Over the last decades, development and democracy practitioners and theorists have worked to understand, and at times, implement decentralization. All countries have a degree of decentralized governance, but the extent to which a country’s government, administrative responsibilities, and fiscal systems are decentralized heavily impacts voters, the private sector, and civil society.
Decentralization has its advocates and detractors.
Its advocates contend that:
- Decentralization improves access to resources in systemically underserved areas such as rural regions;
- Improves decision-making capacity at the local level and allows local governments and organizations to pressure authorities at the national level;
- That locally established organizations will have more of a say in policymaking and thus making it more demand oriented, and because of increased accountability national strategies consider local and regional levels when planning.
Meanwhile, critics argue that:
- Decentralization has at times led to increasing levels of economic inequality and inequities around service delivery depending on the region.
- That it facilitates issues of elite captures.
- Puts weak local institutions into untenable positions where they must work on projects they are not equipped to manage.
- That efficiency and effectiveness is often sacrificed for political expediency – a problem that intensifies at the local level.
While both sides have valid arguments for and against decentralization, decentralization remains a reality for advocates of democracy and a strong private sector and since it remains relevant, deserves clarity and understanding.
As democracy advocates working with the private sector it is prudent to understand how the different levels and types of decentralization impact some of CIPE’s core focuses: advocacy; public-private dialogue and participatory decision making and budgeting. This brief defines the three forms of decentralization, which are Administrative, Political, and Fiscal, highlights how they interact with one another, and then illustrates how they impact CIPE’s work.
Administrative decentralization is the process by which the administrative powers of the national or central government, in terms of administrative responsibilities and service provision, belong to increasingly local levels of government. This process includes administrative responsibilities like planning and the management of government agencies. Depending on the country’s official administrative organization, decentralization may look different. Broadly speaking, administrative decentralization involves the degree to which administrative power and responsibility is locally controlled. What administrative decentralization looks like functionally will depend on the makeup of the country.
Decentralizing administrative power from central planners to locality planners impacts local administration in many ways. One example is that closing the proximity between the administrator of a service and its beneficiaries, both geographically and operationally, allows administrators to have direct interaction with beneficiaries in the form of community meetings. Administrative decentralization creates the opportunity for local governments to direct and facilitate locally created developments because local governments enjoy more autonomy. As a result, administrators may tailor programs to be more responsive to local needs.
A potential challenge for administratively decentralized governments, it must coincide with adequate administrative and technical capacity in decentralized administrative institutions. If administrative responsibilities are devolved from the national level to local administrators, they may lack the technical capacity or resources to effectively carry out these competencies.
Administrative decentralization may help break bureaucratic and hierarchical bottlenecks caused by a national government controlling important service delivery operations. By moving administrative powers to the sub-national level, complex procedures used by national governments to effectively collect information and provide services could be simplified.
A common effect that decentralization has is introducing healthy competition between localities as policies begin to differ. When there is effective decentralization with administrative capacities, there will inevitably be different tax rates, levels of service delivery, and quality of program administration between localities. This difference encourages competition and knowledge sharing between localities to provide better services and more innovative policy making, as innovations and lessons are shared and opportunities arise.
Administrative services that could be decentralized could range from education & health care, waste management, and energy management. Administrative services are not limited to these, but these services are indicative of the administrative responsibilities that decentralized administration requires.
Another additional change that administrative decentralization brings about is the decrease in rent-seeking behavior. In highly administratively centralized governments, service delivery is concentrated and there is a bounty of rents to be collected from constituents in desire of that service. By nature of the structure, through decentralization, the potential rents are significantly smaller and there is less incentive to participate in corruption.
The degree of administrative decentralization impacts CIPE work in various ways. The degree to which administration is decentralized dictates the body responsible for monitoring and providing oversight of foreign investment and development initiatives, carrying out business environment regulation, and administering recovery policies.
Most directly, though, administrative decentralization impacts Public-Private Dialogue (PPD). PPD involves dialogue between the private sector and the public sector to make policymaking more participatory and inclusive. Through PPD, businesses can work to improve the business climate, set policy priorities, enhance policy proposals, and provide feedback and input on regulatory practices. Depending, on the level of administrative decentralization, local business organizations such as regional chambers of commerce, informal associations, and specific industry associations may not be able to participate in PPD to the same extent. Consequently, the venue for regulation and impacts the capacity for local organizations to carry out PPD effectively, the scale of the problem to be solved, and the degree to which local interests can be represented through PPD.
Political decentralization is the degree to which local governments are politically autonomous. In practice, political autonomy means the ability to choose representatives moves from the national government level appointments to localized elections and the same for policymaking. This process imbues localities with the ability to elect local representatives who can more accurately represent their needs, rather than relying on a national government that may not have knowledge of local needs and preferences. In theory, political decentralization should expand democracy sub-nationally.
One of the outcomes of decentralizing political power to local units is that the newfound autonomy introduces more accountability and transparency. Political decentralization means that citizens can see the outcomes (services & programs) that they were promised and interact with those responsible for the programs. Consequently, new accountability mechanisms are introduced at the local level.
Additionally, political decentralization creates more independent electoral administrations and more autonomous local civic bodies, fostering a transparent environment with clearer sightlines of accountability. In other terms, by decentralizing the government units into more local levels, more citizens can participate in their own democracy through community meetings or other forms of feedback when previously there were little to no opportunity to speak to a government official directly. Consequently, local political bodies can draft their own policies – supposedly without national level interference or diktats. For example, a local municipality could reform its business regulations to foster local entrepreneurship, though the administrative and financial independence capacity may dictate whether locally generated policies can be successfully executed.
Similar to the potential friendly competitions between regions that administrative decentralization fosters when rendering services and creating programs, a similar competition between localities can inspire a race to the top. Getting politicians from different localities to recognize and react to improved economic performance or governance innovations of other localities could make political leaders more responsive to their constituents’ needs and encourage lesson and knowledge sharing.
The shift from political activity from the national level to the local level may also change the venue for lobbying, or at the very least, introduce new vectors for these sorts of activity. While in politically centralized nations, lobbying activity is concentrated in the capital, with decentralization, lobbying could occur locally.
Moving political power to the local level may improve systems of representation outside of the individual voter and allow NGOs, interest organizations, and corporatist bargaining in the state that may not have been possible when power was completely concentrated at the top. In non-decentralized political systems, national-level authorities typically appoint subnational authorities. Appointed officials have a different set of incentives and respond to different pressures, so the quality of representation differs when local authorities are unelected.
Political decentralization impacts CIPE focus areas in many ways – local laws and regulations structure business ecosystems, while local policymaking can encourage constructive investments and reward good business practices. From the perspective of democracy and market advocates in the private sector and civil society, political decentralization impacts advocacy quite a bit. When an organization conducts advocacy on behalf of its stakeholders, it works to change public policy, alter aspects of a system, procedure, or institution, or raise awareness about relatable problems. When conducting policy advocacy – organizations should know to match their policy positions to the political power of the governing unit. When conducting advocacy campaigns, understanding who the audience is, what the capabilities of decision makers are, and how to temper your message is crucial, so clarity around the target audience and matching expectations to capacity becomes paramount.
While the other two forms of decentralization are concerned with responsibility and authority, financial decentralization is concerned with capacity. The third component, the one dictating material capacity, is financial decentralization. Financial decentralization regulates local governments’ ability to control their own budgets, raise revenue, and operate with financial independence. With financial decentralization, subnational governments can help align the previous two types of decentralization with their functions and financial capacities.
Financial decentralization enables local governments to finance their own programs that are more relevant to their constituents’ needs. Local governments can pass whatever policies they want, and can have whatever administrative responsibilities they need, but if they lack the capacity to fund this activity, or have financial incentives tied up with other governmental bodies, the efficacy of these programs can be left wanting.
Financial decentralization allows local governments to independently finance activities. While there will still be regional disparities inherent to any country, some evidence suggests that fiscal decentralization is associated with smaller economic disparities between regions and may spur growth in the poorer regions, though this is far from proven. Since local governments become responsible for funding their own activities, the capacity of the tax base and the government to generate revenue can often be determinative of policy impact. Regional inequalities may become exasperated without the national government regulating funding.
However, financial decentralization may encourage more innovation and entrepreneurial thinking to take advantage of and maximize what assets are available. Evidence from the case of Lancaster, California suggests that municipalities can leverage zoning authorities to increase the value of vacant plots, partner with the private sector to provide “add-on” services to reinforce what services the public sector can afford to provide and encourage private-sector activities through business environment reform – with the caveat that the local government retains some of the products and revenue. While regional inequalities might negatively affect a local government’s financial capacity in financially decentralized systems, it might also encourage alternative revenue sources.
Financial decentralization interacts with CIPE work in many ways, just like the other types of decentralization. There is plenty of interplay between the three forms of decentralization and governance competencies. Participatory budgeting, perhaps, is one of the most significant ways financial decentralizations interacts with CIPE work. In financially decentralized systems, local governments make their own budgets, and often are responsible for raising the funds themselves, instead of relying on fiscal transfers from more central authorities.
Participatory budgeting is a fantastic way for local communities to partner with their local governments to influence decision making and set policy priorities. In 2010 for example, after Kenya established a newly devolved system, counties found themselves responsible for raising revenue and creating their own budgets. Citizens and representatives from civil society and the private sector partnered with local governments to collaboratively identify and create new revenue streams and strategies.
In CIPE’s work, financial decentralization plays a role by changing the venue of budget discussions and enabling participatory budgeting. In financially decentralized systems, local governments make their own budgets. For participatory budgeting to function, the community needs to have access to those who control the budget. Through participatory budgeting, citizens, NGOs, and businesses may have their priorities heard, negotiate for better policies, and now they can also act as a check that services that are budgeted for are delivered. However, the degree of financial decentralization may affect the effectiveness of the participatory budgeting process – local governments that have the power to create their own budgets but not the power the change tax rates may not be able to meet the needs of their constituents.
Decentralization cuts across different governance competencies, involving responsibility, authority, and capacity. Although these are discreet areas of governance, they are also interconnected, one impacts the other. When considering how one type of decentralization may impact a CIPE project or concept, it remains crucial to understand the linkages and interplay between all types of decentralization. Decentralization impacts all areas of local governance, from taxation, budgeting, service delivery, policymaking, inclusion, and development. This framework outlines how and why decentralization affects the activities for democracy and market advocates and makes the case that for local advocates to be successful, we must have a clear picture of responsibility, authority, and capacity.
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