Is fiscal decentralisation and intergovernmental finance reform still relevant in international development? This paper argues that fiscal decentralisation reform should not be dismissed, despite inconclusive evidence on its effectiveness in achieving development impacts. Rather, more research and better knowledge-sharing are needed. A review of current knowledge suggests that to be successful, fiscal decentralisation reform must simultaneously address: 1) public finance and intergovernmental fiscal relations; 2) governance mechanisms monitoring local financial administration; 3) sectoral reform; and 4) local government strengthening. Such reform also requires the alignment of (cross-departmental and multi-level) institutional incentives and broad buy-in from stakeholders. The fact that few fiscal decentralisation reforms have taken a systemic approach that considers political economy factors may partly explain their limited impact.
The success of fiscal decentralisation as a development strategy is unclear, and little is known about the determinants of effective decentralised public service delivery. In order to assess the potential effectiveness of fiscal decentralisation reform, it is important to recognise that:
- The intergovernmental dimension of public finance is crucial in supporting economic growth and the effective, pro-poor delivery of public services. However, intergovernmental fiscal reform will not always require greater decentralisation. Sometimes more centralisation or qualitative improvements in a country’s intergovernmental fiscal or institutional architecture are warranted, especially when relatively accountable subnational government is unlikely.
- Fiscal decentralisation reforms require sound decentralised finances as well as sound decentralised governance and administration. However, parallel political and administrative (in addition to fiscal) decentralisation is difficult to achieve: central governments resist further loss of power and international actors resist involvement in political change.
- Decentralisation reform is a gradual process. A country is likely to move from a highly centralised state through a phase of vertical deconcentration and then horizontal deconcentration, slowly building towards readiness for fiscal devolution during each step. Progress can therefore be made on a country’s decentralisation agenda without actually achieving devolution: budgetary deconcentration may be an alternative to (or an intermediate stage of) fiscal devolution.
- Not all countries are at the same stage of fiscal decentralisation, and different policy responses are appropriate under different conditions.
- There is an institutional bias against decentralised approaches in the implementation of international development projects. Some decentralisation projects, for example, empower the central institution that is supposed to champion decentralisation more than the subnational governments.
- Development agencies and international financial institutions tend to adopt a narrow approach to intergovernmental finance. For instance, once their funds are disbursed, the incentive for adequate monitoring and follow-up (to check resource allocation and the establishment of incentives and fiscal systems needed for sustainability) is often lacking.
- When judging reform success, comparisons with developed countries are inappropriate. It is better to measure decentralised fiscal performance against centralised systems in other developing countries.
Fiscal decentralisation and intergovernmental finance are important in international development. But advocates of these reforms have often assumed their benefits without substantiating or qualifying claims. Further, development institutions tend to focus too narrowly on one-off fiscal devolution. They do not often consider the gradual and iterative nature of decentralisation; the need for fiscal decentralisation reforms to move in unison with political and administrative decentralisation; the political economy aspects of reforms or their institutional context. It is therefore important to:
- Undertake an ongoing, structured policy research agenda to widen and deepen understanding of fiscal decentralisation: how do governance and institutions influence the effectiveness of fiscal decentralisation reforms and of decentralised service delivery? The answer will vary from region to region, and possibly from country to country.
- Improve knowledge-sharing to ‘field’ level for better-informed programme design.
- Increase the level of external technical assistance and policy support provided during both design and implementation. Successful fiscal decentralisation reforms in international development will require a combination of institutional insights, policy agility, and advanced technical expertise.
