Following the dissatisfaction with centralized forms of governance, decentralization of public service provision to sub-national governments became a global trend, particularly in developing countries. Decentralization is the transfer of authority, resources and responsibilities from higher to lower levels of government. Scott and Rao distinguish three types of decentralization:
- Administrative decentralization refers to the ability of local governments to hire, fire and set terms of reference for their own employees and on the human resource management and government organization framework.
- Under Political or Democratic Decentralization, power is transferred to lower levels of government, public officials are elected by local citizens and are accountable to citizens rather than to the central government.
- Fiscal Decentralization involves assigning responsibilities for expenditures and revenues to local governments. The degree of fiscal decentralization varies according to local governments’ ability to raise revenues and the extent to which they are given autonomy in allocating their expenditures.
Countries differ in their degree of administrative, political and fiscal decentralization. For instance, in China there is a devolution of administrative and fiscal responsibilities but no political decentralization whereas it is the opposite in India.
There are several theoretical arguments supporting that decentralization can improve governance and reduce corruption. To begin with, decentralization is believed to bring the government closer to its citizens and to improve the allocation of resources at the local level. The optimal output level of a local public good (at which citizens’ marginal benefit equals the marginal cost of providing the good) varies across localities because of differences in preferences and costs. Considering that sub-national governments have better information about the preferences and circumstances of their constituencies, they can tailor the provision of public goods according to these preferences, thereby increasing efficiency and total welfare. This idea goes back to F. Hayek’s argument in his essay “The Use of Knowledge in Society” (1945). Hayek asserts that since knowledge is decentralized (“the knowledge of the particular circumstances of time and place”), it follows that decisions and control over resources should be decentralized (a necessary although not sufficient condition for achieving optimal allocation).
However, principal-agent models demonstrate there can be tradeoffs in transferring decision-making responsibilities. Under these theoretical frameworks, central public officials are assumed to be public-spirited principals and local officials act as self-interested agents. On the one hand, public good delivery can be better adapted to local needs but on the other hand, the decisions are made by agents whose interests differ from the principal. Delegating authority can result in ‘control loss’ or ‘abuse of power’. Decentralization can be more effective than centralized decision-making if the gains from adaptability can outweigh the control loss. The overall effects of decentralization on governance and welfare will therefore depend on the degree to which the principal’s and agent’s interests are opposed and the principal’s ability to exert control over the agent’s actions.
It has also been argued that decentralization can enhance accountability in the service delivery mechanism. Local governments’ proximity makes it more feasible for citizens to monitor and hold public officials accountable. The accountability mechanisms work through political decentralization. In a functional local democracy, local elections constitute an ‘incomplete contract’ enabling citizens to remove non-performing local officials from office. However, as Bardhan and Mookherjee argue, local democracy may not operate effectively in practice in developing countries and may be captured by local elites.
Furthermore, decentralization can reduce corruption by creating horizontal competition between local governments. Tiebout makes the case in a 1956 paper that residents’ and factors of production’s mobility across localities can reduce the monopoly power exercised by local public officials with respect to regulations and bribes. Fiscal and political decentralization encourages inter-jurisdictional competition that pressures sub-national governments to efficiently deliver local public goods. If citizens are dissatisfied with their local government’s performance, they can move to other regions, thereby decreasing tax revenues in less efficient jurisdictions. A similar argument concerning the relationship between a decentralized bureaucratic structure and bribe payments has been explored in the academic literature. Rose-Ackerman suggests that a decentralized civil service can reduce bribery since competition between public officials would bid down bribe payments. Vishny and Shleifer further develop this argument, they build a model where citizens and businesses require more than one service or good from several public officials. If government services are substitutes, then the competitive regime still applies. However, when government services are complementary and in the case of a decentralized bureaucratic structure, firms or citizens are facing several independent bureaucrats. Decentralization might therefore lead to a lack of coordination among bribe-seeking bureaucrats and a “Tragedy of the Commons” outcome where public officials ask bribe payments that are too high, thereby increasing the burden that corruption imposes on firms and citizens.
Diaby and Sylwester empirically test these hypotheses in a cross-country regression and find those bribe payments are higher under a more decentralized bureaucratic structure. Yet Fisman and Gatti detect a strong negative correlation between fiscal decentralization (as measured by the subnational share of total government spending) and corruption. Treisman (2000) examines correlations between eight different measures of decentralization with various measures of corruption and service delivery performance. The same measure of fiscal decentralization used by Fisman and Gatti appears not to be significantly correlated with corruption measures.
Decentralization is a complex process which manifests itself in various forms. The design and impetus for decentralization are specific to each country, which complicates comparisons of a single conception of decentralization. The literature on decentralization experiences in several developing countries suggests the effects of decentralization on public sector performance and corruption are likely to be ambiguous and highly context-specific. The empirical work appears to be inconclusive as various types of decentralization were examined using different measures. What’s more, measuring corruption as bribery without paying attention to special interest capture may provide an inaccurate assessment of the impact of decentralization. As Bardhan and Mookherjee argue, bribery may decrease while being replaced by local elite capture as a result of decentralization.
Treisman purports that the theoretical and empirical arguments about decentralization and governance refer to specific types of decentralization. He identifies five types: structural, decision, resource, electoral and institutional decentralization and develops arguments clarifying how each type affects the quality of government. While some types of decentralization can improve governance and reduce corruption, others can undermine government performance, this can in part explain the mixed empirical evidence on the effects of decentralization.