Decentralised Governance

Jean-Paul Faguet

& Sarmistha Pal

**press.lse.ac.uk**

For developing countries, decentralising power from central government to local authorities holds the promise of deepening democracy, empowering citizens, improving public services and boosting economic growth. But the evidence on when and how decentralisation can bring these benefits has been mixed. Under the wrong conditions, decentralised power can be captured by unrepresentative elites or undermined by corruption and the clientelistic distribution of public resources. The picture is complex, and we still do not understand enough about what factors can contribute to creating

Decentralised Governance

Crafting Effective Democracies Around the World

Edited by Jean-Paul Faguet and Sarmistha Pal

Decentralised Governance brings together a new generation of political economy studies that explore these questions analytically, blending theoretical insights with empirical innovation. Individual chapters provide fresh evidence from around the world, including broad cross-country data as well as detailed studies of Bangladesh, India, Pakistan, China, Indonesia, Ghana, Kenya and Colombia. They investigate the pros and cons of decentralisation in both democratic and autocratic regimes, and the effects of critical factors such as advances in technology, citizen-based data systems, political entrepreneurship in ethnically diverse societies, and reforms aimed at improving

This wide-ranging volume examines the conditions under which devolving power can intensify democratic competition, boost transparency, and improve local governance, providing examples of good and bad practice in both. It is essential reading for researchers

investigating decentralised governance, development and democratisation, and for

"An essential and long-awaited book on the effects of decentralisation in developing

countries from a comparative perspective. Its reading will help to understand the complexity of decentralised governance and the importance of the role of political, social and cultural variables. It is a must-read for researchers, practitioners and anyone interested in the

Professor José M. Ruano, Director of the Complutense School of Government,

Complutense University of Madrid

policymakers and practitioners drawing lessons for future reforms.

complexity of policy-making around the world."

better local government, and to what effect.

transparency and monitoring.

# Decentralised Governance

Crafting Effective Democracies Around the World

> Edited by Jean-Paul Faguet and Sarmistha Pal

# **Decentralised Governance Crafting Effective Democracies Around the World**

Edited by Jean-Paul Faguet and Sarmistha Pal

Published by LSE Press 10 Portugal Street London WC2A 2HD press.lse.ac.uk

Text © The authors, 2023, except Chapter 4 (Shantayanan Devarajan and Stuti Khemani, 'Realising the promise of partial decentralisation'), which is © The World Bank, 2023

First published 2023

Cover design by Diana Jarvis

Print and digital versions typeset by Siliconchips Services Ltd.

ISBN (Paperback): 978-1-909890-84-8 ISBN (PDF): 978-1-909890-85-5 ISBN (EPUB): 978-1-909890-86-2 ISBN (Mobi): 978-1-909890-87-9

DOI: https://doi.org/10.31389/lsepress.dlg

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Except Chapter 4 (Shantayanan Devarajan and Stuti Khemani, 'Realising the promise of partial decentralisation'), which is published under the CC BY-3.0 IGO license https://creativecommons.org/licenses/by/3.0/igo/

The full text of this book has been peer-reviewed to ensure high academic standards. For our full publishing ethics policies, see https://press.lse.ac.uk

Suggested citation:

Faguet, Jean-Paul and Pal, Sarmistha (eds) (2023) *Decentralised Governance: Crafting Effective Democracies Around the World*, London: LSE Press. https://doi.org/10.31389/lsepress.dlg License: CC BY 4.0

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# **Contents**

# **Extended contents**

10. Subnational governance in Ghana: a comparative assessment of data and performance

*Daniel Chachu, Michael Danquah, and Rachel Gisselquist* 271

# **List of figures and tables**

#### **Figures**

#### **Tables**

Further figures are published in the book's supplementary materials for chapters 5, 6, 8, 10, and 11, published on LSE Press's Zenodo community site. See https://zenodo.org/communities/decentralised\_governance/

### **About the editors**

**Jean-Paul Faguet** is professor of the political economy of development, Department of International Development, London School of Economics and Political Science. He is the co-programme director of the MSc in Development Management. He is also chair of the Decentralization Task Force at Columbia University's Initiative for Policy Dialogue. He works at the frontier between economics and political science, using quantitative and qualitative methods to investigate the institutions and organisational forms that underpin development transformations. He has published in the economics, political science, and development literatures, including *Is Decentralization Good for Development? Perspectives from Academics and Policymakers* (Oxford, 2015) and *Governance from Below: Decentralization and Popular Democracy in Bolivia* (Michigan), which won the W.J.M. Mackenzie Prize for best political science book of 2012.

**Sarmistha Pal** is professor of financial economics at the University of Surrey. In the past, she served as a research fellow at the Department of Applied Economics, University of Cambridge, research affiliate at the Centre for the Study of African Economies, University of Oxford, and also a Leverhulme research fellow in the United Kingdom. Currently, she works as a research fellow at the IZA- Institute of Labour Economics in Bonn (Germany), and is also an academic member of the European Corporate Governance Institute. Additionally, she serves as an editorial board member for the *Journal of Development Studies*. Pal's research primarily focuses on public finance, public policy, institutions, and political economy, with a particular emphasis on emerging economies. As an applied economist, she conducts empirical analysis to examine the impact of various laws, social policies, corporate practices, as well as public policies on economic outcomes for different entities such as individuals, households, firms, banks, and communities. She employs various quasi-experimental methods in her research.

# **About the authors**

**Farzana Afridi** is an associate professor of economics at the Indian Statistical Institute in Delhi. Her main area of research is in development and labour economics. Her current research interests include female labour force participation, the design of public programmes in developing countries, and the effects of social identities on labour productivity.

**Daniel Chachu** is currently a PhD student at the Department of Economics, University of Ghana. He has visited UNU-WIDER and also the Department of Economics, University of Zurich. Daniel's research focuses on development economics and public economics.

**Valentina Chegwin** is an economist and graduate research assistant at the Columbia Population Research Center. Valentina conducts research on early childhood development, education, health, and economic inequality in relation to social policy design, with a focus on developing countries. Before joining Columbia, Valentina worked as a research assistant and policy consultant in the Social Protection and Health Division at the Inter-American Development Bank. She also worked as a research assistant at the Center for Studies in Economic Development at the School of Economics at Los Andes University in Bogota, Colombia. Valentina is currently a social policy and policy analysis PhD candidate at Columbia University and holds an MS and BA in economics from Los Andes University.

**Michael Danquah** is a development economist and research fellow at UNU-WIDER, currently serving as co-focal point for the project 'Transforming Informal Work and Livelihoods' within UNU-WIDER's 2019–23 work programme. He is also a research fellow at the International Growth Centre in Ghana and previously worked at the Department of Economics, University of Ghana, Legon. His research interests concern the economic development of sub-Saharan Africa, primarily focusing on issues such as informality, inequality and poverty reduction, and productivity growth.

**Shantayanan Devarajan** is professor of the practice of development at Georgetown University's Edmund A. Walsh School of Foreign Service. He was previously the senior director for development economics (DEC) and a former acting chief economist of the World Bank Group. His research covers public economics, trade policy, natural resources, and the environment.

**Amrita Dhillon** is a professor of political economy in the Department of Political Economy at King's College London. She is also research group leader for quantitative political economy. Her training is in theoretical modelling including political economy, public economics, game theory, and development. Her main field of research is political economy.

**Rachel M. Gisselquist**, a political scientist, is a senior research fellow with the United Nations University, World Institute for Development Economics Research (UNU-WIDER) and a member of the institute's senior management team. She works on the politics of the developing world, with particular attention to ethnic politics and inequality between groups, state fragility, governance, and democratisation in sub-Saharan Africa.

**Dashleen Kaur** is a PhD candidate at the University of British Columbia. Her research interests are political economy and development economics, with a focus on gender.

**Stuti Khemani** is a senior economist in the Development Research Group of the World Bank. She joined through the Young Professionals Program after obtaining a PhD in economics from the Massachusetts Institute of Technology. Her area of research is the political economy of public policy choices, and institutional reforms for development.

**Adeel Malik** is a development macroeconomist at the Department of International Development of the University of Oxford with a strong multi-disciplinary orientation. His research engages with questions of long-run development, political economy, and economic history, with a special focus on Muslim societies. Apart from engaging with cross-country empirics on development, he is trying to develop a broader research lens on the political economy of the Middle East, as well as the interplay between religion, land, and politics in Pakistan. His work combines quantitative and qualitative research methods.

**Monica Martinez-Bravo** completed her doctoral studies from MIT in 2010 and is an associate professor at CEMFI. Her research interests are in the fields of political economy and economic development. She is a research affiliate of CEPR, BREAD, and IGC and an editorial board member of *Review of Economic Studies*.

**Michael Mbate** is a senior research officer at ODI's Development and Public Finance programme. Michael specialises in public finance and governance, with a focus on public spending, fiscal decentralisation, service delivery, and

About the authors xvii

accountability in developing countries. His work relies heavily on the use of causal inference econometric analysis. He holds a PhD from the London School of Economics (including visiting fellowships at Columbia University and the University of California Berkeley). He has previously been with different institutions such as the United Nations Economic Commission for Africa, the United Nations Industrial Development Organization and the African Union.

**Rinchan Mirza** is an assistant professor in economics at the University of Kent. He holds a DPhil in economic and social history from the University of Oxford, an MPhil in economics from the University of Oxford, and a BSc (Honours) in mathematics and management from King's College London. His fields of interest are the economic history of South Asia, development economics, applied econometrics, migration studies, health economics, the political economy of religion, institutions, and development.

**Anirban Mitra** is a senior lecturer in economics at the University of Kent, where he is a member of the Microeconomics Research Group. His research focuses on development economics and political economy – often in their overlap. He is interested in the role of economic factors behind ethnic and civil conflicts, particularly in the context of South Asia. His other works relate to institutional design and its ramifications on elements of public expenditure and income distribution. Anirban has been a member of the CESifo Research Network (Munich) since 2014. He is currently a Leverhulme research fellow. Prior to joining Kent, he was employed at the University of Oslo.

**Dilip Mookherjee** is professor of economics and director of the Institute for Economic Development at Boston University. Educated at Presidency College Calcutta, Delhi School of Economics, and the London School of Economics, he has taught previously at Stanford University and the Indian Statistical Institute, New Delhi. He works on a combination of theoretical and empirical topics related to inequality, development, political economy, and organisations. Current empirical projects include local governments, political clientelism, financial development, community networks, entrepreneurship, and marketing supply chains in Asia. Theoretical topics include corruption, automation, and globalisation. He is a fellow of BREAD, NBER, CEPR, a member of the Economic Development and Institutions Network, on the executive committee of the Econometric Society, and lead academic for the India programme of the International Growth Centre. He has written many books and also some edited volumes; the latter include his 2006 edited volume *Decentralization and Local Governance in Developing Countries: A Comparative Perspective* (jointly with Pranab Bardhan), published by the MIT Press.

**Isabela Munevar** is a doctoral student in economics and education at Teachers College, Columbia University. She also holds both an MS and a BA in economics from Los Andes University. Before joining CCRC, Munevar was a research assistant and policy consultant in the Social Protection and Health (SPH) and Education divisions at the Interamerican Development Bank (IDB). At the IDB, she actively participated in several impact evaluations and policy design interventions for the Colombian, Ecuadorian, and Brazilian governments, on topics related to early childhood development, education, and economic inequality.

**Gerard Padró i Miquel** is a professor of economics and political science at Yale University, where he is also the director of the Leitner Program of International and Comparative Political Economy. He is interested in the interplay between politics and economics as a barrier for development with a focus on civil conflict and on the politics of non-democratic regimes. His previous work has been published in the *Quarterly Journal of Economics, American Economic Review, Review of Economic Studies* and *Quarterly Journal of Political Science*, among others.

**Jean-Philippe Platteau** is emeritus professor of economics at the University of Namur, in Belgium. He has devoted his research career to studying the role of institutions in economic development and the processes of institutional change. He is the author of numerous journal articles and several books, including *Islam Instrumentalized: Religion and Politics in Historical Perspective* (CUP, 2017), *Institutions, Social Norms, and Economic Development* (Routledge, 2000), and (with J.M. Baland) *Halting Degradation of Natural Resources: Is There a Role for Rural Communities?* (OUP, 1996).

**Nancy Qian** is the James J. O'Connor Professor at Kellogg MEDS of Northwestern University and the founding director of China Lab, a part of Northwestern's Global Poverty Research Lab. She is a native of Shanghai, China, and holds a PhD in economics from MIT. Prior to Kellogg, Professor Qian taught at Yale University and Brown University, and was a postdoctoral fellow on the prestigious Harvard Academy Scholars programme. Her research provides empirical evidence for a set of core questions in development economics that broadly fall into four subcategories: demography and development, geography and development, institutions and development, and culture and development.

**Arka Roy Chaudhuri** is an assistant professor in the Economics Department of Shiv Nadar University. He researches in the fields of political economy, development economics, and experimental and behavioural economics.

**Fabio Sánchez** is professor of economics at the University of Los Andes. He has an extensive career working for institutions such as FEDESARROLLO, the main think tank on economic issues in Colombia, where he worked as a researcher. He has also worked as the head of the macroeconomic unit at

About the authors xix

the National Planning Department of Colombia, and as the director of the Center for Economic Development Studies (CEDE). He has done extensive research on the links between equity and macroeconomic issues, social policy and violence, and economic history, including his PhD thesis on the effects of the Great Depression in Colombia.

**Abu S. Shonchoy** is currently an assistant professor in economics at the Florida International University. His current research interests centre around financial inclusion, skills training, infrastructure, and education. He is a J-PAL affiliate professor and a fellow of IZA and GLO.

**Zaki Wahhaj** is a professor in economics at the University of Kent. Following his PhD in economics from MIT, he spent two years as a postdoctoral fellow at the Centre for Research in Economic Development (CRED) at the University of Namur, Belgium, and three years as lecturer in development economics at the Department of International Development (ODID), University of Oxford. His current research deals, broadly, with the themes of social norms and household decision-making in developing countries.

**Yang Yao** is a Chinese economist, academic, and author. He is a professor, director of the China Center for Economic Research, and dean of National School of Development at Peking University. He is the executive director of the Institute of South-South Cooperation and Development and is an editor of *China Economic Quarterly*.

### **Editors' acknowledgements**

We would like to express gratitude to several colleagues and organisations who have contributed to the success of this project. Firstly, we extend our sincere thanks to Patrick Dunleavy and the editorial and production team at LSE Press for working so closely with us to bring this book to fruition. In everything from thematic content to the look and feel of the book, their professionalism and dedication have been exemplary. Open access is, of course, not free, and so we are especially grateful to the Press for making it possible here. We also thank Vijayendra Rao for originally steering us towards the open access option.

We thank Helen Ghodbane and Bi Yifei for their help organising our book workshop in December 2021. Their contributions were essential in ensuring that the workshop was a success.

Sarmistha Pal would like to express her gratitude to Surrey Business School, particularly Dean Professor Steve Wood and Research Director Maia Laura di Domenico, for their financial and organisational support towards this book project. Jean-Paul Faguet thanks LSE's Department of International Development for intellectual and financial support. The generosity of both our universities has been invaluable in making this book possible.

Sarmistha Pal would like to acknowledge her co-authors Indraneel Dasgupta, Sugata Ghosh, Anirban Mitra, and Zaki Wahhaj, with whom she has been collaborating on various political economy research projects. These earlier and ongoing works have paved the way towards this book project, and she is very grateful for their contributions.

Both editors thank the colleagues who wrote the chapters that follow. It was a privilege and a pleasure to work with all of you.

Last but not the least, both editors would like to give heartfelt thanks to their spouses and daughters for unwavering support over the past three years.

—*Jean-Paul Faguet and Sarmistha Pal*

### **1. Decentralised governance: crafting effective democracies around the world**

*Jean-Paul Faguet and Sarmistha Pal*

For over 60 years, decentralisation has been one of the most powerful reform movements in the world, affecting all of its regions and most of its countries. This marks a major inversion of the much-longer-term global pattern, which featured centralised public administrations and the gradual march of the bureaucratic instruments of centralisation across large parts of the world over centuries (Faguet 2012). And then, unexpectedly, around the middle of the 20th century, decentralisation began sprouting everywhere. Take, for example, countries across Africa and Asia. Decolonisation bequeathed highly centralised governments to most of them, usually mirroring their previous colonial administrations. Here the backlash was especially quick, with the first decentralisations launched within a decade of independence.

What did these decentralisations achieve? The literature and policy consensus of the 1970s and 1980s were full of hope about decentralisation's potential to make government more effective and responsive to citizens. But a wave of empirical studies in the 1980s and 1990s cast doubt on its ability to meet these lofty goals. At the turn of the new millennium, evidence on the effects of four decades of decentralisation remained mixed, unclear, and for many analysts deeply frustrating.

Since then, a growing body of research has shown that decentralisation can indeed improve public sector efficiency by, in effect, bringing government closer to the people. While decentralised governments may be captured by elites or undermined by the clientelistic distribution of public resources, a broad consensus holds that – under the right conditions – decentralised systems produce more effective public services and are more democratic. But what these conditions are, and where they hold, have until now remained insufficiently understood. This volume seeks to answer those questions, identifying specific ways in which decentralisation can improve governance, and exploring also how it can go wrong.

#### **How to cite this book chapter:**

Faguet, Jean-Paul and Pal, Sarmistha (2023) 'Decentralised governance: crafting effective democracies around the world', in: Faguet, Jean-Paul and Pal, Sarmistha (eds) *Decentralised Governance: Crafting Effective Democracies Around the World*, London: LSE Press, pp. 1–18. https://doi.org/10.31389/lsepress.dlg.a License: CC BY 4.0

In this volume we bring together a new generation of studies that blend theoretical nuance with empirical innovation. We begin by taking stock of 50 years of decentralisation studies, arguing that – done correctly – decentralisation can improve the democratic accountability and responsiveness of governments by changing the incentives local officials face. We examine how reforms have fallen short of initial expectations due to problems of corruption, elite capture, and political clientelism that can severely distort decentralised governance. We provide fresh evidence from around the world, including Bangladesh, China, Colombia, Ghana, India, Indonesia, Kenya, and Pakistan, highlighting the pros and cons of decentralisation under both democratic and autocratic regimes, providing examples of good and bad practice in both, and drawing lessons for future reforms. Throughout, our goal is to understand in detail, with strong micro foundations, how decentralisation operates differently under different regimes and across a variety of institutional and social contexts.

We document evidence of declining barriers to entry for local political leaders and rising political contestation and improving quality of candidates. We show the emerging role of local entrepreneurship in resolving collective action problems in ethnically diverse societies, leading to greater democratisation and higher local development. These changes are being aided by broader changes in local polities, such as norms governing local public service delivery and improving public transparency and monitoring, aided by complementary reforms such as birth registration cards, citizen-based data systems, and decentralised administration and funding arrangements that create checks and balances for local government officials and limit the scope of corruption. And we explore how some 21st-century reforms to decentralised government use advances in information technology to dramatically reduce costs and enhance welfare provision by tackling corruption, elite capture, and clientelism.

The book's chapters consist of some thematic, critical surveys of recent advances in the decentralisation literature, combined with a larger number of cutting-edge studies of decentralisation in action. The authors are a combination of some of the most influential thinkers in the field with early-career scholars, many themselves from developing countries, employing the latest evidence and methods to explore these complex issues analytically with a blend of qualitative and quantitative data.

We hope the resulting book will prove a worthy update of Bardhan and Mookherjee's influential 2006 volume, which set down an important marker for the field at the turn of the new millennium. Much has happened since then in the world of decentralisation. A great deal of high-quality, fine-grained data has become available during the last two decades, along with more sophisticated empirical methods, that previous generations of researchers did not have access to. And there have, of course, been many additional experiments in reform.

The confluence of these factors implies: (i) a need for a new core reference in this field, and (ii) a significant opportunity to evaluate where and why decentralisation has worked better, and where worse, with better evidence. The current climate of increasing geopolitical conflict and democratic failure in the post-globalisation years also makes the volume a timely venture. As citizens, not just academics, we need to find ways to make the politics of decentralised governance function better. Our hope is that this volume can help generate positive externalities that nurture federalism and deepen democracy.

The remainder of this chapter is developed as follows. Section 1.1 provides an overview of 50 years of decentralisation studies, highlighting both the positive and negative potentials of reform. Section 1.2 discusses the interactions between decentralisation reform and politics at both local and national levels, including the ramifications of decentralisation for political transition that have until now been poorly understood. Section 1.3 discusses decentralisation as 'mechanism design', focusing on non-political aspects of service provision in a decentralised context, such as tax and transfer systems, anti-corruption monitoring, and big data approaches to targeting, as well as how to measure local government performance. Section 1.4 looks to the future of the field.

#### **1.1 Fifty years of decentralisation studies**

In Chapter 2, Jean-Paul Faguet provides a broad survey of 50 years of decentralisation studies. In the aggregate, the results of these studies are contradictory, confusing, and indeed sometimes confused. Faguet employs three tools to bring order to the evidence:

This last point, in particular, is tied to a wealth of conceptual and methodological insights that we are only beginning to fully comprehend. The questions that we have asked over five decades have very often taken the form 'Is decentralisation good or bad for X?', where X is a diverse array of important policy outputs or outcomes, such as primary school enrolment rates, the unit costs of infrastructure provision, or corruption. Studies have, in effect, approached decentralisation as if it were a technocratic issue. They have treated the specifics of reform design, the many, many decisions about how to unpick centralised public services and decentralise which components to what levels – in other words, where expenditure, taxation, and rule-making powers should ultimately lie – as if they were given, choosing instead to compare across countries to identify 'the effects of decentralisation'.

This approach was always more of a methodological convenience than a theoretical precept – something researchers fell into rather than asserted on principle. But it coloured the results of the empirical literature all the same, affecting what questions were asked and how studies were structured. It is only more recently that researchers have begun to internalise the idea that both the decision to decentralise and also the many decisions that follow about *how* to decentralise precisely *which* state functions are not fundamentally technocratic issues. They are, rather, political issues everywhere and all the time. As Faguet (2019) and Faguet and Shami (2021) have shown, decisions to decentralise are taken by leaders in service to the political advantages they seek, and implemented – or not – by officials whose power and status will be directly affected by the outcome of reforms. Even if such a decision were taken on technocratic grounds, it would have powerful political effects, as Devarajan and Khemani argue in Chapter 4, providing politicians with highpower incentives to try to steer reform in directions beneficial to them.

#### **1.2 Politics**

'Done correctly,' Faguet points out, 'decentralisation can improve the democratic accountability and responsiveness of governments by changing the incentives that local officials face' (Chapter 2). Reform reorients officials' incentives from upward-pointing, towards the central administration, to downwards-pointing, towards local voters. This is one of the simplest but most powerful features of a sincere democratic devolution, which will ultimately affect not only local but also national public goods, as well as the responsiveness and accountability of the state writ large.

Done correctly, decentralisation should also lead to local governments better attuned to local economic conditions (Khan et al. 2014; Khan, Faguet, and Ambel 2017). The policies they implement should spur public sector efficiency in ways that boost economic growth. Perhaps less obviously, Faguet argues, the creation of multiple levels of government can be leveraged by different social groups and minorities to defend their interests against an encroaching majority. This can help stitch a country together more tightly from the bottom up, draining wind from the sails of leaders who preach secession, and decreasing the risks of conflict and civil war in diverse developing countries. Indeed, the simple fact of creating multiple layers of government helps end the winner-takes-all problem inherent in centralisation that can, by itself, destabilise a country.

But this 'done correctly' hides far more than it reveals. Countries have chosen to decentralise in very different ways, devolving, for example, different sets of powers over different public services to different levels of subnational government, with different revenue-raising powers and different degrees of subnational democracy. Consider, just as an illustration, three neighbouring South American countries between the 1970s and 1990s. In the 1980s, Chile's military regime decentralised to unelected regions, provinces, and municipalities, all headed by appointed officials who responded to the military government and, ultimately, to General Pinochet himself. Essential services were extensively privatised, and municipal governments in particular became much more 'service delivery agents' than sites of governance where citizens were represented and public priorities were debated and agreed.

A decade later, Bolivia decentralised a range of primary public services to elected municipal governments, largely bypassing departments. The reform prioritised participation and citizens responded enthusiastically, voting in far greater numbers than ever and even defending decentralisation in pitched street battles when a subsequent government tried to reverse it. By contrast, 20 years earlier, Brazil's de facto regime had decentralised significant resources and authority to states, largely ignoring municipalities. But it permitted subnational elections, and so national authoritarianism coexisted with significant subnational democracy. These examples are only three of many that we might choose. They underline that decentralisation is not 'a reform' but rather a highly heterogeneous class of reforms. The ways in which we study decentralisation should seek not to iron out such differences but rather exploit them in the interest of greater understanding.

Devarajan and Khemani take this on frontally in their chapter (Chapter 4). They begin their analysis with the original Musgrave (1959) and Oates (1972) arguments in favour of decentralisation based on the economic efficiency of the subsidiarity principle, and the superior matching between local policies and preferences that decentralisation permits. But, as noted above, empirical tests of these ideas over the decades have proved mixed and disappointing. This is where their contribution begins. They argue that empirical disappointment stems from the failure of the Musgrave–Oates principles to incorporate the essentially political nature of decentralisation into its analysis. (The same failure lies at the heart of the methodological issues that Faguet seeks to correct with his three tools.)

This leads Devarajan and Khemani to the striking assertion that most decentralisations are partial.  It is common, for example, for political decentralisation to advance much faster and further than fiscal decentralisation. The reasons for this are that the prevailing political incentives that govern the behaviour of bureaucrats and public sector officials vary enormously across countries and time periods. As the design of decentralisation is an inherently political act, different national reforms will tend to deviate from economic efficiency in very different ways. Hence, most decentralisations are incomplete in the sense that economic theory would predict, and often feature large mismatches between devolved responsibilities and accountability. These partial decentralisations nonetheless represent equilibria that balance competing political forces, making it difficult to tinker at the margins with a decentralisation that is settled – for example with the allocation of powers or resources.

But, if politics is problematic for empirical studies of decentralisation, it also provides strong grounds for hope in our real-world experiments. Devarajan and Khemani argue that increased contestation in local elections, alongside other characteristics of local democracy, could well lead to improved service delivery. This is because political decentralisation has often led to more, and better, people becoming involved in local politics. It has shone a brighter light on issues of local governance, focusing citizens' attention there and bringing more information into the public realm. As a result, citizens are more aware of local corruption and better able and willing to judge officials' performance more generally. This has the potential to shift social norms about public service so that bureaucracies improve their performance and strengthen the legitimacy of government as a whole. They describe a mechanism for achieving precisely such outcomes, illustrated with the Brazilian state of Ceará, and conclude with a positive view of decentralisation's prospects for realising its original promise. They close with a recommendation to approach decentralisation as a mechanism design problem geared towards improving public services and strengthening state legitimacy.

Mookherjee probes further into the political distortions that often attend decentralised service provision. His wide-ranging chapter (Chapter 3) reviews a wealth of recent studies of transfer programmes in developing countries, reassessing the effectiveness of decentralised mechanisms in improving public sector accountability, programme effectiveness, and helping to meet a number of programme-specific goals. Three key problems of decentralised governance that he focuses on are elite capture, corruption, and clientelism. 'Elites' can be tribal chiefs, large landowners or businessmen, or religious leaders, to name only a few classic examples. Recent literature shows widespread capture of local governments by elites in developing countries, especially where elites are powerful. It is underpinned, at least in part, by the high levels of trust that villagers place in their patrons. The latter may be a survival strategy among poor people who intermittently face times of need that are both unpredictable and potentially severe.

Another distortion widespread in developing countries is clientelism. Although often grouped alongside elite capture, Mookherjee shows that this is an analytically distinct phenomenon with interestingly different implications for development. First, and unlike capture or corruption, clientelism is often consistent with pro-poor targeting. This is because politicians focus clientelistic benefits on the poor, who value them more highly than better-off voters and hence are cheaper to 'buy off '. Second, clientelism may not require high levels of social or economic inequality within the community but it does operate better where there are high levels of poverty. The studies Mookherjee reviews identify two big empirical effects: (i) clientelism undermines accountability, as voters are tied to patrons regardless of their public policy performance; and (ii) clientelism biases politicians towards private benefits, which are more susceptible to its logic, over public benefits, which, being non-excludable, are not. In addition to such intra-community distortions, Mookherjee also examines *inter*-community targeting distortions, resulting from the opportunistic manipulations of programme budgets across local governments by high-level officials. Most studies show evidence of bias towards co-partisans, such as Azulai (2017), who shows central government favouritism in grant allocation towards own-party controlled local governments in Brazil.

Probing deeper into how decentralisation interacts with political systems, our colleagues turn to detailed country studies of Pakistan, China, Indonesia, and Kenya. In Chapter 5, Malik, Mirza, and Platteau argue that institutional changes under General Zia's regime stimulated the return of family politics in Pakistan. Zia's aim was to stabilise his de facto regime by co-opting powerful families and the religious elite, and to undermine his most powerful political opponents. The family- and clan-based politics he nurtured grew in importance until it displaced the programmatic politics that had begun to develop in the late 1960s around the Pakistan's People's Party.  The authors use a unique and extensive database on political genealogies in the Punjab province to provide evidence for the emergence and persistence of political dynasties over time. They also show increasing political competition via the splitting of political dynasties over generations. Malik, Mirza, and Platteau argue that the increasing importance of political dynasties at the subnational level has contributed to the capture of local bureaucracy by elected politicians, thus entrenching clientelism for the long term. More broadly, the Pakistan case richly illustrates how authoritarian regimes often direct the course of electoral politics in ways that allow them to concentrate and consolidate power. Indeed, doing so may be a primary motive for decentralising in the first place.

Martinez-Bravo, Padró i Miquel, Qian, and Yao examine the impact of voters' religious heterogeneity on public spending and public goods provision in China in Chapter 6. By creating millions of elected subnational governments over the past 50 years, decentralisation has dramatically increased the number of electoral polities across the world. Perhaps the single most dramatic increase is China's, where the introduction of village elections created nearly 700,000 new electoral democracies within an otherwise authoritarian system. The chapter exploits variation in this huge experiment to explore the thorny question of the social preconditions required for democracy to prosper. They do this by examining how the introduction of village elections in China interacts with voter fragmentation in determining the allocation of government-provided public goods. One of the chapter's most provocative points is to document the return of religion as an important dimension of social identity and group clustering in post-Mao China, overtaking other divisions such as kinship groups.

Faced with corruption, unresponsive local officials, and the severe under-provision of public goods across large areas of rural China, the Communist Party introduced village elections in the 1980s and 1990s as a structural remedy to the previous system of central appointment of village leadership. Prior to the introduction of elections, local expenditures on public goods were similar across villages with very different levels of social fragmentation. Elections increased public expenditure, and increases were largest in the most homogeneous villages. But, in the 8 per cent of highly heterogeneous villages, public goods expenditure decreased. The authors further show that changes in public expenditures occurred exclusively for village-raised funds; public goods funded by transfers from higher levels of government were unaffected by the introduction of elections. These results imply that the factors causing heterogeneous villages to experience lower (or even negative) gains from elections are locally specific. Martinez-Bravo, Padró i Miquel, Qian, and Yao infer two possible, non-mutually-exclusive mechanisms: (i) heterogeneous villages have a lower preference for public goods, and elected village leaders better reflect these underlying preferences; and (ii) homogeneous villages are better able to hold elected leaders to account, perhaps through more effective monitoring.

If decentralisation can change a country's national political dynamics so comprehensively, surely it will have significant effects at the local level too. What might these be? The rich literature on fiscal decentralisation is surprisingly silent about its ramifications on the organisation of local governance. Mitra and Pal provide a way in, focusing their Chapter 7 on the impact of fiscal decentralisation on local-level leadership selection. The authors exploit exogenous variation in local polities after Indonesia's fiscal decentralisation in 2001, which offered enhanced autonomy to local communities (which sit within districts). Using fine-grained survey data on methods of leader selection in local communities, Mitra and Pal observe three distinct methods of leader selection in Indonesian localities: majority voting (that is, electoral democracy), consensus-building (that is, deliberative, participatory democracy), and oligarchy (that is, leaders selected by the local elite).

Surely the method of leader selection is important in terms of policy implementation and the provision of local public goods and services at the local level, especially in a fiscally decentralised setting. Whether the leader of a community reflects the preferences of the entire populace or is only sensitive to the needs of a select few (that is, the local elite) will determine the pattern of local public spending, and thereby social welfare in the community. This underlines the need for a fuller understanding of the factors that affect the method of a community's leader selection.

Mitra and Pal document that different governance types are associated with different patterns of budget allocations, as well as significant differences in local income and spending following fiscal decentralisation. More interestingly, the authors show that community homogeneity is a key driver of leader selection by consensus-building. By contrast, ethnically diverse communities have increasingly selected their leaders via voting.

Furthermore, voting (relative to consensus-building) communities registered significantly higher income and higher development spending after decentralisation, which Mitra and Pal attribute to higher levels of local entrepreneurship. The issue of elite capture is likely to be particularly problematic in ethnically diverse communities (Mitra and Pal 2021), highlighting a trade-off between gains from decentralisation and losses from elite capture. Local social norms may, however, help promote community reciprocity that can help align policy to community preferences (Pal and Wahhaj 2017). The chapter departs from this literature to show that local political entrepreneurs use voting to align economic interests in ethnically diverse communities, helping them overcome some of the collective action problems otherwise natural to heterogeneous polities. This mechanism, they show, works better when income inequality is modest.

Lastly, and in the spirit of 'complexifying' the state, Mbate's Chapter 8 links local-level corruption in Kenya back up to national-level dynamics to show how their interaction can sometimes strengthen, and other times weaken, local governance. He begins with Kenya's accountability deficit, examining how parliamentary oversight mechanisms meant to hold local executives to account often fail. A critical factor contributing to weak oversight is poor coordination between parliament and subnational government institutions. Mbate uses administrative data that directly match parliamentary sanctions with incidences of subnational corruption to demonstrate how party politics can impede the legislative oversight of local politicians. His results show that co-partisanship and the need to preserve party credibility encourage collusive behaviour between parliamentarians serving in oversight committees and subnational politicians in ways that weaken parliamentary oversight. But this effect declines substantially when committee members face an electoral threat or similar long-term career concern. These findings suggest that the accountability of local-level officials far from the capital is strongly influenced by the structure and composition of legislative committees, as well as the nature of political incentives that legislators face. This points to the importance of micro design of a decentralised system. To work effectively, accountability and anti-corruption mechanisms must fit not just the legislative institutions that oversee and implement them but also a nation's political party system. The larger lesson is that local governments in a decentralised system cannot be viewed in isolation. Even in a highly decentralised country, they remain part of a larger system whose workings can powerfully affect even far-flung localities.

#### **1.3 Mechanism design**

The second overarching theme of this book concerns more technocratic, non-political aspects of effective service provision in a decentralised context. There is a great deal involved in successful governance beyond elections and politicians' incentives. Creating an effective decentralised system implies adapting structures, rules, norms, and behaviours to new actors and dynamics that a centralised system may not have contemplated. Using Devarajan and Khemani's terms, we might think of this as mechanism design.

Again, Chapter 2 by Faguet lays out the basics, summarising the insights of five decades of research on this aspect. The fiscal federalist literature teaches us that efficiency can be improved when we devolve to lower levels of government services that are heterogeneous in demand, geographically specific, have low economies of scale, and are reliant on local information. How low should the services go? Each level of government should be responsible for all services and expenditures that do not impose externalities on other jurisdictions. Devolved services can then be tailored to the preferences of local citizens.

How should such services be funded? Local taxes and other charges should be neutral and should not distort economic activity, and their costs and benefits should be transparent to citizens. Tax incidence should be equitable across taxpayers. Local taxes should focus on immobile tax bases. And the administration and compliance costs of such systems should be low. These guidelines imply that property taxes and specific user charges are best suited to local governments, whereas taxes that are complex or levied on mobile tax bases, such as income and capital taxes, should be assigned to higher-level authorities.

The combination of large expenditure needs with limited taxation possibilities means that locally generated revenues will typically fall far short of requirements. Intergovernmental transfer systems arise to fill these (large) gaps, and also to pursue other policy goals. Revenue is shared among different levels of government in two broad ways: (i) by formula (for example, per capita) or according to origin (for example, natural resource royalties); and (ii) targeted to specific priorities (for example, primary education), or untargeted (for example, block grants). The precise mix of revenue-sharing mechanisms will vary greatly across countries as according to their economies, geographies, histories, and other major characteristics. But, in the real world, a great deal of such variation is not easily explained. The share of intergovernmental transfers in local government revenues varies remarkably among countries in the same region, or at similar levels of development.

The second half of Mookherjee's Chapter 3 takes up the baton with extensive evidence from a series of recent innovative policy experiments to improve monitoring and supervision, and devise institutional alternatives to political decentralisation that achieve some of the same outcomes, such as formulabound programmes that reduce the authority of locally elected officials. In India, for example, the use of biometric identification cards to verify employment beneficiaries reduced programme leakages from 'ghost' beneficiaries by 41 per cent. Beneficiaries were paid more quickly and reported earnings rose 24 per cent while programme costs did not change. And, in many countries, community-driven development (CDD) programmes have been supported by the World Bank and other donors. These seek to involve beneficiaries, including the poor, in the definition of priorities and administration of programme benefits. But such programmes also tend to suffer from elite capture, as local elites frequently gain effective control over funds and decision-making. In a number of cases, non-elite citizens have been hired as monitors to help screen potential beneficiaries, and programme management has been contracted out to NGOs or private firms as remedies. But both sets of measures are understudied, and so their empirical effects on CDD programmes are poorly understood. Mookherjee notes that more research is needed.

Lastly, Mookherjee infers from a suite of studies a feasible set of 21st-century reforms to decentralised government that would use advances in information technology to drastically alter welfare provision. We might call these reforms 'anti-political' as they would replace elected local officials' discretion in the making of policy and administration of public resources with a formulabased system of private benefits. A big data approach would predict the level of poverty of each household or individual in a country on the basis of administrative surveys. The benefits programme would be implemented using a nationwide household or individual-level ID system with biometric identification, combined with electronic transfers to low-cost bank accounts or mobile phones. Mookherjee predicts that such a system has the potential to improve pro-poor targeting significantly at relatively low cost, and suggests it might greatly reduce losses and distortions due to capture, corruption, and inefficiency. But any such programme would first have to solve important economic, administrative, and informational problems. It would also, in effect, recentralise public expenditures, something that must be taken into account before a reform is embarked upon.

Over the past few decades, corruption has taken centre stage as a core problem of development. But how anti-corruption efforts, which have also become commonplace, interact with decentralised governance is little studied and little understood. The positive role of decentralisation in draining the swamp of corruption is largely assumed from first-order theorising about politicians' incentives, along the lines laid out in Chapter 2. Put simply, it is unlikely that decentralised monitoring of corruption is universally superior to the centralised sort. Rather, decentralised efforts are likely better for certain kinds of services, or under certain conditions. What are they?

Afridi, Dhillon, Roy Chaudhuri, and Kaur seek to bring deeper understanding to this debate in Chapter 9 by linking the effectiveness of centralised versus decentralised anti-corruption monitoring to the activities being monitored. They first develop a theoretical model, and then use it as a lens through which to survey the rather diverse empirical literature. The model shows that centralised audits are more effective in certain types of activities, for example procurement, where detailed documentation exists and corruption can be more clearly defined as distinct from mismanagement. Decentralised or community monitoring has higher efficacy when collective action problems can be solved, when monitoring teams have a sense of agency, and when the composition of teams is more homogeneous.

Community monitoring has the advantage of agents' deeper knowledge of local conditions, making it less costly for the government to target monitoring resources better, but may suffer from problems of elite capture. Afridi et al. use their model to identify conditions of relative efficacy of centralised versus decentralised monitoring strategies. The empirical literature that they then survey examines heterogeneous countries, heterogeneous institutions (formal and informal), and heterogeneous political systems. The evidence implies that both centralised and decentralised anti-corruption interventions are successful in some instances but fail in others. Programmatic and institutional details appear to matter a great deal. Failure is likely to reflect the composition of local institutions as well as the nature of political competition.

An ideal tool for combating corruption and enhancing accountability would require analysts to measure local government performance across a developing country. In Chapter 10, Chachu, Danquah, and Gisselquist develop such a tool and then test it on the case of Ghana. Basing their work on Putnam, Leonardi, and Nanetti's (1994) good governance framework, they sketch out an idealised tool that captures three key dimensions of good governance: policy pronouncement, political processes and internal operations, and policy implementation. But a lack of available information leaves them unable to implement this tool for Ghana. So they resort to a second-best approach that combines a weighted quality-of-reporting measure with data on political processes and internal operations, and policy implementation to construct a composite index for local government performance. Implementing the tool reveals large variations in both the nature of local governance across regions of Ghana, and the quality of information reported. The authors conclude that some local governments, especially urban ones, tend to perform better than rural ones. More importantly, they find an inverse relationship between poverty and the quality of reporting across regions. The latter underlines the importance of transparency and disclosure rules for generating the information that supports effective local governance.

Local information is surely key to the success of local monitoring, governance, and accountability. The question of how to produce and manage high-quality information on developing-country citizens lies at the heart of Shonchoy and Wahhaj's Chapter 11. They focus on recent initiatives to create digital birth records and increase registrations in Bangladesh. The absence of systematic birth records can be a serious impediment for implementing public policies related to children, such as monitoring truancy or restricting the minimum age of marriage. The authors document how the Bangladeshi government has instituted local, government-run digital centres linked to a national database, and promoted registrations by making birth certificates a requirement for receiving key public services, for example school enrolment and marriage registration.

Using first-hand data collected from a rural district in Bangladesh, Shonchoy and Wahhaj document the problem of birth certificate validity among a very poor population. Discrepancies in local governments' ability to produce valid birth certificates range from 39 per cent to 67 per cent across five local authorities within a single district in Bangladesh. The authors provide suggestive evidence that this is due to limited local administrative capacity to register births. This pertains, among others, to lack of education and awareness within the union parishad leadership, lack of experience registering births among union digital centre (UDC) staff, corruption and nepotism leading to inappropriate equipment for registering births in the UDC and unqualified persons being assigned to UDCs, and unrealistic targets set by the Bangladesh government to process birth registrations within a set time frame without sufficient investment in capacity-building.

The last chapter (Chapter 12) brings together our two overarching themes in a single case, Colombia, in an empirically rich study of a decentralisation reform that granted almost complete autonomy over education to some municipalities while placing others under the authority of higher-level administrations. Chegwin, Munevar, and Sánchez explore the natural experiment created by Colombia's 2001 law, which 'certified' municipalities above the arbitrary threshold of 100,000 inhabitants and granted them significant additional resources and authority over policy and expenditures, while removing resources and authority from non-certified municipalities and allowing departmental administrations to direct their policies and expenditure priorities. This permits a direct comparison of decentralised (treated) versus centralised (control) municipalities. The authors find that autonomy in the delivery of public education increased student enrolment, teacher quality, and student performance in certified municipalities after 2001.

By what mechanisms did these changes come about? Chegwin et al.'s evidence suggests that better student outcomes were due less to the quantity of education resources that decentralised municipalities managed and more to the superior ways in which resources were used, which generated significant efficiency gains in certified municipalities. Such gains may flow from their lower transaction costs of matching local preferences with educational interventions. In the intellectual battle between local politics and centralising technocracy, the Colombian case supports empowering local democracy over higher-level priorities and administrative control.

Finally, readers may find it helpful to consider how the remaining chapters across Parts 1 and 2 vary in their coverage of regions and governing regime types. Figure 1.1 summarises the chapters' main analytical themes, whether they focus on liberal democracies, authoritarian systems, or both, and their country and regional coverage. They sum to a book that covers a wide variety of developing countries, ranging from open democracies to closed dictatorships,

#### **Figure 1.1: A synoptic overview of the book**

across Africa, Asia and Latin America, with deep, rich analyses of some of the most challenging country cases in the developing world.

#### **1.4 Scope for future research**

While we believe that the chapters included in the volume make substantial contributions to the success/failure of decentralised governance, these studies also raise further questions still to be answered. Here we list some of these issues.

Devarajan and Khemani observe that we know little about whether decentralisation has strengthened the legitimacy of government as a whole and shifted social norms so that bureaucracies perform better. Can local-level politics shape incentives and norms in a community? Such changes are not guaranteed and more research is needed in this respect. While Malik et al. establish an intriguing descriptive association between local decentralisation, the rise of family dynasty, and capture of local bureaucracy under military rule in Pakistan, further research is needed to establish the underlying causality. Mitra and Pal have shown how fiscal decentralisation in Indonesia may give rise to local entrepreneurship in ethnically diverse voting communities in a bid to align the economic interests of diverse populations. The observed empirical associations, while robust, are not strictly causal. While showing that religious heterogeneity could constrain the potential benefits of local election reforms for public goods provision (after a period of severe under-provision of public goods) in authoritarian China, Padro et al. do not take account of the demand for local public goods provision. The latter is, however, essential for welfare assessments of public goods provision. These results are taken as a springboard for further careful exploration of these associations, which are at the heart of such transitions after varying decentralisation reforms in democratic and authoritarian regimes.

Mookherjee (Chapter 3) analyses a set of 21st-century reforms to decentralised government that use advances in information technology to drastically alter welfare provision. While these reforms, using a household-/individuallevel ID system with biometric identification along with electronic transfers to low-cost bank accounts, have shown potential to significantly improve propoor targeting at relatively low cost (reduced corruption and inefficiencies), concerns remain about the likelihood of recentralisation changing the balance of power between central, regional, and local governments. The trade-off between successful technology-driven welfare provision and recentralisation needs to be understood better.

There is a general consensus that corruption is a persistent problem in decentralised systems. Reviewing the existing literature, Afridi et al. note that decentralised monitoring of corruption is unlikely to be universally superior to centralised monitoring. Our knowledge remains quite limited in this respect. Understanding the conditions and processes by which top-down audits work well and those under which social audits (ensuring representation, voice and impact) work well is thus a first-order question. The literature on the efficacy of audits in relation to punishments is sparse; we also know little as to which types of processes are more suitable for top-down audits. To a large extent the state of this literature is a reflection of the lack of available information about the monitoring process.

The essential role of information in securing transparency and accountability is further highlighted in a number of subsequent chapters. While parliamentary scrutiny can discipline lower-level governance despite having scope for political opportunism (Mbate's Chapter 8), public information on the functioning of the oversight committee that can provide insights into their effectiveness and capacity remains limited. Chachu et al. highlight the role of social capital for promoting public sector efficiency in a decentralised set-up that has roots in Putnam's work (Putnam, Leonardi, and Nanetti 1994), which, however, could not be implemented because of lack of information in this respect. Shonchoy and Wahhaj further highlight the limitations in local capacity in registering births and also the reliability of existing birth records, which is an essential ingredient for improving state capacity to deliver a range of public services to citizens. At a minimum, decentralised governments should be encouraged and supported to provide disaggregated local data and timely reports on various monitoring processes to ensure transparency and accountability of decentralised local governments. Access to such information is integral for ensuring the effectiveness of public service provision; this could also provide voters with critical information to hold local politicians accountable, thus securing the health of local democracies.

#### **Conclusions**

Decentralisation, both fiscal and political, has long been advocated as a powerful tool of good governance that devolves political and/or fiscal powers to local governing bodies. But a long list of arguments invites caution and suggests that, even if reform increases the accountability of local governments and strengthens the voices of the poor and marginalised, it may also enhance the influence of local elites, breed clientelism, and increase corruption, thus distorting governance and development. What knowledge can we distil from such contradiction? How do we untie this conceptual knot?

One of the overarching themes of this book is that for too long, too much of the decentralisation debate has been cast in the wrong terms. Correct questions do not take the form 'Is decentralisation good or bad for X?' where X is some policy output or outcome of interest. This is because decentralisation is not a simple change, like flipping a policy switch, with results that are linear, discrete, and predictable. It is, rather, a complicated process by which the centre lets go of power and resources in favour of autonomous subnational governments that are as diverse as the underlying societies they represent. For this reason, decentralisation does not 'do' any particular thing; it does a great many things. It does a great many different things in the same policy space, with often strikingly different outcomes in different municipalities and regions – in the same country, under the same decentralisation programme. That should surprise no one. In a powerful sense, this is what decentralisation is for. We decentralise to get more heterogeneity. Those hoping for a step change in homogeneous outcomes have picked the wrong reform.

It follows that the right way to think about a complex, multi-layered reform like decentralisation is not via first-order theorising. Decentralisation is a complicated set of changes in a country's governance arrangements. It can be implemented in many different ways. Reformers face a daunting set of choices as they design and execute real decentralisation programmes. These 'details' are not only not trivial; they are crucial if a decentralisation programme is to fit a country's needs and challenges. Getting decentralisation right is difficult, but also immensely valuable because it can improve the quality of a country's governance.

How do we 'get decentralisation right'? Not via simple decision rules or dramatic measures. The way to get it right, rather, is through a combination of political and technocratic measures that work with the grain of national and subnational political incentives, and combine old and new technologies to bring relevant information before citizens and public servants in support of high-quality public decisions and more public accountability to citizens. The chapters in this book shine a number of lights on how to do this. They answer questions about when and why decentralisation works across the globe under very different circumstances, what it can achieve when it works, and when and why it does not, with a particular focus on recent policy reforms.

Two key features are noteworthy. First, interactions between decentralisation and politics were acknowledged from the start in the 1960s, but until recently mostly ignored. This is a vastly under-researched area that several of our chapters attempt to bring light to. Contributors document evidence of declining barriers to entry for local political leadership and rising political contestation. An increasing importance of political dynasties at the subnational level may lead to the capture of local bureaucracy by elected politicians, thus entrenching clientelism over the long term. Successful decentralisation programmes are accompanied by transparent democratic mandates, local accountability, and community reciprocity that help align policy to community preferences. Ethnic homogeneity can facilitate successful decentralisation, though decentralisation may work under ethnic diversity too if political entrepreneurs can align the economic interests of diverse populations. It is notable that dysfunctional regional and local politics are often at the heart of growing discontent around the globe today. These chapters show ways to make decentralised politics work better.

Second, the volume identifies several potential non-political mechanisms through which the promise of reform can be realised. We document that decentralisation may generate improvements in the delivery of public services and faster local development when aided by enhanced public transparency and disclosure, centralised or decentralised monitoring (depending on the type of activity being monitored), parliamentary sanctions, and democratic accountability supported by citizen-based information systems, as well as democratic norms governing local public service delivery. In so doing, we highlight the challenge of tackling recentralisation as information technology takes a more central role. We also focus on institutional capacity constraints, for example poor physical and digital infrastructure, the lack of qualified and trained personnel, and setting unrealistic targets for political reasons, all of which create barriers to the effective implementation of decentralisation. But our evidence shows that, with a strong will and clear leadership, such problems can be overcome.

Decentralisation is not in itself a good or bad thing. Designed and implemented strategically in ways that take advantage of the political and mechanism design insights offered here, it can promote democracy, efficiency, and accountability. We can make such claims with confidence because we document the same in a number of the chapters that follow. Decentralisation for subnational development assumes additional significance in the current climate of geopolitical discontent and unrest in the aftermath of spectacular globalisation and technological progress since the 1990s. Dysfunctional decentralisation systems likely explain some of the crisis of democracy in the world today. Making them operational and effective has never been more important.

#### **References**

Azulai, Michel (2017) 'Public Good Allocation and the Welfare Costs of Political Connections: Evidence from Brazilian Matching Grants'. London School of Economics Working Paper.

https://www.sv.uio.no/econ and-events/events/guest-lectures-seminars /job-market/dokumenter/azulai-public-good-allocation-and-the-welfare -costs-of-political-connections.pdf

Bardhan, Pranab and Mookherjee, Dilip (eds) (2006) *Decentralization and Local Governance in Developing Countries: A Comparative Perspective*,

Cambridge, MA: MIT Press. https://doi.org/10.7551/mitpress/2297.001.0001

# **PART 1**

**Taking stock of six decades of decentralisation**

*Jean-Paul Faguet*

#### **Summary**

What is decentralisation, what is its underpinning rationale, and why might it matter for development? This chapter reviews five decades of research on decentralisation and has three overarching objectives:

I propose a concise definition of decentralisation that is both conceptually clear and empirically tractable, and review empirical evidence on decentralisation's ability to overcome some of the key obstacles holding back development.

Beginning slowly in the 1960s, and with gathering speed in the decades that followed, decentralisation has become one of the broadest movements and most contentious policy issues in development. Around the late 1970s it seized the imaginations of policy reformers, and has never really let go (Bardhan and Mookherjee 2006; Faguet 2004a; Manor 1999; Rondinelli 1981;

#### **How to cite this book chapter:**

Faguet, Jean-Paul (2023) 'Understanding decentralisation: theory, evidence, and practice', in: Faguet, Jean-Paul and Pal, Sarmistha (eds) *Decentralised Governance: Crafting Effective Democracies Around the World*, London: LSE Press, pp. 21–48. https://doi.org/10.31389/lsepress.dlg.b License: CC BY 4.0

Rondinelli, Cheema, and Nellis 1983; Ter-Minassian 1997). Many of us who began studying the phenomenon three decades ago assumed that the decentralisation wave was then cresting. To our surprise, the wave has continued to build across the world and shows little sign of subsiding.

A 1999 study by the World Bank estimated that between 80 and 100 per cent of the world's countries were implementing decentralisation in one form or another. This includes not only well-known reforms in developing countries such as Bolivia, India, and South Africa but also – under the guises of subsidiarity, devolution, and federalism – deep reforms in some of the world's most developed countries and regions, such as the EU, UK, and US. Since then, new or deepening reforms have been announced in more than 35 countries as diverse as South Korea, France, Cambodia, Turkey, Japan, and Kenya. It is not just the breadth of reforms across countries that impresses but also their depth. Campbell (2001) shows that, across Latin America, between 10 and 50 per cent of all central government revenues are now spent by subnational governments. Hence, we can summarise that decentralisation is happening, or has recently happened, in the vast majority of countries across the globe, with significant effects on these countries' fiscal accounts and (as we shall see below) on how they are governed.

Worldwide policy experimentation has been accompanied by a huge outpouring of research attempting to ascertain the effects of decentralisation on different aspects of economic, political, and social development. These studies often find contradictory outcomes across different countries, and even within countries. From the late 1980s onwards, study after study bemoaned the decentralisation literature as indeterminate, confusing, and of limited use to policy reformers. Policymakers were left little wiser about whether they should pursue reforms, or how they should proceed if they did. But recently, more sophisticated empirical approaches have combined with fundamental methodological insights to find a way through this tangle of apparently contradictory evidence.

What relevance does decentralisation have for developing countries with comparatively poor infrastructure and weak state capacity? Many such countries have made tentative steps towards decentralising that are partial and still incomplete. What role, if any, should further decentralisation play in their attempts to improve public sector effectiveness and the provision of local goods and services? The question is particularly important because so much of the decentralisation literature focuses on high-income countries. This is for understandable reasons: many of the earliest decentralisations happened there, where data are comparatively high-quality and abundant, facilitating empirical study further.

But, at a minimum, policy lessons from this literature need translation before being applied to developing countries. The reasons for that are similarly straightforward. High-income countries tend to enjoy stronger tax revenues and higher levels of human capital. These combine to produce governments that are more capable, with more policy options and greater policy flexibility, than less well-off countries. But, interestingly, many developing countries have stronger traditions of self-government at the local level, especially in rural areas, than more urbanised high-income countries. This may give them certain countervailing advantages that well-designed decentralisation programmes can take advantage of.

Understanding decentralisation: theory, evidence, and practice 23

In sum, decentralisation is not the same for developing and developed countries. The purpose of this chapter is to provide some 'translation' by reviewing theory and international evidence on the ability of decentralisation to address state weaknesses in ways that promote human and economic development in middle- and low-income countries. In the sections that follow we first review the various definitions of decentralisation that researchers have put forward and examine the key theoretical arguments in favour of decentralisation that are most relevant for developing countries. We then outline the methodological advances that have allowed researchers to put order into this previously confused literature. We use these insights as a lens through which to review international evidence on decentralisation's ability to overcome some of the key obstacles holding back a country's development. And we draw lessons from the fiscal federalism literature on how best to assign powers and responsibilities over expenditure and taxation among different levels of government, and how to structure intergovernmental transfer systems to solve the problems that inevitably result.

#### **2.1 Understanding decentralisation**

What is decentralisation? What is its underpinning rationale? Why might it matter for a low- or middle-income country? This section briefly reviews the most important definitions of decentralisation in the academic literature, along with the underlying logic of each, in order to arrive at the most relevant definition. We then briefly outline the principal arguments in favour of this kind of reform, which have to do with deepening democracy and improving accountability of public officials to the governed.

The huge scale of policy experimentation with decentralisation has provoked an equally huge research literature examining its effects. This includes literally hundreds of published academic papers in peer-reviewed journals; if to this we add rigorous 'grey literature' studies conducted by multilateral organisations such as the World Bank, IMF, and IDB, as well as reputable think tanks, NGOs, and government agencies, the number ascends into the many thousands. But attempts to summarise the lessons of this research have left many scholars frustrated. The empirical literature appears to be broadly inconclusive, with many contradictory findings on any specific question of importance, regardless of region or countries' level of development.

As examples, consider three prominent surveys that sought to summarise the state of knowledge on decentralisation. Litvack, Ahmad, and Bird (1998) found that 'one can prove, or disprove, almost any proposition about decentralization by throwing together some set of cases or data'. A follow-on study by Shah, Thompson, and Zou (2004), which reviewed 56 newer, more quantitative studies, found that decentralisation sometimes improved, but other times worsened, service delivery, corruption, macroeconomic stability, and growth across a large range of countries. Most pessimistically of all, Treisman (2007) found that the empirical literature's results are inconclusive, weak and contradictory. 'To date,' he concludes, 'there are almost no solidly established, general empirical findings about the consequences of decentralization.' This leaves us in a bizarre paradox: after 50 years of policy experimentation and hundreds or even thousands of studies, we appeared to know very little about whether decentralisation is good or bad for any policy outcome that we care about. And yet enthusiasm for policy reform not only persists but continues to grow.

More recent research has found a way through the empirical and conceptual thicket that has characterised the decentralisation literature (Faguet 2014). The solution contains three components: (i) definitional, (ii) empirical, and (iii) conceptual. On the definitional side, much of the literature's indeterminacy arises from the word's very different meanings. Slater (1989), Faguet (2012), and others have pointed out that 'decentralisation' is polysemic, meaning very different things to different people and in different countries where it has been implemented. A number of studies, particularly from the 1980s, begin by delineating different kinds of decentralisation, as if they were variants of the same underlying product. The typical taxonomy would include: deconcentration, delegation, devolution, and privatisation.

As we shall see below, the distinctions between these 'decentralisation variants' are crucial on both theoretical and empirical grounds, and hence it is important to consider them in more detail. *Deconcentration* is when central government shifts personnel, equipment, and offices from the capital city to cities and towns elsewhere in the country. Chains of command, reporting, and accountability, as well as fiscal flows in terms of expenditure and taxation, remain largely unchanged. The main point is to get public officials out of the centre and into the periphery. This can be beneficial when it brings more accurate and detailed information on local needs and conditions to bear on government decision-making. By spreading central government salaries and expenditures more evenly around the country, it can also be politically popular, and may contribute to reducing centre–periphery inequalities.

*Delegation* is when central government shifts managerial responsibilities for certain expenditures or service provision to organisations outside the regular bureaucratic structure, such as quasi-autonomous public agencies. Chains of command, reporting, and accountability are somewhat altered for the services in question, but public officials' incentives continue to point upwards, and the central government monolith may not be overly disturbed.

By contrast, *devolution* (or sometimes 'democratic devolution'; see Manor 1999) is a much more fundamental reform. It shifts power and resources from central government officials to local government officials with independent

mandates whom the centre cannot control. Its effect is to fundamentally change authority over, and accountability for, those resources and responsibilities that are decentralised. Instead of the central Ministry of Education being responsible for the operation of a particular primary school, for example, authority over that school passes to an elected local government. Rather than petitioning distant central bureaucrats, parents and other local citizens seeking to improve the school's operation can take their demands to local officials, whose electoral prospects they hold in their hands. The incentives of education-providing officials are thus shifted from upward-pointing, towards senior officials in the ministry, to downward-pointing, to voters.

Lastly, *privatisation* is the divestiture of public functions to the private sector via the sale or transfer of related assets. It is justified on the basis of improved innovation and managerial efficiency, which should result from the reorganisation of public services on a for-profit basis. Public goods and services that are privatised are typically subjected to careful regulation, as they may constitute essential services (for example, health, water) or natural monopolies (for example, water, electricity). Privatisation is the most radical of these four 'types of decentralisation'. Without elaborating further for lack of space, I will simply assert that privatisation – while an interesting and important phenomenon in its own right, and certainly worthy of study – is sufficiently different from the other three types that it should not, in my view, be classed as a form of decentralisation. It is better understood as one of a menu of additional measures often undertaken alongside decentralisation by reformers eager to reduce the size of the central state or radically alter organisational incentives, rather than as a reform that is analytically comparable to deconcentration or devolution.

The deeper problem with this definitional dissonance is that the literature has often treated these measures as if they were minor variants of the same underlying reform, akin to different flavours of ice cream. But, in fact, deconcentration, delegation, and devolution differ fundamentally in organisational terms. They establish incentives that are fundamentally different from one another, which public officials – being rational – respond to in fundamentally different ways. We should not expect their effects to be similar, and indeed they are not. Studies that compare countries that deconcentrated with others that devolved or delegated are committing a basic methodological error. It is no wonder that their empirical findings are indeterminate – the studies themselves are confused. Happily, the solution to this problem is straightforward: pick one form of reform and compare only examples of that. This is the first key to making sense of the cacophony of decentralisation results.

Henceforth we define decentralisation in a restrictive way that is clear and conceptually discrete, so as to facilitate analytical precision. *Decentralisation is the devolution by central (that is, national) government of specific functions, with all of the administrative, political and economic attributes that these entail, to democratic local (that is, municipal) governments that are independent of the centre within a legally delimited geographic and functional domain.*

With respect to *empirical evidence*, Channa and Faguet (2016) point out that not all empirical evidence is created equal. Studies differ significantly in terms of the sectors they examine, the questions they ask, and the strength of their empirical identification. By classifying empirical results according to these three criteria, the authors show that the evidence does indeed speak with a more unified, less confused voice. Higher-quality evidence indicates that decentralisation increases technical efficiency across a variety of public services, from student test scores to infant mortality rates. Decentralisation also improves preference matching in education, and can do so in health under certain conditions, although the evidence for the latter two is somewhat weaker at this stage.

The third key to making sense of our evidence is *conceptual*. For too long, we have asked the wrong questions of our evidence, along the lines of 'Is decentralisation good or bad for X?' where X may be any policy output or outcome of interest, such as primary education provision or PISA scores. The problem with this approach is that it assumes decentralisation is a relatively simple reform with symmetric effects across different subnational units. This misunderstands the nature of decentralisation, which involves the transfer of power and resources to subnational jurisdictions that differ from each other in important ways. We should expect such jurisdictions to behave in ways that are as different to one another as are their underlying characteristics.

Put another way, the correct answer to the question 'Is decentralisation good for primary education?' is 'Yes, of course it is'. And the correct answer to the question 'Is decentralisation *bad* for primary education?', in the same country at the same time, under the same decentralisation reform, is 'Yes, of course it is'. In the presence of decentralisation, some municipalities will behave in ways that improve primary education outcomes. But other municipalities will behave in ways that worsen it, and many other municipalities will muddle along without great improvement or decay compared to centralised provision. Such heterogeneity is in the very nature of decentralisation; it is built into the reform.

A better class of decentralisation research question admits heterogeneity from the start, and asks 'Why are the good cases good and the bad ones bad?' And, more importantly, 'How can we shift the balance of outcomes away from bad realisations, towards good ones?' To do so is to acknowledge that the outcomes of decentralisation are simply the aggregation of hundreds or thousands of local dynamics across a country. Hence, to understand the effects of decentralisation at the national level, we must first understand how local government works. Faguet (2009; 2012) provides a theoretical model of local government, with quantitative and qualitative empirical tests.

#### **2.2 The benefits of decentralisation**

Why might decentralisation be a good idea? What are the key opportunities and constraints around which it should be designed to best suit a developing country? How might it help a country overcome some of its biggest development challenges? This section examines key arguments in favour of decentralisation through the lens of some of the social and political-economic characteristics typical of many developing countries. We then review empirical evidence on the extent to which reform has helped overcome key development obstacles.

Understanding decentralisation: theory, evidence, and practice 27

Enthusiasm for decentralisation has an enviable pedigree. Arguments about the benefits of devolving authority to subnational units of government stretch at least as far back as Montesquieu (1748) and *The Federalist Papers* (Madison, Hamilton, and Jay 1788). The belief that the natural or most advantageous organisation of society involves multiple hierarchical tiers goes back much further. Aristotle (350s–340s bc) deconstructed the Greek city state 'into a three-tier hierarchy of households, villages, and the polis, each of which aims at a different good' (Treisman 2007, pp.7–8). Building on classical reasoning, Dante (*c*.1314–20) argued that 'Only in a pyramid of different-sized, nested communities could the full multiplicity of human potential be realized all at once' (Treisman 2007, p.8).

Modern claims about the advantages (and disadvantages) of decentralisation follow this gist but are far more numerous, typically framed in terms of economic and political variables (Figure 2.1). Although they span a number of disciplines, and use distinct terminologies and catchphrases, we can summarise them as follows. We divide them into arguments for versus arguments against decentralisation. We list arguments against for clarity and fairness, but focus the discussion that follows on the conditions associated with positive decentralisation outcomes.

#### **Figure 2.1: Arguments for and against decentralisation**

#### Improving democratic accountability and responsiveness

The first four arguments listed in Figure 2.1 are tightly intertwined, and can be bundled together as 'improving democratic accountability and responsiveness' by bringing governance and decisions 'closer to the people'. These are, in my view, the most important and powerful of all the arguments concerning decentralisation. In various forms and with different language, Mill (1895–61), Montesquieu (1748), Rousseau (1762), and Tocqueville (1835–40) all debated these points. This is what policy advocates refer to when they claim decentralisation will take government 'closer to the people'. The latter is more slogan than argument, although there is an unfortunate tendency in that literature to present it as an argument. The more serious version of Wallis and Oates (1988), widely cited, holds that decentralisation makes government more responsive to local needs by 'tailoring levels of consumption to the preferences of smaller, more homogeneous groups' (p.5). While this account is descriptively correct, it is analytically insufficient. Why does homogeneity imply responsiveness? Is the fundamental problem one of scale? It is my view that the principal sources of responsiveness lie deeper, in the incentives that officials face in decentralised versus centralised government regimes.1

The fundamental logic is as follows: by devolving power and authority from upper (usually central) to lower (regional or local) levels of government elected by their respective constituencies, decentralisation fundamentally changes the incentives that local authorities face, and thus – not surprisingly – their behaviour. (For ease of exposition, all subnational levels of government are henceforth referred to as 'local' government.) Under centralisation, those who hold authority over local matters are not elected by local citizens but rather *selected* by higher-level authorities, regardless of whether they are physically located locally or in the capital. Immediate accountability for their performance is thus upwards to the central government officials who have power over their salaries, careers and broader professional prospects (Riker 1964). Accountability does not run downwards to the citizens who consume the public goods and services they are meant to produce except at one or more removes, in the sense that central government officials are ultimately beholden to national electorates. 'Local' officials thus face clear, strong incentives to respond to central government priorities and concerns, and weak, muffled incentives to respond to local citizens' needs.

The most important effect of decentralisation is to reorient these incentives. 'Local' officials become local officials, whose tenure and career prospects are in the hands of the local citizens they serve, who elect them. The incentives that govern their performance are no longer received from on high but rather determined by those most directly affected by what they do. And accountability to local citizens is direct, no longer running through a national administration or various layers of bureaucracy.

This supply effect in the constitution of local authority generates a complementary demand effect. Citizens see the change in local officials' performance, understand the incentive change that has occurred, and

become more involved in local politics (Faguet 2004b). They vote and exercise voice more because both tools are more powerful than before, and so more worth their while. This change will hold for both relatively homogeneous populations and those that are relatively heterogeneous, though the effect may differ in strength and type according to degree of homogeneity, as Mitra and Pal's results in this volume suggest. Elected officials, being largely rational, respond better to citizens' demands – not just because they 'should' but because it is in their interests to do so. The net effect is to shorten and tighten the loop of accountability between those who produce public goods and services and those who consume them.2

One of the main points of this chapter is that decentralisation works – if and when it works – through a fundamental effect on officials' incentives, and thence on government accountability to the governed. Surprisingly often, both enthusiasts and critics of reform omit this basic point in favour of second- and third-order arguments about whether decentralisation can increase growth or reduce ethnic conflicts, points to which we return below. Many of these things, such as inflation, the fiscal deficit, and ethnic conflicts and political stability in a nation more broadly, are important, and decentralisation may indeed affect them. But it does so via incentives and accountability; there is no direct effect. In the best cases, the new equilibrium that emerges after reform features greater citizen voice and participation and greater government responsiveness. It is one in which democracy has been both deepened and strengthened.

#### Boosting public sector efficiency and achieving faster economic growth

The fifth and sixth arguments in Figure 2.1 are also closely related. The case for decentralisation improving public sector efficiency follows directly from greater accountability and responsiveness. A public sector that is more responsive to citizens will tend to produce public goods and services better suited to local conditions and to citizens' needs (Khan et al. 2014). Such services will tend to be more effective in terms of solving real problems. More effective public services in areas such as education, transportation, and water and sanitation will, in turn, better support private sector activity. Private firms will find it easier to operate in such environments, and hence will be more likely to invest. This will lead to better economic performance and higher economic growth.

A separate logical chain posits that by increasing local governments' share of tax revenues, decentralisation gives them a larger stake in the performance of the local economy. This motivates local officials to implement policies that support businesses and promote growth for two reasons: (i) economic growth increases local tax receipts and hence officials' freedom of action, and (ii) growth increases officials' popularity. The effect is to make local governments compete for mobile capital by reducing public sector waste, inefficiency and corruption, and by providing infrastructure. When this happens nationwide, efficiency rises and the economy grows faster (Brennan and Buchanan 1980; Hayek 1948; Jin, Qian, and Weingast 2005; Roland 2000).

#### Strengthening individual and group liberties

Scholars from Hamilton (1769–1804) to Tocqueville (1835–40) to Weingast (2014) have argued that, in a decentralised or federal system of government, strong, legitimate local governments can protect individual freedoms by checking central government abuses. They can use their resources to resist or counteract specific government actions (for example, by suing central government, or implementing a countervailing tax or credit), and can threaten the centre financially by withholding tax receipts, in defence of their citizens. Diaz-Cayeros (2006) related how, in late 19th- and early 20th-century Brazil, repeated attempts by the centre to encroach on state power and independence were resisted using such means plus the credible threat of violence. In Brazil, state-level police forces, especially of Minas Gerais and Sao Paolo, 'constituted true armies that could effectively challenge the federal government' (p.211).

As for individuals, so too for ethnic, religious, and other identitarian groups (Faguet 2019). Many developing states were born out of international agreements, often with arbitrarily defined borders based on colonial partition more than internal political factors, with little to hold them together beyond guarantees by the international system (for example, Englebert 2000; Herbst 2001; Jackson and Rosberg 1986). They exist de jure but perhaps not de facto. Unlike European states in which power over a territory and its population generally came first and sovereignty and international recognition followed, many developing countries have not been able to consolidate power in order to achieve the internal consent or territorial reach necessary to exert authority over the entire state (Jackson and Rosberg 1986). This is a fundamental problem facing many African leaders (Englebert 2000; Herbst 2001).

The state may instead be made up of different ethnic groups spread over sometimes vast geographic areas, each with its own customs, language, and culture. A consciousness of common nationality is often lacking. Citizens do not feel represented by the government and perceive that leaders cater mainly to people of their own tribe or region, rather than to all citizens equally. In addition, parallel or rival forms of authority (for example, traditional chiefs, religious leaders, or drug lords) may supersede the authority of the state (Myrdal 1968).

How might decentralisation affect these challenges? First, bringing locally elected subnational leaders from different segments of the country into government, and thus giving representation to people of different groups, may incite parts of the population that formerly felt excluded from the state to feel represented and included (Faguet 2019). Indeed, federal, decentralised institutions have long been recommended as a mechanism to hold together fractured, 'multi-national states' (Brancati 2004; Horowitz 2003; Lijphart 1977; Stepan 2001; Zuazo, Faguet, and Bonifaz 2012). Where divisions are

defined territorially, decentralisation is said to promote the formation of multiple but complementary identities where citizens can simultaneously carry both an ethnic identity and a national identity (Stepan 2001). Decentralisation can thereby act as a pressure valve for nationalist aspirations. In Canada and Spain, for example, decentralisation has been deemed a success in keeping fractious provinces like Quebec and Catalunya from seceding. In the UK, the devolution of regional powers to the Northern Ireland Assembly was the critical element that made successful peace talks with the Irish Republican Army possible.

But there are also many opposing arguments. Some claim that decentralisation will build a federalist mentality, undermining efforts to build national unity and identity. It may even deepen divides between groups and intensify conflict by reinforcing cultural or ethnic identities. Second, decentralisation may lead fractious groups to want ever more autonomy. In this vein, former British Prime Minister John Major argued against devolving powers to Scotland, claiming it was 'the Trojan horse to independence' that would lead to friction and eventually demands for full independence (Brancati 2009). With more power and independence, decentralised areas may realise they can manage their affairs better on their own. Decentralisation may give subnational leaders experience in governing. Several decentralised regions have seceded after first setting up their own decentralised institutions. South Sudan is one recent example.

The key theoretical issue is whether decentralisation will stoke centripetal or centrifugal forces. Opponents of decentralisation claim devolving power and resources will empower those who seek secession, and – if they prove reasonably competent – assuage citizens' ill-formed fear of the unknown by showing them local authorities who provide services and manage public budgets adequately. Proponents claim that the same stimulus – the devolution of power and resources to even secessionist politicians – will generate the opposite response. Like an onion, it will peel away the outer layers of support from such leaders and parties, stripping them of constituents whose demands can be satisfied by more limited measures of autonomy, such as local control over public services, minority language rights, and symbolic goods such as public art and celebration, so isolating the hard secessionist core that seeks full independence from the mass of citizens (Faguet, Fox, and Pöschl 2015a).

Which side of this argument is correct is not an issue of decentralisation per se but rather depends on the nature of the secessionist impulse and the source of such parties' and leaders' appeal. Where groups are distinct, geographically concentrated, and highly mobilised against one another through violence, it may be difficult to imagine continuing cohabitation within a single nation, barring the comprehensive defeat of one group. But where groups are harder to distinguish, or where they comingle, or where mobilisations are only partial, decentralisation may offer the 'steam valve' required to satisfy those who actually demand autonomy, not full secession, and help to ultimately hold a nation together.

In practice, the more important factor is likely to be the regional specificity of elite interests. If coherent regional elites have more to gain from secession (greater control over resources at the cost of lost markets and lost influence) than autonomy (partial control over resources, continued access to national markets and policymaking), then national integrity is in much greater peril. Regional elites will have an incentive to invest in creating conditions propitious to national schism. Beyond funding political parties and campaigns, this may well extend to supporting armed insurgencies and investing in the sorts of violence against civilians that peace talks cannot later reconcile. The recent history of the Balkans richly and sadly illustrates this dynamic.

On the other hand, the evident success of both developed and developing federations that have strong regional identities but much stronger national identities, such as Brazil, Germany, India, and the United States, demonstrates that decentralised government can stitch together diverse countries in ways that lead to neither subnational tyranny nor secession. One of the keys is regionally diverse elite interests. There are undoubtedly powerful elites in Sao Paolo, North Rhine-Westphalia, Uttar Pradesh, and California. Any of these would rank as a medium-sized to large independent country in both population and GDP. It would be a perfectly respectable country of important weight in the international system. And yet secession is not seriously debated in any of these places. Why don't these states' elites agitate for secession?

Because their political and economic interests span state boundaries. Business and political leaders in California and Uttar Pradesh have more to lose than to gain from splitting from the other 49 US or 27 Indian states, despite the fact that all of them are smaller. Pulling up the drawbridges would leave elites in North Rhine-Westphalia and Sao Paolo unambiguously in control of a non-trivial country instead of a state. But, from their leading positions in these states, elites in all four exert considerable influence over much larger and more important countries. And they have access to considerably larger internal markets, and can influence international treaties that give them better access to the world economy and a stronger voice in international affairs. They benefit from the unity of a nation they can expect to sway and perhaps even lead. They would lose from its break-up. So they invest in unity, not division.

Interestingly, Stepan (1999) argued that another deciding factor in the ability of federalist states to hold together fractious groups is the timing of elections. When elections are introduced in the subunits of a new federal polity prior to countrywide elections, and in the absence of countrywide parties, the potential for subsequent secession is high compared to when national elections are held first. National elections produce a sense of common identity and purpose whereas subnational elections can generate fractious local parties. Of the nine states that once comprised communist Europe, six were unitary and three were federal. Yugoslavia, the USSR, and Czechoslovakia are examples of countries that first held subnational elections prior to national elections, and subsequently broke up into 22 independent states.

Can decentralisation be designed in ways that hold fractious groups together rather than promoting secession? Yes – by decentralising power and authority to a level *below* that of major ethnic, linguistic, or other identity groups. In this way, empowered subnational units will tend not to be identified with group identity or privilege. Rather than stoking divisive tensions, local government will instead become identified with issues of efficiency and service provision (Faguet, Fox, and Pöschl 2015a). In a country where an ethnic minority is concentrated in one region, decentralising to the regional level is far more likely, all else being equal, to reinforce ethnic divisions, and place authority and resources in the hands of those with most to gain from national break-up. Decentralising to the local level, by contrast, will create many units of any given ethnicity, and most likely others that are mixed. No level of government will be associated with any particular ethnicity, and hence not with ethnicity per se. Comparisons across local governments will tend to focus more on issues of competence in service provision than identity, revindication, or pride.

This is not to say that decentralisation somehow neutralises the importance of ethnic or religious identity for governance. Indeed, in this volume, Martinez-Bravo et al. (Chapter 6) find that the accountability-enhancing effects of village elections in China were larger in more homogeneous villages, and ascribe this to a greater capacity of such electorates to monitor their leaders. The leaders of homogeneous villages then implemented policies that better reflected villagers' underlying preferences. Likewise, Mitra and Pal (Chapter 7; also 2022) show in this volume that ethnically more diverse communities in Indonesia tend to use voting to choose their leaders, whereas more homogeneous communities use non-electoral, consensus-building methods. The former, furthermore, were more successful than comparable consensus-building communities in raising local income and local development. And Martinez-Bravo (2014; Martinez-Bravo, Mukherjee, and Stegmann 2017) showed differential effects of social heterogeneity on local development depending on how community leaders are chosen (elected vs nominated). These results all underline the more general point that decentralising to a level beneath that of the main ethnic or religious cleavage in a society tends to associate that identity with public investment and service provision rather than with group privilege and pride. It is not that identity ceases to matter after decentralisation, as those studies have shown, but rather that decentralisation redirects it from some of the destructive ways in which it can be activated by separatist leaders.

Complementary reforms that promote a single internal market for goods and services nationwide can also help by preventing the development of elites with regionally specific economic interests who might gain from national schism. These would instead be substituted by elites whose assets or historical bases might be in a particular region but whose economic interests are multiregional, and who therefore have a strong interest in national integrity and growth (Faguet, Fox, and Pöschl 2015b). Specific measures such as improved infrastructure and transport links can help bring this about, in addition to facilitating the flow of people and ideas across an economy, so binding it together from the bottom up.

#### Reducing the risk of conflict and facilitating power-sharing

The relationship between decentralisation and conflict has long been a topic of debate (Green 2008). Arguments overlap significantly with those on self-determination and secession, since the failure to integrate regions and minorities into the state is a key source of conflict. As argued above, decentralisation can accommodate diversity by giving territorially concentrated groups the power to make their own decisions about issues that most interest them (Lijphart 1996; Tsebelis 1990). This may diffuse social and political tensions and prevent conflict (Bardhan 2002). Giving groups control may protect them against abuse or neglect from the centre or from one another, which can cause conflict. For instance, if a group is experiencing economic disadvantage, it could be given the power to control its own resources and decide how to allocate resources. If fear of social extinction is the cause of conflict, it could be granted control over issues such as education, religion or culture in order to protect its language and customs (Brancati 2009).

Others take the view that decentralisation will instead lead to increased conflict with fractious groups. Roeder and Rothchild (2005), for example, contended that decentralisation will give subnational leaders the resources and 'institutional weapons' they need to mobilise the local population and demand more political power from the centre, thereby elevating tensions. Subnational leaders may also gain prominence and followers, and subsequently threaten the power of national political elites, again causing conflict. Some note that decentralisation has produced local leaders who discriminate against minorities in their own regions (Horowitz 2003; Lijphart 1993). Brancati (2009), for example, pointed out that allowing parts of northern Nigeria to adopt their own (Sharia) law has aggravated rather than defused tensions between Christians and Muslims, when the Christian minority was forced to comply. This underlines the importance of protecting minority rights, which theorists going back at least as far as the *Federalist Papers* (Hamilton, Madison, and Jay 1788), and including most major contributions since (see for example, Dahl 1971; Dahl 1989), have considered critical to the stability and sustainability of democracy as a form of government.

How can decentralisation be implemented so as to dampen, and not promote, conflict? Decentralised governments that are responsive to national minorities will drain tensions from the polity. But local governments that become 'little tyrannies', ignoring or oppressing local minorities, will stoke tensions, threatening not just particular governments but the notion of democracy itself. Hence decentralisation should be designed with strong local accountability mechanisms that align local leaders' incentives with the will of local citizens and allow voters to hold politicians responsible for their decisions. And central government should enact strong safeguards of minority rights nationwide, to which individuals and groups can appeal in any locality.

Understanding decentralisation: theory, evidence, and practice 35

How do we construct local political systems that promote responsiveness to voters and avoid little tyrannies? A well-developed political science literature on the trade-offs between descriptive vs substantive representation is relevant here. Descriptive and substantive representation are generally considered the two most important forms of electoral representation. Their main difference is that, in descriptive representation, representatives have similar backgrounds to the people they represent, whereas, in substantive representation, representatives focus on the issues most important to a particular group (Mansbridge 1999). But, beyond this distinction, lessons for policymakers are few. While some studies show that descriptive representation ensures substantive representation, others do not find a tight correspondence between the two, and so the literature is mixed in this respect (Bratton and Ray 2002; Mansbridge 2003).

In a post-conflict environment, or one where the risk of conflict is high, decentralisation can underpin power-sharing arrangements that settle power struggles and stave off violent conflict. This mechanism operates by creating or empowering subnational levels of government to which political power, responsibility, and resources, are devolved. In doing so it also creates new fora for political competition, and hence new prizes over which opposing parties can compete. This solves the winner-takes-all problem inherent to centralisation, where parties in government wield huge central government resources and reap huge rewards, and opposition parties are left to wither. In a federal system, by contrast, opposition parties can still win power over states and local governments (O'Neill 2003), and hence enhanced voice in national debates and opportunities to display competence in government. The penalty of losing national elections is much less steep, and so the temptation to win at any cost greatly lessened. This can help cement the peace in a post-conflict environment.

Decentralisation, for instance, has recently been advocated for Iraq and Afghanistan with exactly this in mind (Barfield 2011; Brinkerhoff and Johnson 2009). Green (2011) explained how Ethiopia's decentralisation process in the 1990s was part of a civil war settlement that successfully maintained the peace for three decades. The country was divided into 11 federal regions. This fragmented the political opposition, creating various new parties that competed against one another for power over the newly created regions, while preventing a return to conflict for power over central government. Peace was maintained and the government in power at the federal level remained free of coups (and electoral defeat) for three decades. Such shifts in power arrangements can be used to diffuse power struggles at the top. But, in other cases, decentralisation may merely shift conflict downward rather than eliminating it altogether. Uganda's government under President Yoweri Museveni implemented a decentralisation programme in 1986 in order to reduce national-level conflict. While successful in this regard, Green (2008) argued that the ultimate effect was to replace conflict at the top with conflict at the local level.

Can decentralisation be designed so as to promote power-sharing? A properly operating decentralised system should naturally lead to the sharing of powers that have been devolved to different subnational levels of government. Few additional reforms are required other than the avoidance of electoral and fiscal distortions. In countries where politics is closed or captured, measures that promote open, competitive local politics will tend towards fairness and power-sharing, and away from capture and conflict. Electoral finance laws that support a level political playing field have particular importance in this regard, as one of the most powerful and prevalent ways in which democracy is distorted is through the flow of money into campaigns. Where political competition is open to new entrants and the playing field is level, elections will tend to be fought over issues of substance to local voters. In such places, political conflict and violence will tend to transform naturally into electoral contestation, which is by far the better outcome.

#### **2.3 How to build decentralisation – a framework for development**

Let us now turn to the specifics of policy design. How do we allocate powers and responsibilities across hierarchical levels of government? Which levels of government should we design in the first place? Which services and powers, and how many resources, do we devolve to which levels?

These questions are part of a different but closely related literature called fiscal federalism. Fiscal federalism focuses on two interrelated issues: who taxes and spends? That is, the division of taxing and spending responsibilities among levels of government (national, regional, local, and so on). And what is taxed and spent on? That is, the discretion given to regional and local governments to determine expenditures and revenues.

According to the fiscal federalism literature (Besley, Faguet, and Tomassi (2003) provide a useful overview), public services should be devolved to subnational levels of government when they have the following characteristics:

The broad principle of government design that fiscal federalism puts forward is the *encompassing principle*, which holds that powers and responsibilities should be assigned to levels of government such that all relevant externalities are encompassed by that level of government. Hence national externalities and public goods, such as national defence or a trunk highway system, are best dealt with by national governments, while local externalities and public goods, such as rubbish collection and street lighting, are best dealt with by local governments.

Understanding decentralisation: theory, evidence, and practice 37

Building on this, one of the crowning achievements of fiscal federalism theory is the Oates decentralisation theorem (1972). This holds that local governments should be responsible for all forms of spending that do not inflict externalities on other jurisdictions. The level and type of such spending can be tailored to the desires of local residents. This is why services like rubbish collection, street lighting, and fire prevention are particularly well-suited to a high degree of decentralisation, that is, to local government. But it is important to note that actual political jurisdictions across most countries will rarely match the optimal scope of all the public goods and services that must be provided. Hence there will always be a need for intergovernmental cooperation among different hierarchical levels to provide a full suite of services.

How should decentralised tax systems be designed? Fiscal federalism puts forward five basic guidelines for designing revenue systems:

Employing these criteria shows that the most appropriate local taxes for local governments in developing countries are property taxes and user charges. Property has the advantage of being easy to identify and assess, which is not the case for many other classes of assets or economic activity. Further, property values are linked to local prosperity and hence local policy. This provides local governments with an incentive to undertake policies that increase the size of the local economy. It also provides a channel by which local officials are encouraged to be accountable to local taxpayers. User charges include public transport fares, housing and business rents, market fees, and water and heating charges, to name a few. They help defray the costs of providing these services, and help make local officials directly accountable to the users of these services. Some highly developed countries also devolve income taxes and VAT to regional and local governments, although this is much less common in developing countries. The evidence shows that the lowest-income countries are unable to mobilise much local revenue through property taxes, partly because citizens are not used to paying them and partly because in most localities poverty levels are high and property valuations are low.

For countries at any level of development, local taxes are likely to be greatly exceeded by local expenditure needs; this is doubly true for developing countries. How do we square this circle? The answer is intergovernmental transfers among different levels of government. In practice this tends to mean revenue-sharing by central authorities, who have significant advantages in raising taxes that are complicated or based on mobile assets, with regional and local authorities. Revenue-sharing can take one of two broad forms:

Additionally, central governments typically choose to make grants or subventions that are either:

Targeted grants are typically used to support priorities favoured by national government, while untargeted grants allow regions and localities to choose their own priorities. Targeted and block grants generally have two main purposes: vertical and horizontal equalisation. *Vertical equalisation* refers to attempts to close the gap between the costs of services devolved to subnational governments, and the revenues they are able to mobilise. *Horizontal equalisation* refers to the attempts to close the gap between richer and poorer districts' revenues. This is intended to ensure greater equality in public service provision, such that, for example, rich districts do not have much-better schools, roads, and water provision than poor districts, thus generating a vicious circle in which wealth begets wealth and poverty begets poverty.

How are these guidelines implemented in practice? Figure 2.2 shows the value of all intergovernmental transfers to local governments as a proportion of local government revenues for a selection of developing and developed countries. There is considerable variation among countries, from lows of 10 per cent in Iceland and Switzerland to more than 80 per cent in Indonesia and Lithuania and more than 90 per cent in Uganda. There do not seem to be any instantly obvious patterns by region or level of development. This non-pattern is broadly repeated for the larger set of countries for which data are available. It illustrates how considerably real-world practice differs from the principles of fiscal federalism outlined above, not least because many countries have implemented decentralisation only partially, a key point at the core of Devarajan and Khemani's chapter in this volume.

Source: IMF Global Financial Statistics; OECD Fiscal Decentralisation Database. Notes: Blue bars show European (or European-influenced) liberal democracies.

One of the overarching conclusions of the fiscal federalism literature, which would appear to be obvious but is seldom acknowledged and perhaps insufficiently understood, is that decentralisation does not do away with the centre. The decentralisation literature often portrays key policy options as 'central versus local'. This is mainly a rhetorical device, and is very far from capturing what actually happens to fiscal flows and public authority in countries that decentralise. The reasons for this flow naturally from our discussion above. Decentralisation does not imply getting rid of one level of government in favour of another but rather an increasing 'complexification' of public service provision in the interest of greater responsiveness, higher quality, and greater economic efficiency (in addition to a number of potential second-order benefits discussed above).

Decentralising the provision of education, for example, does not imply that budgets and authority over schools are transferred wholesale to local governments. Rather, it implies a new system in which central, regional, and local governments coordinate and cooperate intimately to mobilise revenues, hire personnel, define curricula, build infrastructure, and supply and maintain schools for the benefit of local children. A decentralised education system is far more complex than a centralised one, and will always involve multiple levels of government. But it is more sensitive, better informed, and more robust, and should produce better results (Faguet 2004a; Faguet, Khan, and Kanth 2020; Faguet and Sánchez 2008; Faguet and Sánchez 2014; Khan, Faguet, and Ambel 2017).

#### **Conclusions**