Delivering Public Services In Developing Countries: How The Poor Can Benefit From Decentralisation

02 Jan 2006

Many developing countries are experimenting with decentralisation of public service delivery to elected local governments instead of bureaucrats appointed by a central government. New research by Professors Pranab Bardhan and Dilip Mookherjee, published in the January 2006 issue of the Economic Journal, shows that this shift is
warranted, provided the new systems are accompanied by suitable mechanisms for financing local governments.

In particular, there is a need to restrict the fiscal autonomy of local governments to guard against the danger that they are used by elites to award themselves large increases in supply at the expense of the poor. The researchers note the many problems of accountability and corruption associated with traditional modes of public service delivery involving centralised bureaucracies. These include cost-padding, service diversion, limited responsiveness to local needs, limited access and high prices charged, especially to the poor.

Many developing countries have thus introduced initiatives to increase the accountability of service providers by providing greater control rights to citizen groups. These include decentralisation of service delivery to local governments, community participation, direct transfers to households and contracting out delivery to private providers and NGOs. The programmes include a wide range of infrastructure services – water, sanitation, electricity, telecommunications and roads – and social services – education, health and welfare programmes. And the countries where such trends have gathered momentum in the past two decades span different continents: Latin America (for example, Bolivia, Brazil, Colombia and Costa Rica), Africa (Ghana, South Africa and Uganda) and Asia (Bangladesh, India, Indonesia and Pakistan).

A concern expressed by many observers about these decentralisation experiments is that the functioning of local democracy in many developing countries is far from perfect. So there is the danger that local government leaders may be susceptible to ''capture'' by special interest groups, slacken effort to improve public services, or be incompetent, without facing any risk of losing their positions. In that case accountability, efficiency and equity in service delivery may worsen under decentralisation.

The choice between centralised and decentralised service delivery mechanisms then presents a stark choice between the dangers of bureaucratic corruption in the former, with poorly functioning local democracies in the latter.

This study provides an analytical framework to appraise conflicting claims about relative accountability under centralised and decentralised delivery mechanisms. It helps identify key parameters that determine the growth, equity and welfare impact of decentralisation of an infrastructural service such as water or electricity.]

An important insight that emerges is that the effect of a switch from centralisation to decentralisation depends on the mechanism by which service provision by local governments are financed. Three different financing arrangements for local governments are considered:
(i) complete fiscal autonomy, with unrestricted powers to impose local taxes;
(ii) local financing authority restricted to charging user fees for services delivered;
(iii) and zero fiscal autonomy, with local governments financed entirely by fiscal
grants from the central government.
A general prediction of the analysis is that decentralisation tends to expand service delivery levels when local governments are self-financing, and the effect is greater when they have greater fiscal autonomy. Moreover, decentralisation is associated with lower corruption as measured by bribes charged by government officials. These are consistent with findings of a number of cross-country empirical studies.

But the analysis cautions against hailing these as evidence of the superiority of decentralised arrangements. This is because indicators such as volume of services or bribes paid do not represent the entire story: they ignore the pattern of distribution of benefits and costs across rich and poor citizens.

Poor citizens may be rendered worse off as they bear the burden of a growing volume of services delivered to rich and powerful local citizens. Capture of local governments by these elites may also result in inefficiently large supplies to them at the expense of the poor, so the impact may be a reduction in both efficiency and equity.

Using correct indicators of social welfare, the analysis shows that user-fee financed decentralisation generally dominates both centralisation and decentralisation with unrestricted local fiscal autonomy. It is argued that user-fee financing has built-in safeguards against the dangers of local elite capture of decentralised programmes, so as to render them superior to centralised delivery systems.

''Decentralisation and Accountability in Infrastructure Delivery in Developing Countries'' by Pranab Bardhan and Dilip Mookherjee is published in the January 2006 issue of the Economic Journal. Pranab Bardhan is at the University of California, Berkeley. Dilip Mookherjee is at Boston University.

Dilip Mookherjee