On the dangers of decentralization

Abstract

The author highlights some of the dangers of decentralizations. The benefits of decentralization in allocative efficiency are not as obvious as suggested by the standard theory of fiscal federalism. The assumptions of this theory are fragile. These doubtful benefits might carry a cost in production efficiency, but more empirical research is needed on this point. What is not doubtful is that decentralization runs counter to redistribution and stabilization. Decentralization makes redistributive policies, whether interpersonal or interjurisdictional, more difficult, if not impossible. Decentralization also makes macroeconomic stabilization programs more difficult to implement because subnational government fiscal policies can run counter to national policies. Serious drawbacks or potential drawbacks should be considered in designing any decentralization program. The arguments that the author develops make it easier to understand some of the real choices. These choices are not so much whether to decentralize in general but rather what functions to decentralize - in which sectors, and in which regions. Guidelines can be provided on this. Often, the problem is not so much whether a certain service should be provided by a central, regional, or local government, since the service often has to be provided with the intervention of all three levels of government. The real challenge is how to organize the joint production of the service. Decentralization refers simultaneously to a state and to a process. The virtues and dangers of decentralization are often discussed simultaneously for both concepts. This is a dangerous confusion because decentralization is path-dependent. What is desirable in a given country at a certain point in time depends on the present state of decentralization and the speed at which it has been reached. Much more work, particularly empirical work, is needed -- in review of decentralization (or centralization) experiences in general, as well as those encouraged or supported by the World Bank.National Governance,Banks&Banking Reform,Municipal Financial Management,Economic Theory&Research,Pharmaceuticals&Pharmacoeconomics