Opportunities and Risks of Fiscal Decentralization

Despite the overwhelming support for decentralization programs, there is little agreement among scholars and policy makers, and scant empirical evidence, as to whether the devolution of power to subnational governments actually increases or decreases their effectiveness in supplying public goods and raising own-source revenues. Roy Bahl observes that the degree of decentralization has not changed. He reports that, from the 1970s through 2005, the average subnational government share of public expenditures in developing countries remained at about 13 to 14 percent of total public spending. For OECD countries, the percentages were also stable, ranging from 32 to 34 percent during the same period. Subnational government tax collections as a share of the total revenue in developing and OECD countries also experienced no drastic changes.

Bahl highlights two difficulties in assessing decentralization outcomes in less developed nations. First, decentralization is often a remedy for certain specific political or social problems rather than just a fiscal strategy. This duality complicates evaluation because matching theory with practice is difficult. Second, policy makers have given limited attention to the implementation of decentralization programs. Implementation is often flawed because governments do not fully recognize the benefits and costs of decentralization and the preconditions necessary for successful reforms. As a result of these oversights, decentralization in many countries has progressed slowly, with long time delays before benefits are realized. Bahl argues that it is too early to examine the full effects of decentralization.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2007 and is Chapter 2 of the book Fiscal Decentralization and Land Policies.