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Key Text Fiscal Decentralization in Developing Countries: a Review of Current Concepts and Practices

Author: P Smoke
Date: 2001
Size: 51 pages (928KB)

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Summary

Fiscal decentralisation and local government reform have become widespread trends in development. Yet, is fiscal decentralisation desirable? How should it be approached? What has to be decentralised and when and how should it be done?

In addressing these questions, this UNRISD paper examines the origins, conceptual foundations and practice of fiscal decentralisation in developing countries. After revising fiscal decentralisation history and theory, reviewing claims made for and against it and outlining some key elements and problems of fiscal decentralisation in practice, the paper concludes with some observations on how to think about designing more appropriate and effective fiscal decentralisation in developing countries. There is a dearth of good comparative information on the extent to which and the conditions under which the alleged benefits and disadvantages of fiscal decentralisation have been realised. Thus, in spite of economic and political pressures for fiscal decentralisation, this is still likely to be a painful process because serious constraints on decentralisation are not going to disappear suddenly and some standard analytical tools may have limited applicability.

Simply decentralising is not going to bring development, and failing to decentralise is not necessarily going to undermine it. The challenge is to devise an appropriately structured system that mandates and provides incentives for responsible local government behaviour and enables the creation of a climate conducive to private investment. Other findings are:

Contextual differences across countries and the complexities of interpreting fiscal data create great comparative challenges for analysts
Evidence proving that fiscal decentralisation has potential macroeconomic dangers and growth-retarding effects is anecdotal, relevant only under particular common circumstances
Evidence on the extent to which decentralisation can impact income distribution and service delivery is limited and mixed. There is need for more research on these topics before any conclusions can be reached.
Key elements of a good fiscal decentralisation programme include: an enabling environment; assignment of an appropriate set of functions to local governments; an adequate intergovernmental fiscal transfer system; and adequate access of local governments to development capital
The behaviour of donors supporting fiscal decentralisation initiatives may sometimes paradoxically contribute to the failure of these programmes.

Defining a reasonable fiscal role for local governments depends on the diverse contexts in which they operate. Yet, key issues in evaluating and designing an appropriate fiscal decentralisation programme include the need to:

Carefully consider the unique economic, cultural, institutional and political environment in particular cases
Get consensus from key institutional actors on how to define fiscal decentralisation and which level of government should take responsibility for key functions
Implement gradual, strategic and integrated approaches to fiscal decentralisation
Develop local government capacities to meet the requirements of the system and the abilities of central government officials to assist local governments in the process of their evolution to greater autonomy
Support sectoral co-ordination.

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Source: Smoke, P. 2001, 'Fiscal decentralization in developing countries: a review of current concepts and practices', UNRISD, Democracy and Human Rights Programme Paper 2.
Author: Paul Smoke , paul.smoke@nyu.edu
United Nations Research Institute for Social Development (UNRISD), http://www.unrisd.org
Organisation: United Nations Research Institute for Social Development (UNRISD), http://www.unrisd.org