PROBLEMS AND PROSPECTS OF DECENTRALIZATION IN DEVELOPING COUNTRIES

Scott A. Fritzen and Patrick W. O. Lim

LKY School of Public Policy
National University of Singapore
First draft May 2006
Submitted for consideration by the Encyclopedia of Public Administration and Public Policy
4,061 words inclusive of abstract and references

ABSTRACT
Decentralization as an approach to development administration occupies an important conceptual position
within the development discourse. Yet the assessment of decentralization in a significant share of the
academic and practitioner literature has shifted from marked optimism to one of caution, even pessimism.
This review presents a typology of decentralization reforms in developing countries. It then explores the
ideological and rhetorical underpinnings of decentralization reforms and the complex set of political
realities and motivations in the centralized governments that are, rhetorically or effectively, undertaking
them. Four problematic issues and controversies surrounding decentralization are explored in the
concluding section, including the impacts of decentralization on inequality, macroeconomic stability and
political accountability. In analyzing specific reforms, analysts should attempt to explain the diverse
impacts of decentralization reforms and to elucidate the political dynamics of center-local relations.
Key words: Decentralization, inequality, elite capture, developing countries

INTRODUCTION
Decentralization as an approach to development administration occupies an important conceptual position
within the development discourse. Manor sums up the situation nicely, in so doing emphasizing the
rhetorical importance of the concept to developing country governments themselves:
[Decentralization] is being considered or attempted in an astonishing diversity of developing and
transitional countries - by solvent and insolvent regimes, by democracies (both mature and emergent)
and autocracies, by regimes making the transition to democracy and by others seeking to avoid that
transition, by regimes with various colonial inheritances and by those with none. It is being attempted
where civil society is strong, and where it is weak. It appeals to people of the left, the center and the
right, and to groups which disagree with each other on a number of other issues. [1]
Even officials in Myanmar, one of the worlds most centralized states, have expressed the need for reforms
involving a degree of decentralization.[2] Decentralization has been applauded for its supposed potential to
improve levels of public participation, bureaucratic accountability, administrative efficiency, and
responsiveness to local needs, among other goals.
Yet the assessment of decentralization in a significant share of the academic and practitioner literature has
shifted from marked optimism to one of caution, even pessimism. Since the 1990s, except for some
overly sanguine donor reports, the decentralization-is-problematic argument predominated in the
academic literature. Analysts typically point to one or more dangers such as increasing inequality, the
empowering of local elites, political instability, and general ineffectiveness.

This review begins by presenting a means of classifying the different forms of decentralization and their
ideological underpinnings. The roots of decentralizations renaissance are then traced to a complex set of
political realities and motivations in the centralized governments that undertook this reform. Some
problematic issues and controversies surrounding decentralization are explored in the concluding section.

DISSECTING DECENTRALIZATION
The most common typologies of decentralization attempt to distinguish between the various functions
and/or resources being decentralized. One often-cited classification presumes four broad categories of
decentralization: administrative, fiscal, political, and market. [3]
Administrative decentralization refers to the transfer of policy-making, planning and management
responsibilities from central to local levels. Distinctions are often made between two sub-types:

Deconcentration in which branches of the central government are geographically dispersed, but
no real authority is transferred to lower levels. If the Ministry of Finance opens offices at the
district level in an attempt to improve tax collection in problematic districts, this would be an
example of deconcentration.

Delegation in which authority for certain functions are transferred to lower levels that remain
substantially accountable to (but not directly controlled by) the central level.

Fiscal decentralization refers broadly to efforts to change the distribution and sources of resources
available to local governments. Such efforts can take many forms, including transfers between levels of
government, authorization of local borrowing, cost recovery, and changes to revenue sources available to
local governments through taxes, user fees and contributions.
Political decentralization (or devolution) refers to attempts to devolve powers to democratically elected
local governments or, in much weaker forms, to attempts to make local governments more accountable to
communities through the establishment of oversight boards or the introduction of new forms of citizen
participation in development projects and policy-making.
Finally, market decentralization involves attempts to transfer substantive control over resource allocation
to non-state actors. Privatization is the obvious example, and it can apply not only to State-Owned
Enterprises (SOE) but to broad swathes of the economy.
Another useful typology formulated by Turner and Hume [4] looks at the nature and basis of the transfer of
authority innate in any form of decentralization. Normally, decentralization is based on territorial
considerations, with the aim of bringing authority geographically closer to both front line bureaucrats and
to the public they service. In less common instances, transfers can be made on a functional basis which
results in transferring authority to specialized agencies. Thus, decentralization could either have a
territorial or functional basis.
Across these two categories, the nature of authority transfer could be any of three manners: delegation
within formal political structures, transfer within public administrative or parastatal structures, or transfers
to non-state agencies. This classification yields the six forms of decentralization shown in Table 1.

Table 1: Nature and Basis of Decentralization [4]

Basis for Delegation
Nature of Delegation
Territorial
Within formal political structures
Devolution (political
decentralization, local
government, democratic
decentralization)
Within public administrative or
Deconcentration
parastatal structures
(administrative
decentralization, field
administration)
From state sector to private sector
Privatization of devolved
functions (deregulation,
contracting out, voucher
schemes)

Functional
Interest group
representation

Establishment of parastatals
and quangos

Privatization of national
functions (divestiture,
economic liberalization)

The two sets of typologies presented here help clarify the concepts surrounding decentralization and
enumerate the various ways in which it can be implemented. Not all experiences of decentralization
however will fit tightly into these categories, as decentralization has often been implemented as a hybrid
of these forms. The different manifestations of decentralization can be rooted in a wide range of
ideologies, goals, and political contexts that have served as distinct motivations among the central
governments and multilateral aid agencies advocating decentralization.

PUTTING DECENTRALIZATION INTO CONTEXT

The 1980s saw the beginning of a wave of decentralization that had swept across the globe in the
following two decades. What accounts for this growing prominence of decentralization as both a reform
program and category of analysis? One factor is that interest in decentralization had and still has varied
roots, as seen in the strong ideological bend of much writing on decentralization. Figure 1 points to some
of the aims typically associated with different types of decentralization reforms. These include
economistic interest in efficiency, classic leftist concerns with participation and democracy and rightest
interest in reducing state intervention in the economy.
Figure 1: A spectrum of ideological underpinnings of decentralization

Degree of systemic change required

Lower
Administrative
Program
effectiveness,
breaking
through
bureaucracy

Higher
Fiscal
Efficiency,
responsiveness to
local preferences

Political

Market

Holding failing states

Bypassing the

together

state

Promoting ethnic harmony

Enabling democratization
Empowering the grassroots,
civil society

Various regimes have used the ideologies presented above to explain their push towards
decentralization; but in addition to efficiency or empowerment rationales, central authorities
have of course also driven by more self-serving motivations.
In his analysis of the political-economy of decentralization, Manor [1] points out that many
centralized regimes had to engage in some form of decentralization as a response to the publics
loss of confidence in their governments. Such a loss was often the result of the degeneration of
existing patronage systems and political parties. Regimes faced mounting demands from
organized interests, yet sluggish economic growth and increasing corruption by political activists
at all levels undermined their ability to respond to those demands (Manor, 1999, p.27).
Decentralization thus became widely appealing to politicians as a means of coping with an
eroding centralized system, as it pushed the responsibility of responding to some of the publics
mounting demands to lower levels of authority.
Furthermore, the lack of conceptual clarity in the forms of decentralization within the earlier
decentralization discourse debate enabled authoritarian regimes to borrow rhetoric associated
with political forms of decentralization while pursuing administrative reforms requiring little
systemic change and tending to strengthen central monitoring of peripheral regions.
ISSUES AND CONTROVERSIES IN DECENTRALIZATION

A. Does Decentralization Improve Service Delivery and Accountability?

Decentralization is at the heart of a range of reforms seeking to improve service delivery through paving a
short road to accountability [5]. Citizens under a centralized regime normally have to voice their demand
for better services to central authorities who in turn direct local level bureaucrats to respond. By bringing
policy makers closer to the public, decentralization makes it easier for citizens to voice their demands on
government, as well as better monitor the performance of the responsible politicians or bureaucrat. Policy
makers are also better able to monitor their subordinates who are in the front-lines of service delivery.
There are several successful experiences wherein decentralization played an instrumental role in
improving basic service delivery, such as the experience of 16 municipalities in Columbia where water,
education and road infrastructure improved. Another example is the City of Porto Alegre in Brazil, which
experienced a doubling of enrollment rates and improved access to basic sanitation. [6] Yet while the
available empirical evidence suggests a positive impact of decentralization on service delivery, the
evidence is insufficient to conclude causality, as decentralization often coincides with other reform
programs.[7] Furthermore, since these studies did not collect household level data, the impact of
decentralization across different socio-economic classes cannot be determined.
Accountability is also intended to improve with decentralization as local political competition and the
publics greater ability to monitor local officials can improve performance and lessen corruption. But
these positive effects can be off-set by several risks faced in the decentralization reform process.[8] In
places where powerful local elites exist, decentralization could serve as a vehicle for greater consolidation
of their power and influence, leading to the eventual capture of the state. There is also the risk of
expanding and further enrooting clientelist networks and patterns of patronage politics. Local politicians
could instead choose to cater to a small subsection of the electorate who could be counted on for loyalty
and political support come election time. There is a growing consensus that context plays an important

role in how decentralization affects accountability. The strength and influence of competing interest
groups, levels of economic and social inequity, and the capacity of institutional counterchecks on
government (local legislature, judiciary, media, and civil society), among other factors, affect the impact
of decentralization on accountability relationships.
Indonesia offers a good example of the ambiguity of a major decentralization reform. While its
experience of big bang decentralization has clearly opened up new spaces for popular participation in
political debate and for the watchdog groups in civil society, there has also been evidence of every one of
the major problems associated with decentralization, such as decentralizing corruption, increased
inequalities between resource-rich and resource-poor regions, failure of the central government to
successfully set and enforce minimum service standards in critical areas of national priority.[9]
The World Bank suggests that two conditions that allow political decentralization to bring about the
promised improvements in basic social services: First, voters must be more likely to use information
about the quality of local public goods in their voting decision. Second, local political promises to voters
must be more credible than regional and national promises. (World Bank, 2004: 89)

B. Threat of Macroeconomic Instability

Fiscal decentralization entails a careful balancing act between the revenues and expenditures transferred
from central to local governments. Decentralization can undermine the fiscal position of local
governments with respect to transferred functions, leading to a deterioration of government service
quality. On the other hand, increased central level transfers can undermine local revenue raising effort.
Aside from affecting service delivery and local taxation effort, fiscal decentralization also affects the
macroeconomic stability of a country, as poorly planned fiscal decentralization can lead to uncontrolled
local government budget deficits. The experiences of four Latin American countries underline the
necessity of careful macroeconomic fiscal management. The transfer and expansion of local government
expenditure in Argentina, Brazil, Columbia and Mexico, amidst fiscal decentralization, has made it more
difficult for the central governments to control government budget deficits and stabilize inflation during
the Latin American economic crisis in 1994-1995.[11]
Litvack, Ahmad, and Bird[12] argue that proper decentralization design can mitigate these problems. Some
of the recommendations they offer include:
Expenditure responsibilities among different levels of government should be clearly stated.
Central government transfers should be made transparent and predictable, ideally based on a
simple and standard distribution formula.
Local government should face restrictions in borrowing.
Local government borrowings should not be subsidized or guaranteed by the central government.

C. Does Decentralization Increase Fiscal and Capacity Disparities?

There is substantial evidence that significant administrative, political or administrative decentralization
can increase fiscal and capacity differentials between administrative units and local governments. Local
governments differ greatly in their ability to raise revenue; hence greater reliance on local sources will in
the absence of significant central government transfers raise disparities. This was the case in Indonesia,
where even after central government transfers, the poorest region has only 20 percent of the average
regional per capita revenue.[9] Hofman and Guerra[13] also identified the existence of large fiscal

disparities in Vietnam and China, inked to changing patterns in the financing of subnational governments.
Their analysis shows significant but weak correlation between the levels of expenditure and the level of
service delivery (using health and education indicators as a proxy). While their study does not show that
decentralization had actually increased these disparities in expenditure and service levels, this is a
reasonable conclusion.
Political decentralization expands the responsibilities of local government from just program
implementation and service delivery to include policymaking. This necessitates a greater range of skills
and capacities that local governments need to employ in order to fulfill their functions. These include
technical and managerial skills, of course, but also extend to the sense of the legitimacy of local
government in the eyes of the citizenry, and its capacity to engage local populations in problem solving
(which can depend both on government capacity and attitudes as well as the density and quality of civil
society locally). The point is that in all of these capacity areas above, we can expect local governments to
vary fairly dramatically. This may not be a problem for large urban governments as resources are more
available to them, but it may pose a serious problem for small and far-flung local governments with
limited financial and human resources.
This does not necessarily imply that service delivery performance itself, let alone development outcomes,
diverged as dramatically; correlation between levels of expenditure, service delivery patterns and
outcome indicators in health and education, for instance, has often been shown to be weak. Central
government efforts to address this issue have revolved around attempts to equalize fund transfers to local
governments. Fiscal disparities across local governments decreased (to varying degrees) after fund
transfers from central governments as data from China, Indonesia, Philippines and Vietnam indicate.[13]
These considerations should not be taken to mean that decentralization always or necessarily fails in
relatively poor areas of a country.

One of the poorest provinces in Brazil was able to achieve impressive boosts in performance
through creative local management, which Brazils federal structure had in turn enabled. [16]

Fritzen[14] modeled some of these complexities for Vietnamese provinces and districts, showing
how the responses of, and effects on, local governments of a central-government initiative to
decentralize social policy functions varied dramatically. Fiscal, administrative and political
capacities, together with local socioeconomic conditions, all helped to predict the success of the
scheme, but some poor local governments were able to find creative ways to overcome resource
constraints.

In Columbia, service delivery improved or remained the same in all of the 16 municipalities
where case studies of decentralization were undertaken following a decentralization initiative,
notwithstanding well-documented, widening disparities.[15]

Asymmetric decentralization has been proposed as an alternative framework to deal with capacity
disparity problems associated with decentralization. [12], [5] The concept refers to the possibility of
decentralization being applied to different degrees across subnational units, depending both on demand
for the reform and on local government capacity. The weakness of such a proposal is the complexity
inherent in its implementation, which may be beyond the capacity of many central governments to
effectively carry out.

D. How to Strengthen Local Government Capacity

An important segment of the decentralization debate focuses on local capacity development framework.
This involves specific attempts to develop theories about local government which will facilitate central
and donor interventions to support local capacity and institutional development. The major distinction
among approaches to capacity building which the emergence of structural and New Development
Administration theorists have highlighted is that between supply- and demand-driven orientations.
Supply-driven theorists tend to view local government deficiency in capacity as a function of limited
human and financial resources, which should be remedied, in Rondinellis revealing phrase, tutorially [3],
i.e. gradually through patient central government and donor intervention, if possible prior to initiating
decentralization.
In contrast, theorists such as Litvack think the problem of whether local governments are capable of
responding to central requirements and tasks is related at least as much to program design. If bureaucratic
requirements imposed by the center were more appropriate, argue Litvack and colleagues, they might be
less of a problem. David Korten[17] and Ostrom[18], from significantly different theoretical starting points,
both emphasize the need to conceive of central level as creating facilitative conditions for local capacity
development, as opposed to supplying the capacity itself. Fiszbein argues that local capacity
development involves the promotion of innovative and responsible leadership and civic involvement.[15]
These writers thus emphasize local demand for capacity development; this is basically a way of saying
that shifting responsibilities to lower-tier governments may provide the incentive for public officials to
invest in capacity building or seek creative ways to tap into existing sources of capacity [12]. Another
aspect of this demand-driven approach is information sharing among local governments in service of a
learning-by-doing strategy.[19]

E. The Centers Role in Decentralization

The central government has a strong role to play in all systems, decentralizing or not. It provides overall
policy direction, defines minimum standards of service delivery, transfers technical and fiscal resources to
assist local governments, guards against local overspending, and monitors subnational performance.
Aside from these, the central government should also support information sharing among different local
governments. This could be done through recognition of exemplary local governments (an example of
which is the Gawad Galing Pook awards annually given to innovative local governments in the
Philippines), the articulation of minimum service standards, and support of local government associations,
among many other alternatives. These functions are crucial in mitigating some of the problems associated
with decentralization.
How central government actors more used to a command and control style of government adjust to their
new roles is thus critical to reform success, and is also contingent on the political configurations and
impetus behind decentralizing reforms. Central-level readiness is an important input in the design of the
reform process. At least three types of problems related to the centers role are cited in the literature. An
often cited problem in literature is the tendency for central governments to abdicate important
responsibilities in the process of decentralization. Second, complicated and cumbersome monitoring
system designs may be beyond a central governments capacity to implement effectively, weakening the
attempt to hold local governments accountable in areas of high national priority. Third, some powerful
central-level actors may oppose decentralization due to powerful interests in managing economic
activities, as when ministries in Vietnam resisted decentralization of control over state-owned enterprises
that had long proved a source of revenue and authority. Such resistance may even lead to currents of
effective recentralization, even when the process of ostensibly decentralizing rhetorically continues, as
documented for Thailand by Mutebi [20].

CONCLUSION
Decentralization is likely to remain a key part of the rhetoric and practice of public sector reforms, but
there is a need for the discourse to be more nuanced. It is not a one way street; it is not irreversible; and
attempts to recentralize can be expected. But whether or not recentralization occurs, the center will
continue to play an important role in decentralizing systems, and thus needs to be given further attention.
It may be useful to think of a pendulum in center-local relations, wherein ultimately no set equilibrium
will be ever be reached.
Beyond center-local relations, there is also a need for greater care in defining and contextualizing
decentralization. It is not enough to simply categorize the reforms being implemented. Critical attention
should be given to factors underpinning the demand for (or appropriateness of) decentralization such as
the degree of socioeconomic development and size of a country and the ability of a country to supply
functioning decentralized institutions like the existing degree of responsive governance. The immediate
political circumstances underlying decentralization reforms also must be characterized in order to
understand how they are changing the constellation of stakeholders in a country.
Finally, understanding the national context of decentralization is not enough. Literature should also
pursue a greater understanding of the subnational context. There is little understanding of how policy
processes and decision-making take place at the local level. An anthropology of the local state must be
developed to help gather empirical data on the variations among local political structures and institutions.
This would bring about a more complete picture of the problems and prospects of decentralization
reforms in developing countries.

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