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Berkeley A,RESEC C253 - Decentralization of Governance and Development

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Decentralization of Governance andDevelopmentPranab BardhanAll around the world in matters of governance, decentralization is the rage.Even apart from the widely debated i ssues of subsidiarity and devolution inthe European Uni on and states’ rights in the United States, decentraliza-tion has been at the center stage of policy experiments in the last two decades ina large number of developing and transition economies in Latin America, Africaand Asia. The World Bank, for example, has embraced it as one of the majorgovernance reforms on its agenda ( for example, World Bank, 2000; Burki, Perryand Dillinger, 1999). Take also the examples of the two largest countries of theworld, China and India. Dece ntralization has been regarded as the major institu-tional framework for the phenomenal industrial growth in the l ast two decades inChina, taking place largely in the nonstate nonprivate sector. India ushered in alandmark constitutional reform in favor of decentralization around the same timeit launched a major program o f economic reform in the early 1990s.On account of its many failures, the centralized state everywhere has lost agreat deal of legitim acy, and decentralization is widely believed to promise a rangeof bene ts. It is often suggested as a way of reducing the role of the state in general,by fragmenting central authority and introducing more intergovernmental com-petition and checks and balances. It is viewed as a way to make government moreresponsive and ef cient. Technological changes have also made it somewhat easierthan before to provide public services (like electricity and water supply) relativelyef ciently in smaller marke t areas, and the lower levels of government have now agreater ability to handle certain tasks. In a world of rampant ethnic con icts andseparatist movements, de centralization is also regarded as a way of diffusing socialand political tensions and ensuring local cultural and political autonomy.These potential bene ts of decentralization have attracted a very diverse rangeyPranab Bardhan is Professor of Economics, University of California, Berkeley, California.Journal of Economic Perspectives—Volume 16, Number 4 —Fall 2002—Pages 185–205of supporters. For example, free-market economists tend to emphasize the be ne tsof reducing the power of the overextended or predatory state. In some interna-tional organizations pushing structural adjust ment and transitional reform, decen-tralization has sometimes been used almost as a synonym for privatization; similarly,in the literature on mechanism design, an informationally decentralized system ofindividual decisions coordinated by a price mechanism is pitted against a system ofcentral commands and plans. Even those who are convinced of the pervasiveness ofmarket failures are increasingly turning for their resolution to the government atthe local leve l, where the transaction costs are relatively low and the informationproblems that can contribute to central government failures are less acute. Theyare joined by a diverse array of social thinkers: postmodernists, multiculturaladvocates, grassroots environmental activists and supporters of the cause of indig-enous peoples and te chnologies. In the absence of a better unifying name, I woulddescribe this latter group as “anarcho-communitarians. ” They are usually bothanti-market and anti-centralized state, and they energetically support assignment ofcontrol to local self-governing communities.As is usually the case when a subject dr aws advocates from sharply differentviewpoints, different people mean different things by decentralization. In thispaper, we shall focus on a particular kind of decentralization in developing andtransition economies, the devolution of political decision-making power to l ocal-level, small-scale entities. In countries with a long history of centralized control—asin the ol d empire states of Russia, China or India—public administrators oftenmean by de centralization the dispersion of some responsibilities to regional branchof ces at the local level of implementation on a particular project. For the purposeof discussion in this paper, we shall distinguish decentralization in the sense ofdevolution of political decision-making power from such mere administrative del-egation of functions of the central government to local branches. We should alsoseparate the political and administrative aspects of decentralization from those of scal decentralization and, in the latter, the more numerous cases of decentraliza-tion of public expenditure from those involving decentralization of both tax andexpenditure assignments. We shall include cases where local community organiza-tions become formally involved in the implementation of some centrally directedor funded projects. Not all these aspects of decentralization operate simultaneouslyin any particular case, and it is quite possible that a given economy may bedecentralized in some respects, not in others. It should also be clear that the effectsof a policy of deliberate decentralization—which is our concern here—can bequalitatively different from those following from an anarchic erosion of centralcontrol, which can be due either t o the collapse of the stat e, as has happened insome countries in Africa, o r lack of administrative or  scal capacity on the part ofthe central authority leading to abandonment of social protection functions, as hashappened in some transition economies.The territorial domain of subnational governments, of course, varies enor-mously from country to country. A typical pr ovince in India or China is larger inpopulation than most countries in the world, and so federalism in the sense of186 Journal of Economic Perspectivesdevolution of power to the provincial state governments may sti ll keep power overpeople pretty centralized. Unfortunately, data below the provincial governmentlevel are often very scarce, and most quantitative studies of decentralization—forexample, those based on share of the central government in total expenditure orrevenues— do not pertain to the issues at the local community l evel (even apartfrom the fact that the share of expenditure or revenues is not a good index ofdecision-making authority). Even at the l atter level, the units are diverse, rangingfrom megacities to small villages, and the boundaries are often determined byaccidents of history and geography, not by concerns of decentralization of


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Berkeley A,RESEC C253 - Decentralization of Governance and Development

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