1. Decentralization, Development and Public Sector Governance: Evolving Perspectives from Global Experience Shanghai National Accounting Institute 22-25 April 2014 Paul Smoke New York University Robert. F. Wagner Graduate School of Public Service

2. Overview I.Selected Decentralization Basics II. The Evidence: Does Decentralization Improve Development Outcomes? I!I. The General Challenge of Fiscal Decentralization in Global Perspective IV. Expanding the Scope: Factors that Need More Attention in Understanding and Bridging the Theory-Practice Gap V. Concluding Thoughts

3. I. Selected Decentralization Basics Decentralization has been a common and prominent aspect of public sector reform in recent decades; there has also been some recentralization, often because of poorly designed and/or implemented reform Motivated partly by the perceived inadequate impact of centralized approaches—decentralization, especially in larger urban areas, is seen as an important means to stimulate development and well being, potentially more so as countries enter middle-income status Rapid political, economic and technological changes have also driven the trend (origins differ in specific countries and historical trajectory is important) Decentralization intersects with domestic political agendas (fundamentally a political phenomenon)

4. Decentralization Goals and Forms Stated Goals of Decentralization (policies and laws): –Improved governance and accountability –More efficient/equitable resource allocation –Economic development/poverty reduction –Promoting stability/conflict resolution –Various relationships posited among these goals Forms of Decentralization –Deconcentration: sub-national institutions function primarily as agents of the central government –Delegation: center assigns specific functions to sub- national governments or nongovernmental institutions –Devolution: center devolves to (semi) autonomous sub-national entities a meaningful range of expenditure and revenue authorities and institutes local accountability structures

5. Dimensions of Decentralization –Administrative: institutional structures/procedures –Fiscal: service delivery and revenues (own-source, transfers and borrowing powers) –Political: decision-making and accountability mechanisms Main dimensions are necessarily linked: –Fiscal without administrative and political: funds without institutional and governance capacity –Administrative without fiscal and political: local responsibilities/autonomy without resources and governance structures –Political without administrative/fiscal: decision making without institutional and fiscal structures

6. Choice of Form/Degree/Timing Many systems mixed in form and with different combinations of dimensions (administrative, fiscal, political) sometimes different at different levels of government (intermediate, local, community) Appropriate form/degree depends on political/institutional circumstances of a particular country, nature of functions to be provided, and capacity; history is key Different starting points: –Strengthening existing local governments –Converting devolved administration to elected local government –Creating new local governments There are key principles for general consideration, but decentralization must be seen as a context-specific process (not a one time act) that can evolve over time and follow different trajectories

7. 7 System Design Elements I Enabling National Framework –Constitutional/legal/administrative (balancing central oversight with SN power/autonomy) Structural Features –Number of levels –Role: Administration or government –Degree of hierarchy/independence Fiscal Dimensions –Clear assignment of service functions/ revenues (some subnational autonomy) –Appropriate/sufficiently stable vertical share of resources –Appropriately structured shared taxes/transfers –Fiscal responsibility and borrowing framework and oversight

8. 8 System Design Elements II Political Dimensions –Elections and/or other types of accountability mechanisms –Transparency in subnational processes and decision –Sufficient autonomy to facilitate responsiveness to local citizens Administrative/Managerial Dimensions –Institutional relationships appropriately defined –Planning, budgeting & public financial management (PFM) systems and procedures –Civil service system (degree of local control) –Contractual framework for partnering with private sector/NGOs

9. The Landscape of Decentralisation

10. II. The Evidence: Does Decentralization Improve Development Outcomes? DEVELOPMENT OUTCOMES Service Delivery: Effectiveness, Efficiency, Equity Human Conditions and Livelihood: Average Improvements, Distribution of Improvements Governance: Participation and Inclusion, Transparency and Accountability, Resource Allocation, Conflict Reduction DEVELOPMENT OUTCOMES Service Delivery: Effectiveness, Efficiency, Equity Human Conditions and Livelihood: Average Improvements, Distribution of Improvements Governance: Participation and Inclusion, Transparency and Accountability, Resource Allocation, Conflict Reduction UNDERLYING FACTORS Context: Social, Political, Economic Institutional Design: General, Finance, Mechanisms for Transparency and Accountability Political Economy: Central, Central-Local and Local Dynamics Capacity: Local/Central Governments and Citizen UNDERLYING FACTORS Context: Social, Political, Economic Institutional Design: General, Finance, Mechanisms for Transparency and Accountability Political Economy: Central, Central-Local and Local Dynamics Capacity: Local/Central Governments and Citizen

11. Interpreting Available Evidence Empirical literature on the effects of decentralization is mixed and inconclusive –“Macro” literature (mostly quantitative) focuses on econometric study of broad trends (cross- or intra- national);great data challenges; general findings based on a few variables help little with crafting specific policies; often insufficiently deep analysis of factors underlying results: context, design details, processes, and political dynamics, etc. –“Micro” literature (mostly qualitative but more recent quantitative, e.g. randomized experiments) focuses on detailed cases; broader relevance unclear because of the great variety in context, conceptual frameworks (discipline based) and methods (collection/use of evidence)

12. Empirical Evidence “Conclusions” Given many constraints, detailed universal advice for improving decentralisation outcomes (beyond well known general principles) are not feasible Empirical work validates many expected relationships, but to varying degrees and only in certain conditions that vary across countries and over time Countries operate in diverse contexts with different initial objectives and conditions; reform measures and outcomes must be assessed in relative terms Quantitative and qualitative analysis have different advantages; the two are rarely used together, but this could often contribute to better policy analysis The key to improving outcomes is to learn from experience how to analyse decentralisation (prospects and performance) in a specific case more effectively

13. III. The General Challenge of Fiscal Decentralization in Global Perspective Fiscal decentralization has received considerable attention as a critical element of broader decentralization reforms in a wide range of countries around the world for decades Fiscal federalism and related literature provide well- defined principles for sharing fiscal functions and balancing central and local objectives Despite the reform momentum and a clear analytical framework for developing national policy, fiscal decentralization reform has too often failed to meet goals, needs or expectations, even where normative fiscal policy advice has (or seems to have) been followed

14. Some Basic Challenges Well Recognized Why this stubbornly persistent divide between theory/intent and practice? Technical design involves tradeoffs among principles, and institutional fragmentation can complicate use of core principles Economic realities (limited/narrow bases, poverty, etc.) constrain SN fiscal performance (less in urban areas) Lack of good information (and poor use of what exists) creates significant challenges Often fragmentation among IGF system elements, e.g. transfers create disincentives for local revenue generation Capacity constraints are often cited as key in limiting subnational governments fiscal performance A common explanation is that insufficient “political will” hinders good FD policy and practice

15. The Need to Look Beyond Traditional Fiscal Federalism is Understood Over time increasing recognition of the need to think beyond traditional concerns of fiscal federalism—sharing functions and revenues among levels of government General agreement on the need for a broader multi- dimensional constitutional/legal/administrative framework—not only the administrative and political factors outlined above, but also, for example, property rights that affect property tax policy/administration, legal provisions for local governance (beyond elections) and civil society protections that create space for citizen discipline of LGs, etc. Such factors can strongly affect performance and the accountability of UGs to their constituents in raising/spending resources

16. But Fundamental Weaknesses in the FF Approach Remain IGF design remains dominated by a fairly normative, narrow technical analytical framework infused with assumptions (explicit and implicit) Need for context specific analysis is recognized, but what is context? The typical notion is too narrow and mechanical, lacks nuance, and inadequately account for the integrated and complex nature of FG reforms Also limited analysis of why certain behaviors do or do not happen on the ground—explanations are typically simplified and proposed solutions technocratic and weak in effect—e.g. adopt state of the art PFM or independent revenue authority reforms—”the budget as theatre” The approach lacks a sense of pragmatic strategy and is often overwhelmed in practice by factors it fails to or only weakly considers

17. IV. Expanding the Scope: Factors that Need More Attention in Understanding and Bridging the Theory-Practice Gap A. National and Intergovernmental Political Economy Dynamics B. The Central Government Bureaucratic Environment C. Subnational Political and Institutional Dynamics and Accountability D. Capacity and Leadership E. Lack of Strategic Orientation and Implementation in Decentralization and Fiscal Reform Programs

18. A. National and Intergovernmental Political Economy Dynamics Fiscal decentralization has deep political as well as technical foundations, some taken up by Second Generation Fiscal Federalism literature The elementary PE of decentralization literature framed “political will” as a simplistic construct that presumes the commitment of a unified government to traditional decentralization goals and required supporting policies Politicians & bureaucrats support stronger LGs when it serves their interests! (i.e. electoral goals, security of tenure, career trajectories, support coalitions, etc.) Sometimes the true reasons some actors support decentralization have little or nothing to do with the normative fiscal or political justifications for it

19. National and Intergovernmental Political Economy Dynamics Even strong (or apparently strong) political commitment is not sufficient; robust constitutional/legal decentralization frameworks may be incompletely designed and implemented or even undermined them in practice due to political interference from legislatures Intergovernmental political dynamics: in some cases influential SN governments may demand empowerment or the center may seek to please or marginalize them Political economy conditions can change rapidly in competitive political environments or in emergency situations; powers can resources can be officially or unofficially decentralized or recentralized when an opposition party takes control or a new crisis emerges

20. B. The Central/Regional Government Bureaucratic Environment Most of the national responsibility for detailed design and implementation of decentralization falls to administrators rather than politicians Decentralization, both general and fiscal, often takes place in complex and “siloed” poorly coordinated national bureaucratic environments: –Local government oversight ministries (local government, interior, home affairs, etc.) –Ministries/bodies/commissions with a government-wide mandate: finance, planning, public service, etc. –Special purpose ministries: urban development, rural development, etc. –Sectoral ministries and special bodies involved in service delivery (education, health, transport, water, etc.).

21. The Central Government Bureaucratic Environment Higher level agencies may have different views of decentralization and their role in designing/managing it Individual agencies may fail to comply with mandates of decentralization if their power is reduced Some agencies (or departments in an agency) withhold support for LG empowerment efforts led by an agency seen as a rival or pursue conflicting policies Such conflicting behavior by higher level bodies can weaken subnational government autonomy and performance incentives International development agencies can reinforce such dynamics in aid dependent countries

22. C. Subnational Political and Institutional Dynamics and Accountability Fiscal system design usually involves three assumptions regarding local political behavior: –A well conceived overall system for local fiscal functions with an appropriate degree of upward accountability and incentives intended to reduce inappropriate behavior (patronage/clientelistic behavior) –Well designed local political mechanisms are in place and used to determine local preferences and to ensure downward accountability of subnational councils to their constituents –Local political bodies have appropriate horizontal accountability relationships with local administration How subnational governments use authority depends on the distribution/concentration of local political power—economic elites, ethnic/religious groups, specific political parties, labor unions, civil society movements, etc.– these shape the relationship between elected councilors and administrators and the resulting incentives faced by local politicians and bureaucrats

23. Urban Area Governance and Finance

24. Local Accountability Requirements/Mechanisms Credible elections are increasingly recognized to be an important but a blunt accountability instrument Other mechanisms can promote public knowledge of revenue details/use and alleviate political obstacles to local revenue generation by better linking to services: public consultation, information/education, participatory planning and budgeting, social auditing, etc. But such approaches can be pro forma and also subject to elite capture, corruption, weak capacity, etc. Effectiveness requires public awareness/interest/ capacity: Do local people know about/understand available mechanisms? Can they access them? Are they willing to use them or feel intimidated to do so? Critical role of horizontal accountability: local council relationships with local staff

25. The Broader Subnational Accountability Landscape Subnational governments may not be the only public sector actors in the local landscape Devolved systems of subnational government may exist in parallel with deconcentrated administrations, both with departments in the same sectors and jurisdictions without clearly distinguished responsibilities Other service delivery mechanisms with dedicated funding, e.g. constituency and community development funds, can further challenge the role of local government Willingness to engage LGs and pay local taxes is likely to be undermined if confused accountability channels leave citizens unsure of what to expect from local governments

26. D. Capacity and Leadership Although obvious at a general level, some empirical evidence suggests that capacity and leadership can be important forces in the outcomes realized by decentralized systems, including revenue generation There is not enough study of how and why these were built and if/how they may be replicable How capacity is built matters—comprehensive/ targeted, supply/demand driven, classroom/on-the-job Much capacity building remains supply driven and classroom based despite concerns about effectiveness Capacity is not only for governments (local and/or central): reforms need a capable civil society to work

27. E. Strategic Orientation/Implementation Challenges of underlying decentralization strategy and how reforms are implemented—often too quickly or slowly and with relative inattention to embedded political/institutional incentives that affect performance Growing interest in how to more strategically implement and sequence fiscal decentralization Fiscal decentralization reforms are often complex, contentious, and dependent on (1) a level of capacity that does not broadly exist; and (2) nontrivial behavioral changes that do not occur easily or rapidly or if they do may not be sustained Thus, implementation is as important as the design of decentralization and local revenue reforms

28. Implementation Strategy: The National Perspective National framework adoption approach: center sets the framework and assumes all actors/levels comply Heavily managed gradualist approach: central/state government manages each step and makes decisions Strategic asymmetric approach: overall reforms rolled out through use of, for example: consultative mechanisms; asymmetric treatment of subnational governments with different characteristics and capacities; negotiated reform trajectories, such that subnational governments share responsibility for agreeing to adopt specific reforms; and performance based approaches to create incentives for adopting reforms; after initial steps, more advanced reforms can be progressively undertaken Each approach has benefits and risks, but the first two have dominated and often failed to meet expectations Appropriate role for capacity building

29. Implementation Strategy: The Local Perspective Starting point: begin local reforms on a base of simple, manageable, and more politically acceptable and capacity appropriate reforms that maximize probability of success and begin to build a foundation for reform Raising awareness: appropriate use of citizen information and education campaigns Engaging citizens/voters/taxpayers: Appropriate (depending on local conditions) use of participation and oversight mechanisms, user committees, partnerships with nongovernmental actors, etc.; better linking revenue payments to service delivery Risks of local political capture of the strategy, but reformers can look for ways to be aware of and mitigate such risks

30. V. Concluding Thoughts from Global Experience Finance and governance are inextricably linked Factors beyond those typically considered influence how fiscal decentralization reforms are pursued and help explain the deviation between theory and practice National/state political dynamics are characterized by (sometimes shifting) incentives that may undermine fiscal decentralization even with a strong framework Diverse central/state agencies with competing perspectives are often able to pursue conflicting agendas (not uncommonly reinforced by international agencies in aid dependent countries) Complex local political realities can severely constrain the effective implementation of even an “optimally” designed intergovernmental fiscal system

31. Concluding Thoughts Capacity development is critical for CG, SNG and citizens—a known issue but less well managed All reforms involve some implementation plan, but there is growing recognition of insufficient attention to crafting implementation strategies that recognize and work with prevailing conditions and constraints, as well as create incentives for better performance These issues and needs—PE, bureaucratic dynamics, strategic capacity development and implementation, etc. are usually recognized to some extent but not well considered in framing and executing FD reform No approach can be comprehensive and deal with all of the challenges, but more can be done to understand broader realities and what they imply for productive, pragmatic, and strategic and sustainable reform

32. THANK YOU!