What impacts does decentralisation have on macroeconomic policy, public service delivery and subnational government? This paper for the Inter-American Development Bank examines these issues in depth, setting out the main factors determining the effects of intergovernmental finance.
Decentralisation is an important phenomenon in a growing number of Latin American countries, influencing policy outcomes throughout the continent. Impacts differ according to underlying issues. Different mechanisms are required depending on whether decentralisation is seen as a process of devolution, or of delegation, and whether the underlying model of subnational government finance is based on ability or benefit. Latin America differs from other developing regions in that there is generally an under-controlled, as opposed to an over-controlled, local public sector. Lots of cash is transferred to local governments, but there are no (or inadequate) institutional frameworks to ensure that it goes where it should, or is spent properly. Local government is very diverse and has a wide range of realities, with different population levels (city of 10 million or village of 200), degrees of local corruption, community spirit, wealth and so on. Latin American central governments and donors often fail to recognise this diversity.
The report finds that many Latin American countries have achieved successes in decentralisation policies, and that subnational governments have benefited from being able to draw on sources of local technical assistance rather than central government. Other conclusions include:
- Decentralisation actually leads to greater government outlays
- Shifting public funding emphasis from inputs to outputs is essential to improving policy outcomes, but how to do this depends on the specific conditions of each country
- The issue of how to finance regional governments and local services is critical and difficult to resolve. Property taxes are reliable but inelastic and politically vulnerable. Local business taxes are better, but can distort market conditions
- Decentralisation complicates macroeconomic management, but it doesn’t necessarily increase overall budget deficit because monetary policy is still the responsibility of central government.
The paper identifies an essential need to develop both an adequate information base and strong national and subnational fiscal frameworks if decentralisation is to work. Critically for DFID’s poverty reduction goals, the paper concludes that basic needs delivery should be done by central not local government. Indirect transfers to poor localities are inefficient and require very elaborate monitoring mechanisms. Other policy implications include:
- Intergovernmental fiscal relations can be worked out only in country specific conditions. Donor assistance must take into account constitutional restrictions, political realities, and an array of contextual factors
- The human dimension of decentralisation is essential and often overlooked. It is necessary to build local administrative capacity, and to attract the right people to the target areas
- It is necessary to foster the development of an institutional framework, especially for the larger countries. Intergovernmental transfers must be as simple, transparent, comprehensible, and predictable as possible.
