In academic circumstances I tend to argue that decentralization is one of the few areas of public affairs where good economics (public choice theory) and good politics (representative, responsive government) come together - at least in the context of theory. As a practitioner, however, reality tends to rear its disconcerting head(s).
Once we get past the handy "ffff - finance and functionaries follow functions" catch phase, the real challenges begin. In keeping with the overall theme of this Board I will try to organize the discussions through the Finance framework.
To get started, in practice we often find that two institutional actors who are most instinctively hostile to decentralization are the Ministry of Finance and Parliamentarians. Strange bedfellows. The Ministry of Finance worries about the potential chaos and loss of fiscal control as a result of having - as they tend to see it - a plethora of undisciplined and uncontrolled actors with access to an overstrained public purse. The Parliamentarians see competition and immenent rivals from local politicians who are close and accessible to their constituents on a daily basis and potentially in a position to deliver basic goods and services that impact these constituents everyday lives. As a consequence, both seek to limit the authority and resources at the local level to the maximum extent.
There are, of course, real design issues that have to be carefully addressed in every set of circumstances. Local advocates want as much unfettered resources as possible and comensurate authority to exploit these resources. In the ffff framework, functions are presumed to be the starting point. There may be a tendency during the early stages of the decentralization process to think of functions as they are presently exercised by the Central government. it is important to get over this tendency as soon as possible. Policy often stays at the center without much objections. However, there are good reasons to consider country size and circumstances in deciding on the level of service disaggregation. To make easy picks, for example, primary education and primary health care may make sense to manage at the local level under most circumstances, however, university education and sophisticated hospital care may not be feasible at the local level in relarively small countries.
Even when a service makes sense at the local level, there may be a case for ensuring that there are incentives for local governments to consider joint operations for some services. Water supply distribution may be a local responsibility, but it may be efficient for a group of local governments to jointly manage a contiguous watershed or to build, own and manage trunk infrastructure. Clearly, the design of financial arrangements need to take these possibilities into account. Investments frequently require borrowing, and herein lies sleepless nights for many Finance Ministry officials.
Should local governments be allowed to borrow, and if so, from whom, under what circumstances and under what rules? This is a substantially different concern to limited bridging financing that may be justified for routine cash flow purposes within an orderly, predictable, well managed budget process, but both types of borrowing can and have spiralled out of control in some circumstances. Raising local revenues should be an objective and responsibility of local governments, but what revenues, within what limits and how soon in the process? When thay have a track record of delivery or concommitant with assignment of functions? I should pause here and see if this is enough of a starting agenda to get a discussion going. We haven't even raised the issues of management, as yet ....
