Decentralization and Governance

jean-paul-faguet-portraitIn January 2014, World Development dedicated a special issue to the subject of decentralization and its role in development. Jean-Paul Faguet, who has written about decentralization in Bolivia and Colombia, wrote the editorial article called “Decentralization and Governance.” One of the main benefits of decentralization, as argued by its proponents, is that it makes governments more accountable and responsive to its people. Faguet notes that so far the literature on the subject has been focused on policy-relevant outcomes, while his paper examines how decentralization affects governance.

Faguet begins the paper by claiming that decentralization is one of the most important reforms of the past generation, both in terms of number of countries affected as well as its implications for governance. Ten years ago, 80% or more of the world’s countries were estimated as experimenting with decentralization (Manor, 1999) and the trend has continued.

The strongest argument in favor of decentralization is that it will improve accountability and responsiveness of governments.  It can also reduce abuse of power, improve political stability, and increase political competition.

Faguet defines decentralization as the devolution by central government of specific functions and uses Fukuyama’s definition of governance (a government’s ability to make and enforce rules, and to deliver services). He notes that neither term means that a government has to be a democracy.

Nature of competition

If decentralization improves governance, then there would be increased competition in politics. There has been little study on whether decentralization affects the nature of political competition, but Myerson does in this issue of the journal. Myerson says that decentralization creates new opportunities for politicians. If successful, those local officials could advance to higher levels in the federal government. This gives them an increased incentive to offer better public services.

It also implies that obstacles to creation of new parties will be removed. Argentina is an example of what could happen if one ignores Myerson’s advice to remove barriers to new party formation. The structure of legislative accountability allows clientelism and a vicious cycle, the incumbents use rents to restrict political decentralization. Argentina illustrates that “subnational actors have large incentives to distort a federal system to their own ends.” To avoid this, the form of the party system is key. In countries where national elites dominate parties, local leaders can be forced to acquiesce, as what occurred in Mexico under the Institutional Revolutionary Party during 1929-2000.

Public accountability and corruption

The theory of accountability has been studied much more than that of political competition. Decentralization and public accountability have been studied since Mill, Montesquieu, Rousseau, and de Tocqueville. For a more modern source, one can look to Wallis and Oates (1988), who argue that decentralization can make government more responsive by “tailoring levels of consumption to the preferences of smaller, more homogeneous groups” (p. 5).

The logic behind this argument is that decentralization changes the incentives of local authorities and therefore their behavior. The potential to increase accountability can be undermined if the local government is susceptible to capture by elites. Faguet notes that the current issue of the journal includes papers that study a broader model in analyzing evidence from Argentina, China, and Mexico.

Reducing political instability

A less known but promising area of decentralization literature concerns ethnic conflict and political instability. It is argued that decentralization could relieve tensions by handing control over subnational governments to local leaders.

Proponents argue that there are two benefits. First, decentralized governments can implement policies better suited to the local needs of a heterogeneous population, such as education in minority languages, thus addressing some of minority groups’ grievances. Secondly, by meeting the demands of those willing to settle for limited autonomy, the national government can weaken support from leaders who promote violence or secession.

Limits on power

All successful democracies satisfy the limit condition, limiting the stakes of power which can be achieved via institutional rules or the granting of special privileges. One way to implement these strategies is through open vs. limited access orders. Limited access occurs when society allows only certain groups to form organizations with specific privileges.

The importance of open access is not limited to the economy. Open access is critical to political competition and open access to civic organizations is important to a healthy democracy.

Multilevel fiscal governance

There has been research on the connection between decentralization and fiscal sustainability, much of which has been pessimistic. This collection “analyzes the political economy dynamic in a federal system that drives macroeconomic instability.” Argentina is an extreme fiscal example.

Public sector outputs and outcomes

Some say that decentralization should improve public sector outputs by improving accountability and responsiveness. Others argue that decentralization will have the opposite effect by decreasing efficiency and the quality of policy-making.  Since there are contradictory arguments, there is room for empirical studies. Recently literature has used the municipality or province as the unit of analysis, and combined large-N econometric methods with knowledge of a country. Gonçalvez addresses the question of accountability and service provision directly in her study of Participatory Budgeting (PB) in Brazil.

Conclusion: decentralization, and development transitions

What is the difference between decentralization that promote development transitions and those that undermine them? More empirical research is needed to answer that question, but it’s possible that the electoral incentives in a competitive democracy are responsible. One could argue that decentralization requires democracy to achieve its full potential. But democracy itself may require a degree of decentralization to move away from autocracy. Which comes first and where should reformers focus their attention?

The paper is available to download here.

Image from Governance from Below

Review published with permission of the author.

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