The Impact of Fiscal Decentralization

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Jorge Martinez-Vazquez. The Impact of Fiscal Decentralization

Contents

Acknowledgments

Introduction

The Causes and Basic Theory of Decentralization

Evidence of the Impact of Fiscal Decentralization on Economic and Fiscal Variables

Evidence of the Impact of Fiscal Decentralization on Governance

Evidence of the Impact of Fiscal Decentralization on Political Outcomes

Conclusion

References

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The Impact of Fiscal

Issues in Theory and Challenges in Practice

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The classical principles for decentralization design are well traveled across countries and over time. Hundreds of decentralization programs proposed by the Asian Development Bank, the International Monetary Fund, the World Bank, bilateral donors, and policy advisors have been inspired by these principles. After certain design issues have been addressed (e.g., hard budget constraints), the classical framework has been quite successful.

But decentralization is not an automatic remedy. The dangers of decentralization have been listed by many, and include a lack of capacity causing macro instability (Prud’homme 1995, Tanzi 1995). Others have tracked the diversion of funds in decentralized settings (Reinikka and Svensson 2004) while still others have warned of the dangers of capture by local elites (Bardhan and Mookherjee 2000).

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