How can you evaluate arguments for fiscal decentralization?

1 The benefits of fiscal decentralization

Fiscal decentralization can bring numerous advantages, such as increasing the efficiency and responsiveness of public services, by allowing local governments to tailor them to the preferences and needs of their citizens. It can also enhance the accountability and transparency of public finances, by making local governments more accountable to their voters and taxpayers. Additionally, it can stimulate local economic activity, create incentives for local revenue mobilization, and empower local communities and civil society. All of these benefits can help foster local development and participation.

3 The conditions for fiscal decentralization

The success or failure of fiscal decentralization is highly dependent on the institutional and economic conditions in which it is implemented. These conditions must include a clear and consistent legal and constitutional framework that defines the roles and responsibilities of different levels of government, as well as a fair and transparent intergovernmental fiscal system that allocates resources equitably and efficiently. Furthermore, a robust and diversified local revenue system should be established to allow local governments to raise funds from a variety of sources, such as property taxes, user fees, and local surcharges. Additionally, a strong and accountable local fiscal management system must be in place to ensure sound budgetary practices are followed, fiscal rules and standards are adhered to, and fiscal information is disclosed to the public and the central government. Finally, a supportive and cooperative central-local relationship should be developed to foster dialogue, coordination, and collaboration among different levels of government while respecting the autonomy of local governments.

4 The evidence on fiscal decentralization

The empirical evidence on the effects of fiscal decentralization is mixed and inconclusive, with different studies finding various results depending on the indicators, methods, and countries used. Generally, decentralization seems to have a positive impact on public service delivery for services that are more local in nature, such as education, health, and infrastructure. However, it can also have a negative impact on income distribution in countries with large regional disparities. Additionally, its effect on economic growth is neutral or ambiguous due to the trade-off between efficiency gains and coordination costs. Lastly, its impact on fiscal performance is complex and context-specific depending on the design and implementation of fiscal rules, transfers, and borrowing mechanisms.

5 The best practices for fiscal decentralization

Fiscal decentralization is not a one-size-fits-all approach, as different countries have different objectives, constraints, and opportunities. To achieve successful fiscal decentralization, some best practices include adopting a gradual and sequenced approach that matches the capacity and readiness of local governments; aligning the incentives and objectives of different levels of government; enhancing the participation and voice of local stakeholders; and strengthening the monitoring and evaluation of fiscal decentralization outcomes. Doing so will allow for learning, adaptation, and evidence-based feedback to inform policy decisions and reforms.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?