This seminar paper deals with a critical discussion of the economic insight from chapter 8: Decentralization and development of the Handbook on Fiscal Federalism. Decentralization is generally defined as the transfer of certain administrative and fiscal functions or powers of a central authority to several local authorities. The main advantage of local decentralization is that local governments are more efficient at providing certain public services compared to the higher levels of government Oates (1972).
The chapter focuses on the type of decentralization in developing and transition economies, on the transfer of political decision-making power to subnational levels of government and cases where local community organizations formally participate in the implementation of funded and centrally directed projects. It’s important to mention that the chapter distinguishes decentralization in the sense of decentralization of political decision-making power from administrative delegation of functions of the central government to the local one. However, the effects of a policy of decentralization may differ sustainably. Like the common case when the central government delegates responsibility for social sector expenditure to local authorities in the form of unfunded mandates, which results in a closure of the social programmes.
Decentralization can be used to serve the political power of the central government to dispel some authority, when the central control might be threatened by regional interest. During the apartheid regime in South Africa, decentralization was used as an instrument of central control and racial division. But on the other hand, it also has positive effects where decentralization is the result of the recent transition from authoritarianism to democracy, as in countries such as Brazil or Indonesia.
Table of Contents
1. INTRODUCTION
2. DEPARTURES FROM THE FISCAL FEDERALISM LITERATURE
3. ADAPTATION OF DECENTRALIZATION FOR DEVELOPING COUNTRIES
4. EMPIRICAL EVALUATION OF DECENTRALIZED DELIVERY OF PUBLIC SERVICES
5. DECENTRALIZATION AND BUSINESS DEVELOPMENT
6. CONCLUSION
Objectives and Topics
This seminar paper provides a critical examination of decentralization in the context of developing and transition economies, focusing on the transfer of political decision-making power and the functional effectiveness of subnational government structures compared to traditional fiscal federalism models.
- Comparison between classical fiscal federalism models and the institutional realities of developing nations.
- Analysis of political accountability and the challenges of local elite capture.
- Evaluation of empirical evidence regarding the delivery of public services in decentralized systems.
- The role of decentralization in promoting business development and market-preserving incentives.
Excerpt from the Book
3. Adaptation of decentralization for developing countries
Most of the fiscal federalism literature, like Oates (1972) is pointing out that, when preferences are heterogenous and there are no spill overs across jurisdictions decentralization is in favour of centralization. However, decentralization would lead to under provision of local public goods in the event of spill overs, since local decision makers do not consider benefits going to other local branches. This is relevant when the public good is less local like highway transportation, public research and controlling pollution and epidemics. Vice versa it is less relevant when the public goods are more local, as for example local roads. In the case of spill overs and no heterogeneity a central government providing a common level of public goods and services for all localities is more efficient. Moreover, the fiscal federalism is extended to political economic environment setting, where political agency and intergovernmental problems between the ruler and ruled are considered. Bearing that in mind the traditional literature is arguing that the local government has an information advantage over the upper-tier governments. The main reason is because of political accountability. In democratic countries the incentive to use local information rather than national is stronger. Since the local information’s are more answerable to the local people while the other information is going through constituencies might get diluted. But how can the public monitor and affect elected officials at different levels of government.
Summary of Chapters
1. INTRODUCTION: This chapter defines the scope of the paper, focusing on the transfer of fiscal and administrative powers and distinguishing between administrative delegation and political decentralization.
2. DEPARTURES FROM THE FISCAL FEDERALISM LITERATURE: This section contrasts standard fiscal federalism models, such as the Tiebout model, with the specific constraints and institutional weaknesses found in low-income and developing countries.
3. ADAPTATION OF DECENTRALIZATION FOR DEVELOPING COUNTRIES: This chapter examines the theoretical trade-offs between centralized and decentralized systems, emphasizing political accountability, spill-over effects, and the risks of elite capture.
4. EMPIRICAL EVALUATION OF DECENTRALIZED DELIVERY OF PUBLIC SERVICES: This section reviews existing empirical studies on the effectiveness of decentralization, highlighting challenges like data scarcity and the difficulty of isolating program impacts.
5. DECENTRALIZATION AND BUSINESS DEVELOPMENT: This chapter explores the role of local government in fostering business growth, specifically referencing the market-preserving federalism observed in China's development model.
6. CONCLUSION: This final chapter synthesizes the discussion, highlighting that while decentralization offers potential for responsive governance, its success depends heavily on local accountability and the mitigation of elite capture.
Keywords
Decentralization, Fiscal Federalism, Developing Countries, Political Accountability, Public Service Delivery, Local Government, Elite Capture, Market-Preserving Federalism, Governance, Institutional Context, Efficiency, Equity, Poverty Alleviation, Transitional Economies, Administrative Delegation.
Frequently Asked Questions
What is the fundamental focus of this seminar paper?
The paper provides a critical economic discussion on decentralization and development, specifically analyzing how fiscal federalism concepts from the Handbook on Fiscal Federalism apply to developing and transition economies.
What are the primary thematic areas covered?
The core themes include the adaptation of fiscal federalism for poor countries, the role of political accountability, the challenges of elite capture, empirical evaluations of service delivery, and the connection between decentralization and business growth.
What is the main research objective?
The primary goal is to examine how the transfer of political decision-making power affects the delivery of public services and governance efficiency, while considering the unique institutional constraints of developing nations.
Which scientific methodology is employed?
The author uses a literature-based critical review approach, analyzing theoretical frameworks (such as the Tiebout model and Seabright's political accountability models) and contrasting them with empirical case studies from regions like Brazil, Bangladesh, and China.
What topics are discussed in the main body?
The body covers the shortcomings of traditional fiscal federalism in low-income contexts, the mechanisms for financing local government, the impact of corruption and elite capture on development outcomes, and the success of market-preserving federalism.
Which keywords best characterize the work?
Key concepts include decentralization, political accountability, elite capture, fiscal federalism, and institutional governance.
How does the author view the role of 'yardstick competition'?
The author discusses yardstick competition as a potential institutional device that can strengthen local accountability by allowing citizens to compare the performance of different jurisdictions, provided that local efforts are correlated with outcomes.
What is the significance of the distinction between the US case and developing countries?
The paper argues that the classical US model assumes high levels of administrative capacity and functioning democratic institutions, which are often absent in developing countries, necessitating an alternative approach to decentralization.
What conclusion does the author reach regarding the effectiveness of decentralization?
While definitive conclusions on universal effectiveness remain elusive due to data limitations, the author concludes that decentralization generally increases the potential for public policy to be more responsive to local needs, provided that accountability mechanisms are properly established.
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- Samuel Mäurer (Autor:in), 2019, Decentralization and Development. Fiscal federalism in theory and practice, München, GRIN Verlag, https://www.grin.com/document/1176440
