduced expenditures on immunizations
  (e.g., Uganda), drinking water quality (e.g.,
  Indonesia)

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PRINCIPAL ROADBLOCK POLITICAL WILL

• Many decentralizations are poorly designed and
  implemented, and this is not due to ignorance or
  lack of experience!
• Key political problem higher levels of
  government are inherently unwilling to devolve
  power or finances

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PRINCIPAL ROADBLOCK POLITICAL WILL

• Raise primary question why does the higher level
  government want to devolve in the first place?
• Only in rare instances is there a genuine
  political will to implement decentralization that
  is meant to succeed transition to democracy from
  authoritarian regimes (Indonesia, S Africa)
  election of governments committed ideologically
  to democratic decentralization (Workers Party,
  Brazil)

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ROADBLOCKS (contd) POLITICAL WILL

• Motive for decentralization in most other
  contexts challenge to authority of central
  governments from regional governments and powers
• Decentralization a strategic tool in competition
  for legitimacy and power between central and
  regional governments

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ROADBLOCKS (contd) POLITICAL WILL

• Attempt to cultivate channels of political
  patronage at local levels
• Indian story central government wanted to bypass
  state governments and create direct channels of
  resource transfer to local governments, and
  undermine authority of state governments
• Early bills blocked by state governments, later
  passed on condition that state governments would
  be free to implement devolution to local
  governments

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ROADBLOCKS (contd) POLITICAL WILL

• Many state governments inherently unwilling to
  devolve powers and funds to local governments
• So there is a big gap between de jure and de
  facto decentralization
• Implementation varies widely across different
  Indian states

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ROADBLOCKS (contd) POLITICAL WILL

• Decentralization sometimes used by autocracies to
  consolidate their power and pre-empt competition
  from regional powers
• In such contexts (e.g., Pakistan, Uganda, China),
  decentralization used to subvert democracy at the
  national level
• Tendency to rely on administrative devolution
  rather than decentralization of political power

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SUMMARY

• More often than not, decentralizations are poorly
  designed and implemented (callousness,
  consistency)
• Even if they were properly designed and
  implemented, there are other potential pitfalls
  capture, capacity, coordination, cash, and
  comprehension
• Decentralization likely to be accompanied by
  widening inter-regional disparities owing to
  regional dispersion in both pitfalls and
  roadblocks

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PROBLEMS FOR INTER-REGIONAL INEQUALITY

• Problems of local capture, corruption, capacity
  and more severe in poorer, backward, less equal
  regions
• Free-rider problem in inter-governmental grants
  limits inter-regional equalization and reaction
  to unverifiable local shocks
• Prosperous regions less willing to contribute to
  subsidize less prosperous regions

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NECESSARY SAFEGUARDS

• Essential to accompany any decentralization with
  safeguards and monitors
• Evaluate de facto devolution and service delivery
  based on community and household surveys
  implemented by independent agencies
• Need to design indices of devolution and service
  delivery

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NECESSARY SAFEGUARDS (contd)

• Necessary for central governments to intervene in
  instances where devolution or service performance
  falls below minimum standards, particularly in
  poor, backward areas
• Combine with measures to curb local capture and
  corruption
• Close monitoring of elections, prevent
  manipulation of voting process, allow political
  parties, encourage competition from new entrants
  to incumbents
• Consider reserving positions for minorities in
  local government (India)

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NECESSARY SAFEGUARDS (contd)

• Audits from above (Indonesia experiment), random
  checks by independent external auditors,
  penalties for malfeasance, advertise results
  before elections (e.g. Brazil)
• Constraints on delivery of services to
  minorities explicit formulae for inter-regional
  allocations based on measures of need

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NECESSARY SAFEGUARDS (contd)

• Create rules for intra-regional targeting based
  on surveys of socio-economic status of households
  (e.g., PROGRESA in Mexico)
• Build local civil society mandatory village
  meetings, encourage minorities to form active
  social groups (e.g., DPEP in India),
  participatory budgeting (e.g., Brazil), citizen
  oversight committees (e.g., Bolivia)

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NECESSARY SAFEGUARDS (contd)

• Transparency in flow of funds e.g., local
  governments should know what resources and powers
  they are entitled to (e.g., Uganda) clear
  delineation of responsibilities between levels of
  government assignment of powers to elected local
  officials over personnel working with or under
  them
• Citizen empowerment via clear legal rights and
  entitlements ease of using legal system to
  demand information from local governments (e.g.,
  Right to Information, Employment Acts in India)