Costs and Benefits of Decentralization SATI Workshop on Tax Policy and Administration, University of Pretoria, June 18-20, 2006

Choosing decentralization? Some countries are born decentralized Some choose to become decentralized And some have decentralization thrust upon them – for many diverse reasons But no matter why a country is (to some degree) decentralized, it has to work out just what decentralization means and how to do it.

What is Decentralization? Deconcentration – decentralizing the central administration Delegation – ‘contracting-out’ central policy implementation to local governments Devolution – letting local governments decide what to do and how to do it…within limits?

Modes of Decentralization Administrative decentralization – the centre decides, the regions and localities administer Political decentralization – sub-national governments decide Fiscal decentralization Done right: how to make political decentralization efficient and effective Done wrong: how to make a mess of things

Potential Benefits Efficiency gains The right services to the right people in the right amounts Creating incentives for growth ‘Laboratory’ for innovation More heads are better than fewer Learning from success…and failure Revenue mobilization – broaden the base? Political aspects Improve governance Restoring (or redressing) regional balance Helping to build (or rebuild, or hold together) a nation

Potential Costs Macroeconomic concerns Runaway deficits Unsustainable borrowing Equity concerns More local revenues increase regional imbalance Is local control helpful or harmful to the poor? Efficiency and effectiveness – can LG really do the job? Capacity – can LG really do the job? Critical infrastructure from a national perspective Corruption – more …or less? Political concerns – exit and loyalty

Striking the Balance Much discussion but little solid evidence Complex, multi-faceted issue Some general ‘lessons’ Make rules clear to all Finance follows function Need for financial control system Hard budget constraint - accountability Some local revenue flexibility Get intergovenmental transfers right Borrowing – keep an eye open for problems Asymmetry – the big, the small and those in-between Universal problems, local solutions Strategy, process (‘buy-in’), time…..

A Separate Question: Local Tax Administration Is it necessary? No. Economic and political accountability does not require local tax administration. Is it desirable? Possible informational and accountability advantages. If center does it, will LG see the money? Is it feasible? Constraints on local capacity. Consider splitting the task?

Dividing Tax Administration Central valuation and central collection Pakistan, France, Jamaica Central valuation and local collection U.K., Colombia Local valuation and central collection Tunisia, Slovenia Local valuation and local collection India, Mexico, U.S.

Property Tax Administration Who sets the rate? Who identifies the base? Who assesses properties? Who decides appeals? Who sends the bills? Who collects payments? Who enforces the tax? Who receives the revenue?

Some Questions for Discussion What role should LG have in taxation? In deciding what taxes to levy? In deciding what tax rate to impose? In identifying and assessing taxpayers? In billing and collecting taxes? If there is a separate LG tax office, what should its relations be with CG tax administration? None? Information sharing? Support and training? Division of labour?