The first local elections in almost two decades demonstrate a commitment to realising the decentralisation laid out in the new Nepali constitution. But is decentralisation good for economic growth? Bishal K Chalise writes that it has the potential to be, but key barriers must be overcome

Chalise, Bishal K

LSE Research Online

Localising	development:	Will	decentralisation	helpor	hinder	Nepal’s	growth?The	first	local	elections	in	almost	two	decades	demonstrate	a	commitment	to	realising	thedecentralisation	laid	out	in	the	new	Nepali	constitution.	But	is	decentralisation	good	for	economicgrowth?	Bishal	K	Chalise	writes	that	it	has	the	potential	to	be,	but	key	barriers	must	be	overcome.With	the	local	elections	ongoing,	Nepal	has	embarked	upon	massive	decentralisation.	The	2015constitution	guaranteed	that	a	wide-range	of	state	powers—executive,	legislative	and	to	a	certainextent,	judiciary	–	would	be	devolved	to	newly	formed	and	town	municipalities.	The	primary	objective	is	to	ensurethe	inclusion	of	hitherto	underrepresented	groups	into	the	country’s	political	process.	But	how	doesdecentralisation	play	out	for	overall	economic	growth	and	development?	This	is	a	pertinent	question	given	thatthe	country	aspires	to	graduate	to	middle-income	country	by	2030.Efficiency	vs.	equityThe	answer	depends	upon	our	priorities:	do	we	want	best	possible	outcome	or	do	we	want	the	outcome	to	be	fairfor	all?	In	economic	terms,	it	is	the	trade-off	between	efficiency	and	equity.The	pro-efficiency	proponents	fear	that	the	decentralisation	of	development	processes	might	add	transactioncosts	to	the	economy	and	slow	down	overall	economic	growth.	The	municipal	governments	have	many	economicrights	including	levying	local	taxes;	local	level	development,	project	planning,	and	market	management;	andenvironment	protection	among	many	others.	The	costs	may	therefore	be	incurred	by	non-uniform	policymaking,the	cost	of	coordination,	the	duplication	of	development	work	and	delayed	decision-making	at	local	level.Additionally,	large	businesses	operating	in	multiple	local	units	could	face	excessive	administrative	or	legal	costs,procedural	intricacy	and	double	taxation	burden.	Small	market	under	the	local	bodies	jurisdiction	of	local	bodiescan	create	diseconomies	of	scale	in	providing	public	goods	like	healthcare,	environmental	protections	or	disasterrisk	management.	These	can	add	enormous	additional	costs	to	the	economy	and	drag	down	economic	growth.On	the	other	hand,	pro-equity	proponents	argue	that	devolution	of	power	would	actually	result	in	the	‘de-bureaucratisation’	of	current	centralised	planning	and	development	effort	and	thus,	be	cost	effective	and	havegreater	positive	impact	on	people	lives.	Prominent	economists	like	Elinor	Ostrom	and	Amartya	Sen	stronglysupport	this	bottom-up	approach	to	development	and	asserts	that	local	knowledge	and	common	sense	ofcommunities	should	play	central	role	in	decision	that	affects	them.When	viewed	through	this	lens,	decentralisation	hopes	to	foster	economic	development	that	matches	the	need	ofthe	communities	and	are	suitable	to	local	conditions.	The	freedom	given	to	local	communities	in	designing	andimplementing	their	own	development	programs	creates	ownership,	reduces	corruption	and	misuse	of	resourcesand	increases	the	utility	over	a	long	period.Moreover,	decentralisation	prompts	a	healthy	division	of	responsibilities	where	local	units	are	empowered	to	caterto	local	needs	and	allow	central	government	to	focus	on	larger	national	projects	more	effectively.South Asia @ LSE: Localising development: Will decentralisation help or hinder Nepal’s growth? Page 1 of 3		Date originally posted: 2017-07-10Permalink: http://blogs.lse.ac.uk/southasia/2017/07/10/localising-development-will-decentralisation-help-or-hinder-nepals-growth/Blog homepage: http://blogs.lse.ac.uk/southasia/Image:	Community	at	discussion	of	water	supply	and	sanitation	in	Kaski	Nepal.	Credit:	SimoneD.	McCourtie/World	Bank	CC	BY-NC-ND	2.0Although	this	philosophical	debate	cannot	be	resolved	decisively,	Nepal’s	constitution	envisions	inclusiveeconomic	model	in	which	everyone	gets	equal	opportunity	to	participate	in	the	development	process	and	haveright	to	get	a	fair	share	of	outcomes.	In	that	sense,	we	are	gearing	up	for	localisation	of	development	i.e.development	by	the	people	for	the	people.It	may	take	a	decade	or	more	to	assess	the	real	impact	of	state	restructuring	on	overall	development	may	beseen.	For	now,	we	can	say	that	there	has	not	been	enough	discussion	on	the	matter.	The	actions	of	policymakersseem	to	be	driven	more	by	ideology	and	a	general	sense	of	‘hopefulness’	rather	than	by	a	systematic	discussionand	methodological	analysis	on	fiscal	transfer	mechanism,	providing	resources	to	local	bodies	and	creatingaccountability	framework	among	others.	Nevertheless,	there	were	some	clues	as	to	the	direction	of	developmentin	the	annual	budget	announced	in	May.Localisation	of	budgetThe	restructuring	of	the	budget	to	include	intergovernmental	fiscal	transfer	marks	the	beginning	of	the	localiseddistribution	of	state	resources	enabling	the	localisation	of	development.	The	budget	allocates	minimum	of	NPR	10crores	(just	under	one	million	USD)	to	maximum	of	NPR	124	crores	(c.	12	million	USD)	to	village	and	townmunicipalities.	The	exact	allocation	is	dependent	upon	the	population,	current	development	status	and	size	of	therespective	municipalities.Moreover,	the	central	government	is	also	handing	over	ongoing	projects	under	a	certain	threshold	to	the	localgovernments.	A	total	sum	of	NPR	225	billion	(2.17	billion	USD)	has	been	allocated	for	fiscal	transfer	to	the	localbodies	which	will	constitute	around	18	percent	of	total	budget	for	fiscal	year	2017-18.	The	amount	may	not	besufficient	given	the	tasks	at	hand	ranging	from	setting-up	new	offices	and	paying	salary	to	teachers	and	doctorsto	building	bridges	and	roads,	it	is	nonetheless	a	good	start.Next,	the	respective	municipalities	will	create	development	plans	and	programs	to	meet	local	development	needsand	will	allocate	the	budget	provided	to	them	accordingly.	However,	implementation	of	the	budget	may	prove	aherculean	task	for	the	new	local	bodies.Challenges		South Asia @ LSE: Localising development: Will decentralisation help or hinder Nepal’s growth? Page 2 of 3		Date originally posted: 2017-07-10Permalink: http://blogs.lse.ac.uk/southasia/2017/07/10/localising-development-will-decentralisation-help-or-hinder-nepals-growth/Blog homepage: http://blogs.lse.ac.uk/southasia/There	are	three	main	barriers	to	make	localisation	of	development	a	reality.	First,	in	case	of	budget	shortfall,	thelocal	administrative	units	need	to	be	able	to	generate	alternative	sources	and	mechanisms	to	fill	the	gap.However,	based	on	current	distribution	of	sources	of	revenue,	the	likelihood	is	that	only	few	municipalities	will	beable	to	adequately	generate	revenue	to	sustain	their	development	programs.	Many	other	municipalities,particularly	in	sub-urban	and	rural	areas,	could	not	even	support	their	regular	expenditure	from	local	sources,	letalone	make	capital	investment	like	in	infrastructure	(note	that	constitution	prohibits	local	bodies	from	acceptingforeign	assistance).Similarly,	unhealthy	competition	to	raise	internal	revenue	can	cause	unrestrained	exploitation	of	natural	resourcesand	might	even	lead	to	conflict	among	the	local	units.	Hence,	enabling	local	government	to	be	financiallyindependent	from	the	central	government	or	at	least	making	them	less	reliant	for	regular	administrativeexpenditure	would	be	a	challenge	going	forward.The	second	challenge	relates	to	availability	of	competent	human	resources	who	can	deliver	development	at	locallevel.	Considering	the	tasks	and	responsibilities	entrusted	by	the	constitution,	local	governments	need	multi-tasking	people	who	understand	the	diverse	nature	of	their	role,	perhaps	as	administrator,	developmentpractitioner,	government	service	provider	and	community	negotiator.	In	an	ideal	world	these	would	be	multi-lingual	individuals	who	can	communicate	well	and	deliver	services	using	modern	technologies.	They	would	havefine	coordination	and	negotiation	skills	to	deal	not	only	with	people	in	their	constituency	but	also	othermunicipalities,	as	well	as	state	and	central	governments.	Finding	such	kind	of	human	resources	within	theexisting	bureaucracy	looks	like	a	daunting	task.The	third	and	probably	the	most	pressing	challenge	is	to	ensure	active	participation	of	communities	in	budgetplanning	and	decision	making.	Locals	can	best	understand	their	own	problems	and	needs,	so	they	can	set	theirpriorities	and	may	have	ideas	for	tailored	solutions.	They	can	also	check	on	the	behaviour	of	elected	officials	andthus	strengthen	governance	accountability.	Hence,	whether	the	localisation	of	development	is	a	success	or	failurewill	depend	on	how	effectively	people	participate.The	remarkably	high	voter	turnout	in	both	phases	of	the	local	election	so	far	showcases	overwhelming	desire	ofNepali	people	to	establish	the	democratic	representation	that	was	missing	for	nearly	two	decades.	Hopefully,	thisindicates	a	willingness	to	engage	with	the	process	of	locally-led	development.This	article	gives	the	views	of	the	author,	and	not	the	position	of	the	South	Asia	@	LSE	blog,	nor	of	the	LondonSchool	of	Economics.	Please	read	our	comments	policy	before	posting.About	the	AuthorBishal	K	Chalise	is	an	economist	based	in	Kathmandu	and	president	of	Artha	Foudnation.South Asia @ LSE: Localising development: Will decentralisation help or hinder Nepal’s growth? Page 3 of 3		Date originally posted: 2017-07-10Permalink: http://blogs.lse.ac.uk/southasia/2017/07/10/localising-development-will-decentralisation-help-or-hinder-nepals-growth/Blog homepage: http://blogs.lse.ac.uk/southasia/

Localising development: will decentralisation help or hinder Nepal's growth?

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