Descentralization and corruption: revisiting the debate

Caroline Charpentier

January 2008
 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

London, 8th January 2007

ESSAY#1: DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

Since the 1970s, decentralization has been recommended as a policy process to improve the
quality of governance. However, many critics focus on the disadvantages of decentralisation and
consider corruption as one of them. The possible link between decentralization and corruption is
particularly critical since the latter might partly undermine the expected success of the former. Indeed,
while decentralization should help make government more accountable, corruption substantially
reduces confidence in government’s actions. On the one hand, the potential benefits of decentralization
are highlighted by Shah (2006) as a way to “to break the monopoly of power of the national level by
bringing decision making closer to people” and hence “allowing them to monitor public performance
and to demand corrective actions”. On the other hand, Carbonara (1999) suggests that corruption is
more likely to appear at local than at central government level since “decentralization causes a loss in
control to the higher levels, thus curbing their incentive to monitor and detect corrupt activities”.
Which of these contrasting views should we believe? The analysis offered here supports the
hypothesis according to which decentralization, when considered in its political, fiscal and
administrative dimensions can potentially reduce corruption levels. The first section in this essay
focuses on the political dimension of decentralization, the second makes the relationship with fiscal
capacity and the third with the allocation of administrative functions1. The fourth section concludes.

Firstly, political decentralization refers to the “transfer of political and legislative powers from
central to autonomous, lower level governments that have been democratically elected”. (World
Bank). In a cross-country analysis of decentralised systems, Gurgur and Shah’s (2005) find a strongly
significant correlation between lower corruption level and democratic institutions as well as free
media2. This highlights the fundamental role of the democratic process to strengthen institutions’
accountability. Hence, the incentives to be re-elected, as well as the mechanisms of exit and voice,
present in a politically decentralised system are key factors to fight corruption.

1
Decentralization as a privatization process will not be analysed here for a lack of space.
2
For corruption as a dependant variable, the t-statistics result for democratic institutions was (-4.27) The democratic
institutions’ indicators were political rights, civil rights and freedom of the media.

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 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

One might question whether the democratic process is more efficient at local than at national
level. According to Bardhan and Mookherjee (2005), “local government is in a closer proximity to
citizens than central government and that fact may make them more accountable to ordinary people”.
Closeness facilitates the evaluation and possible sanction or reward process through votes. Seabright
(1996) argues that central politicians monitor local level bureaucrats more poorly than do local citizens
since local communities owe to their knowledge local conditions and have a closer look at local
bureaucrats’ behaviour. This kind of knowledge, which influences votes in local elections, can be
characterized as “tacit”3, which entails it is hard to delocalize or to submit to central level officers.
Hence, the efficiency of local monitoring and evaluation provides strong incentives to local public
officers to perform in a transparent way, be accountable and respond better to local needs 4. More
efficient allocation of resources under political decentralization has been observed in Bolivia where,
on average, the shift from a centralised to a decentralised system coincides with increased investments
in sectors and municipalities where needs were the greatest. For instance, local government invested in
education where the literacy was the lowest (Faguet: 2004). Hence, political decentralisation improves
the allocation of resources in regard to local needs.

However, the problem of local elite capture seriously threatens the efficiency of local
democratic process. Bardhan and Mookhejee (2005) examine whether, in a politically and fiscally
decentralised system, capture at local level is more likely to happen than at central level.
First, mechanisms to enhance population’s awareness contribute to reduce local elite capture.
Indeed, they strengthen the democratic process, which gives legitimacy to local rulers. The media play
an important role to generate population awareness. Some argue that information on nation-wide
issues receive more coverage (Madison: 1937), while others maintain local population is more
informed on local issues (Bardhan and Mookherjee, 2005:16). We consider that even when
information on nation-wide issues is made available at local level, the proximity of the local
population to municipalities makes it easier to monitor their transparent use of resources.
Second, there are contrasting views on the role of government’s size on corruption level.
Blanchard-Shleifer (2000) sustain that capture would be more likely to appear at local level since
central government, being larger in size, would be less directly affected by elite pressure such as
unemployment implications of closing any particular firms. Madison (1937) takes a similar position by

3
Feldman (2000) refers to the notion of “tacit knowledge” as a knowledge that requires face to face interaction to be
transmitted.
4
In a politically decentralised system, heterogeneous preferences are better addressed then in a centralised system.

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 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

maintaining that the smaller a society is the greater influence elite can have on local government.
Nevertheless, a cross-country analysis realised by Gurgur and Shah (2005) demonstrates a correlation
of only (-0.37) between government size and lower corruption level. Additionally, since the national
government is larger in size then local governments, it requires larger resources to finance political
campaigns then local governments, which increases the risk of bribery. Moreover, the impact of
capture depends on the extent to which the level of organization of civil society can counterbalance
elite capture. While a smaller size of local government facilitates local elite capture, it also makes it
easier for local communities to organise themselves in interest groups, political parties, trade unions or
other kinds of social organisations. For instance, minorities which are under-represented at national
level, can potentially counterbalance local elite influence as long as they represent a majority at local
level and they are organised in influent groups.

A second important element of decentralisation is its fiscal aspect. Fiscal decentralization can
be defined as “the revenue and expenditure autonomy to local governments, including the power to
levy taxes” (World Bank5). Empirical studies demonstrate that fiscal decentralization is strongly
correlated to governance quality (Huther and Shah: 1998)6. This can be explained by the fact that
fiscal decentralization enhances local governance autonomy through providing them fiscal power.
Both autonomy and competition can potentially improve the quality of governance and reduce
corruption.
On one hand, in a fiscally decentralized system, expenditures are more closely tied to real
resources at local level, which gives to some extent fiscal autonomy to local government. Oates states
that “each public service should be provided by the jurisdiction having control over the minimum
geographical area that would internalize benefits and costs of such provision.” (Oates 1972: 55).
However, fiscal autonomy is often limited. In Bolivia, the legal framework for municipalities defines
that “20% of the national taxes is destined to municipal governments”7. This complements local taxes
since local governments still rely on central government for substantial amount of resources transfers.
It would not be problematic if they could maintain enough autonomy to spend national resources at
local level according to local preferences, as a mean to be re-elected. However, national government
can constrain local spending. For instance, the Peruvian national public investment mechanism

5
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECTORANDGOVERNANCE/EXTDSRE/0,,contentM
DK:20246056~menuPK:2086231~pagePK:210058~piPK:210062~theSitePK:390243,00.html#4
6
Indicators of governance quality used by Huther and Shah (1998) are economic management, social development,
government orientation and civil participation.
7
Article 20 of the Local Municipalities law: http://www.minedu.gov.bo/pre/ley/ley1551.pdf.

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 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

requires a certificate of sustainability for each public investment project, which can only be delivered
by central government officers8. Therefore, it is important to accompany decentralisation process with
local economy stimulation to increase local fiscal autonomy.
On the other hand, when combined with political decentralization, fiscal decentralization
generates competition between jurisdictions. It is worth noting that central governments are less
subject to competition for political and fiscal preferences or mobile investors. They compete only vis-
à-vis foreign location. Hence, the outcomes of competition at national level can be inferior to those at
local level (Bardhan and Mookherjee: 2005). According to Tiebout’s model “vote with your feet”, any
attempt to raise the tax price of local public goods and services will entail citizens-tax payers
migration to alternative jurisdictions (Tiebout: 1956). Faguet makes an explicit comparison with the
neo-classical model of competitive markets and refers to “political entrepreneurship”, that is “the
extent to which a variety of competing political expressions innovate by identifying interests that are
under-represented or by proposing policies that respond to changing voters’ needs” (Faguet: 2004:
7,8). It is worth noting that a purely fiscal decentralisation would probably increase corruption since it
would give to localities the means to accept local elite bribery without giving them the incentive to
behave in a transparent way in order to be re-elected. We can observe that a combined fiscal and
political decentralization is necessary to fight corruption. Let us now analyse its administrative
aspects.

Administrative decentralization is defined as the placement of “planning and implementation

responsibilities in the hands of locally situated civil servants and these of local civil servants under the
jurisdiction of elected local governments”(World Bank9). Administrative decentralization should give
elected local officials the power to administrate local policy efficiently, to hire and fire unreliable
officials and to set the terms of employment of civil servants in their jurisdiction (A. Shah & T.
Thompson, 2004, 7). Some of the expected objectives of an ideal administrative decentralisation
would be the reduction of overloaded channels of administration and communication, reduced delays
and improved quality of public service provision as well as increased efficiency of central ministries
by relieving top management of routine, repetitive tasks and allowing them more time to plan and
monitor programmes that absolutely require central direction or control. (Rondinelli, Nellis and
Shabbir Cheema: 1984).

8
Peruvian Ministry of Economy and Finances and PRODES, USAID, (2005).
9
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPUBLICSECTORANDGOVERNANCE/EXTDSRE/0,,contentM
DK:20246056~menuPK:2086231~pagePK:210058~piPK:210062~theSitePK:390243,00.html#4

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 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

However, the results of administrative decentralization in developing countries have not always
been convincing. We consider that administrative decentralization will only be effective if it comes
along with political and fiscal decentralization. If not so, we would speak of a deconcentration
process, that is, the mere appointment of central government agents at local level. The fact that
decentralised bodies can deliver services more efficiently and more responsibly depends on adequate
mechanisms for political and fiscal accountability. The quality of administrative decentralization, just
as that of political and fiscal ones, enhances interjurisdictional competition. In China, administrative
decentralization has had a significant positive correlation with local fixed investment and local growth.
(Bardhan and Mookherjee: 2005).

As mentioned above, local autonomy enhances local jurisdictions’ accountability. However, it

is critical that functions between centre and locality are clearly defined. Studies of improved local
government indicate that decentralization benefits from a good coordination between a strong central
state (principal) and a strengthened local state (agent) (Cohen and Peterson, 1999: 102). Even in a
decentralised system, central government is required to coordinate the delegation of political, fiscal
and administrative responsibilities. Moreover, while certain kinds of pubic services can be provided
through local government such as health care or education, other services requiring large scale
production such as transports, electricity remain the responsibility of central government (Paul Smoke:
2001). Systems such as the integrated system of financial administration10 published on the Peruvian
Ministry of Economy and Finances web page, where every financial transaction both at central and
local level are registered, enhances government transparency as well as its accountability not only to
local and central government but also to the civil society. Finally, local governments have a
fundamental role in building institutional safeguards to limit local elite: reservations of positions in
local governments for minorities, information-media campaigns, mandated village meetings, civic
participation mechanisms. Experience offers a fertile study ground. In Brazil, mechanisms such as
participatory budgeting involving local residents to discuss investment priorities, review accounts,
evaluation of past investments and elect representatives to a city council are mechanisms have been
implemented (Bardhan and Mookherjee: 2005).

In conclusion, effective democratization is a good way to control corruption, but it has to be

strengthened with mechanisms of fiscal and administrative decentralization to give local government

10
Sistema integral de administración financiera-SIAF

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 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

the autonomy to use it efficiently. Under these circumstances, local elected governments assume the
labour of raising taxes, that of spending local resources and administrating them while facing the
possibility of being voted out. Local communities have a key role to play in controlling local elite
capture through its level of organisation. However, an element required to make decentralisation work
in the long term is the local government’s coordinated actions with central authorities in order to build
a coherent institutional framework. Finally, it is worth mentioning effective decentralization can be
affected not only by corruption levels but also by the lack of coordination between local governments,
slow decision making, lack of result-oriented management and local capacity, which still offers a
fertile ground for further studies.

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 DECENTRALIZATION AND CORRUPTION: REVISITING THE DEBATE

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