This publication analyzes the impact of fiscal decentralization and the resultant issues and challenges that countries face in practice. It traces the evolution of fiscal decentralization as a significant and consequential global reform that has made subnational governments' key public sector actors in a majority of countries. This note touches upon its various aspects: incidence and presence in the world; foundation in economics; impact of a list of outcomes, including economic growth, macroeconomic stability, poverty and income distribution, and service delivery and political accountability. It confirms the positive overall impact of decentralized systems, especially when they are well designed and implemented with examples from around the world, including those from Asia and the Pacific.
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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).
