GOVERNANCE GOVERNANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Decentralization, Multilevel Governance and Intergovernmental Relations: A Primer © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org. Some rights reserved. This work is a product of the staff of the World Bank with external contribution. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. Cover photo: Bosco Verticale, Milan (Pier Luigi Palazzi). Used under license (IStock 1300800302). >>> Contents Acknowledgments 5 Preface 6 1. Decentralization, multilevel governance and 7 intergovernmental relations: why and what? 1.1 Why decentralization? 7 1.2 Decentralization: Key concepts and definitions 9 1.3 Decentralization, multilevel governance, and 12 intergovernmental relations: An assessment framework 1.4 The evolving nature of decentralization as a public sector 16 reform 2. Placing country practices within a spectrum of 17 intergovernmental institutional and fiscal arrangements 2.1 Intergovernmental arrangements tend to evolve with the 17 state of development 2.2 A typology of intergovernmental (institutional and fiscal) 19 arrangements 2.3 Sequencing decentralization 22 >>> Contents 3. Understanding the political economy of 23 decentralization and intergovernmental relations 3.1 Why is understanding the political economy of 23 decentralization crucial? 3.2 Why is sound decentralization an unlikely reform? 25 3.3 Different political economy viewpoints on decentralization at 26 the local level 4. Promoting resilient, inclusive, sustainable and efficient 28 development in a multilevel public sector 4.1 Decentralization in a changing world 28 4.2 Political economy challenges faced by the World Bank and 30 other providers of external development assistance 4.3 Concluding thoughts 31 References 32 >>> Acknowledgments Manager: This Practice Note was prepared under the guidance of Tracey Lane (Practice Manager, EPSPA). Authors: The note was drafted by Jamie Boex, (Consultant, EPSPA), Tim Williamson (Sr. Public Sector Specialist and Global Lead, Subnational Governance, EPSPF); and Serdar Yilmaz (Lead Sector Specialist and Global Lead Subnational Governance, EEAG2). Peer Reviewers: Christine Owuor (Senior Public Sector Specialist, EAEG1) and Pedro Arizti (Senior Public Sector Specialist, EECG2). Editor: Richard Crabbe >>> Preface The role that decentralization plays in public sector management around the world is evolving rapidly. Whereas decentralization has traditionally been pursued in countries around the world as a governance reform to increase political competition and to bring the public sector closer to the people, multilevel governance reforms to strengthen subnational governance and intergovernmental relations are increasingly understood as critical in promoting inclusive service delivery, ensuring the efficient use of public finances, and achieving resilient and sustainable development. By its very nature, the analysis of decentralization—or multilevel governance and intergovernmental relations arrangements—is a complex and cross-cutting public policy topic. Ensuring the effective functioning of public sector across different levels of government – so that national policy objectives are achieved at the grassroots level – requires action for strengthening political, administrative, sectoral, and fiscal aspects of public sector management at the same time. Naturally, different stakeholders, often coming from different disciplines, different sectors, and different institutions, bring their own perspectives, insights, and language to the topic. The primary objective of this primer on decentralization, multilevel governance, and intergovernmental relations is to establish a common framework and to bring common vocabulary to the topic. The idea is to guide policy makers and policy analysts to systematically identify the strengths and weaknesses of a country’s approach(es) to decentralization, multilevel governance, and intergovernmental relations, and to leverage, whenever possible, a country’s intergovernmental systems to improve the effectiveness of the public sector’s performance in achieving results. This primer is primarily written to inform the perspective of World Bank Task Teams from different global practices working in a multilevel governance context. As stated earlier, pursuing inclusive and effective service delivery in a multilevel public sector requires bringing together stakeholders from across different government levels, understanding their various perspectives, and coming up with interventions and solutions that present win-win scenarios for all stakeholders involved. Therefore, this primer also offers a useful frame of reference for policy analysts, government officials, sector experts, and civil society actors involved in multilevel public sector reforms worldwide. With this context in mind, Section 1 provides an overview of the topic by identifying why countries pursue decentralization (Section 1.1); establishing a common vocabulary around the topic (Section 1.2); providing a conceptual framework for assessing decentralization and the effectiveness of the local public sector (Section 1.3); and acknowledging the context-specific nature of decentralization as a public sector reform (Section 1.4). Section 2 recognizes that decentralization is not a one-size-fits-all reform and provides an overview of global decentralization experiences by placing country practices within a spectrum of intergovernmental institutional and fiscal arrangements. Section 3 highlights the importance of understanding the political economy of decentralization and intergovernmental relations. Finally, Section 4 highlights some issues to consider for task teams seeking to promote resilient, inclusive, sustainable, and efficient development in the context of a decentralized multilevel governance system. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 1. >>> Decentralization, multi- level governance and intergovernmental relations: why and what? 1.1 Why decentralization? Decentralization, the transfer of authority, responsibility and resources over public function from the central government to local governments or other local entities, is one of the most significant public sector reforms pursued by countries around the world.1,2 Over the past 25 years, countries have pursued substantial decentralization reforms or reformed their intergovernmental fiscal architecture. Like any intervention, there are pros and cons to decentralization as a public sector reform. While the specific impetus for pursuing decentralization reforms varies from country to country, the motivation behind decentralization reforms is often derived from one or more of the following four arguments: ● Efficiency. A major motivation for decentralization is that centralization is likely to be inefficient. While central government organizations often possess greater institutional capacity than local government organizations, centralization as a system provides a rather inefficient one-size-fits-all approach to policy making, taxation, and public service delivery. Under the right circumstances, decentralization can improve the allocative (and technical) efficiency of the public sector by tailoring policies, taxes, and the provision of public services more closely to the preferences and needs of residents in different regions and localities. 1. Unless otherwise noted, when referring to government levels, this note will use the terms “local” and “subnational” interchangeably. When used in a more precise manner, local governments are often defined as governments at the lowest level(s) of the territorial-administrative hierarchy, whereas regional or state governments are frequently positioned as an intermediate territorial-administrative level. 2. The term, “central government,” refers to the national government in a unitary country or to the federal government in a federal country. The distinguishing feature of a federal country (compared to a unitary country) is that in a federal system some of the powers or rights of subnational governments are protected in the Constitution or Basic Law in a way that cannot be unilaterally undone by the national government. Other than this distinction, all concepts and principles related to decentralization apply equally to federal and unitary countries. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 ● Inclusiveness and responsiveness. Central elected local governments can enhance the effectiveness government inefficiencies tend to be aggravated by of the public sector as a mechanism for inclusive and the distance between the people and public sector responsive collective decision-making by shortening the decision-making, while decentralization tends brings “long” route of accountability between the public sector the public sector closer to the people. In particular, the and its constituents (Figure 1.1).3 establishment or increased reliance on democratically >>> Figure 1.1 .A framework of accountability relationships: centralization versus decentralization Panel A. A long route of accountability (centralization) Panel BA shorter accountability route (decentralization) Source: Prepared by authors based on WDR 2004. ● Restructuring of political economy forces, especially ● Sustainable development and improved public in fragile and (post-)conflict contexts. Decentralization service delivery. In countries around the world, many reforms involve changes in the vertical and horizontal of the pro-poor public services that are required to distribution of power and resources and therefore have achieve sustainable global development – education, the potential to restructure the political economy dynamics health services, access to clean water and sanitation, of a country. While political economy considerations are and others – are delivered at the local level. As such, relevant to decentralization reforms in every country, it is sustainable development interventions and service not uncommon for the restructuring of intergovernmental delivery have important, but often overlooked, local and relations to be a specific aspect of peacebuilding and state- intergovernmental dimensions. building in fragile and (post-)conflict countries. In these cases, decentralization reforms are pursued specifically A caveat should be placed upfront in any discussion of to increase political competition and encourage political decentralization and intergovernmental fiscal relations: while pluralism by creating subnational political space and by decentralization presents an opportunity to improve the reducing the political monopolization of the public sector efficiency of the public sector in a multilevel public sector by a ruling party.4 context by moving public sector decision-making closer to the people, the reform in no way guarantees greater 3. World Bank. 2004. WDR 2004: Making Services Work for Poor People. 4. As noted further below, however, decentralization reforms are a pendulum. As such, intergovernmental systems can also be restructured in order to increase the vertical power of the national ruling party or the national government as a whole based on political or political economy considerations. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 allocative and technical efficiency or greater accountability. its agencies to (a) field units of central government Decentralization is not a panacea by itself. Capacity ministries or agencies; (b) subordinate units or constraints, weak accountability relationships, and other public levels of government; (c) semi-autonomous public sector management challenges faced within the public sector authorities or corporations; (d) areawide, regional or are important factors that influence the outcome. At the same functional authorities; or (e) nongovernmental private time, however, it is unlikely that the weak frontline performance or voluntary organizations.” of the public sector in any country, regardless of its public sector structure, can be resolved without acknowledging the Although there are slight variations among Rondinelli’s important role of the country’s vertical or intergovernmental definitions of decentralization over the years, the core fiscal architecture and relations. concept of decentralization involves the transfer of authority, responsibility, and resources away from the central government and towards more localized actors. 1.2 Decentralization: Key concepts Forms and dimensions of decentralization. Professor and definitions Rondinelli’s definition implies that there are several different forms of decentralization, depending on the nature of the The literature on decentralization, fiscal federalism and local intended recipient of the authority or responsibility that is government finance has its foundations in works by political being decentralized, including: scientists and economists including Paul Samuelson (1954); Charles Tiebout (1956); Ursula Hicks (1961); James Buchanan ● Deconcentration. The transfer of authority, responsibility, (1965), Mancur Olson (1965), Wallace Oates (1972), and and resources from the central government to field Dennis Rondinelli (1981). Decentralization is an evolving administration of central government ministries or concept, however, and its role in public sector management agencies; in other words, assigning authority and and development is increasingly well-understood, including responsibility to local offices within the central bureaucracy. due to more recent efforts by scholars and policy practitioners including Roy Bahl and Richard Bird (2018); Barry Weingast ● Delegation. The transfer of authority, responsibility, and (2009); Paul Smoke (Smoke et al 2011; Smoke 2018); resources from the central government to semiautonomous Leonardo Romeo (1999; 2014), Jean-Paul Fauget (2014) and or quasi-public corporations, and the assignment of Dorothée Allain-Dupré (2018). delegated functions to nongovernment organizations that are ultimately still accountable to the center. Traditional definition of decentralization. Although there is no single consensus definition of decentralization, most ● Devolution. The transfer of authority, responsibility, and “traditional” definitions are derived from the definition posited resources from the central government to (elected) local by Dennis Rondinelli (1981; 1986; 1999), who defined governments. decentralization as In addition, decentralization can be segmented is by the nature “the transfer of authority and responsibility for public or type of power that is being decentralized, resulting in three functions from the central government to subordinate dimensions of decentralization: or quasi-independent government organizations or the private sector.” ● Political decentralization. The transfer of political authority and oversight responsibility from the central or in a more detailed manner as the government to citizens and/or their elected representatives at the local level is often associated with pluralistic politics “transfer of [authority and] responsibility for planning, and representative government. This is because it gives management, resource-raising and allocation and citizens, or their representatives, more influence in the other functions from the central government and formulation and implementation of policies—decisions EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 made with greater participation will be better informed and more relevant to diverse interests in society than those Inconsistent application of definitions and understanding made by national political authorities alone. of the concept. Unfortunately, the traditional definitions of decentralization are not universally understood or consistently ● Administrative decentralization. The transfer of applied, even within the academic literature. The inconsistent administrative authority and responsibility from the use of terminology tends to cause confusion and takes away central government to subordinate or quasi-independent from the consistency of Rondinelli’s definitions.5 subnational governments. This involves the transfer of administrative responsibility for the planning, financing, Perhaps the most common source of confusion is and management of certain public functions from the the interchangeable use by some the terms like central government and its agencies to subnational “decentralization” and “devolution.” Traditionally, discussions governments. of decentralization have tended to focus on devolution of political, administrative, and fiscal authority and establishing ● Fiscal decentralization. The transfer of fiscal authority political accountability linkages between citizens and local and responsibility as well as financial resources from the politicians. In that sense, the term decentralization is often central government to subordinate or quasi-independent but incorrectly equated to devolution. subnational governments. It is not unusual, for instance, for a Cabinet to approve a The need for balance between the different dimensions Decentralization Policy or law which spells out a series of of decentralization. While the three main dimensions of decentralization reforms empowering local governments decentralization can be considered in isolation in order to allow over a number of sectoral functions (i.e., devolution reforms), for more in-depth analysis, there are clear and strong inter- only for sectoral ministries to implement a series of “sectoral linkages between these different dimensions. The literature on decentralization” reforms by which the ministries empower multilevel governance suggests that public sector outcomes or their own lower-level administrations or frontline service results can be achieved by more centralized as well as by more delivery facilities through deconcentration or delegation.6 decentralized public sector arrangements, but that—regardless As these different types of decentralization reforms are of the extent of (de)centralization—public sector effectiveness very different in nature, it is critical to clearly specific the in a multilevel governance context requires that each of these type of decentralization to be pursued. Consistent use of three dimensions are (a) well-structured and internally coherent, the appropriate terms helps to ensure that everyone is on and (b) balanced with the other two dimensions (Boex and the same page when discussing a reform, particularly one Simatupang 2015; OECD 2019). For instance, in order for the of such a political nature. benefits of devolved public service delivery to materialize, local governments would need to be assigned a reasonable balance of political, administrative as well as fiscal powers. By contrast, assigning local governments with extensive fiscal powers and resources would be unlikely to achieve better service delivery outcomes in the absence of sufficient political accountability or decentralized administrative authority. 5. Two common inconsistencies in terminology are, first, to equate devolution and political decentralization, and second, to equate deconcentration and administrative decentralization (Boex 2012). While political decentralization is an important dimension of devolution (without which in would be impossible to have an effective devolved system), these two terms do not share the same meaning. Likewise, while administrative decentralization is an important dimension of deconcentration (without which in would be impossible to have an effective deconcentrated system), these two terms do not mean the same thing. 6. This was the case during the implementation of Nepal’s Local Self-Government Act (1999). Despite the fact that the legislation clearly empowered local government bodies over primary education, the Ministry of Education transferred responsibility for the operation of primary schools to facility-level school committees – while retaining authoritative decision-making and resource-distribution powers at the ministerial level – based on the argument that the school committees were “closer to the people” than the elected local governments. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 Box 1.1 What is a local government? Devolution is defined as the transfer of authority, responsibility, and resources from the central government to local governments. Thus, in order to have a clear understanding of the meaning of devolution, it is important to clearly define local governments as opposed to, for instance, deconcentrated local administration entities. Although there is no single consensus definition of local governments, they are often understood to be defined by these four characteristics: (a) separate legal entity or body corporate; (b) authoritative decision-making power over one or more public functions in a local jurisdiction—that is, with its own political leadership); (c) control over its own officers and staff; and (d) responsible for preparing and executing its own budget (WDR 2004; PEFA 2013). Local governments may be formed at one or more levels of territorial administration; have different legal status in urban versus rural areas; and go by different names in different countries—including local governments, local authorities, local councils, district governments, municipalities, and communes. Some countries recognize two types of local governments, general-purpose local governments or special-purpose local governments. Whereas general-purpose local governments have a broad range of functions or responsibilities, the special-purpose ones typically only have functional responsibility over a single function, such as water boards in the Netherlands or school districts in the United States. There is no absolute dividing line between what a local government is and what it is not. For instance, based on the characteristics defined above, not all entities traditionally accepted as local government adhere closely to all four characteristics.7 In other cases, depending on their adherence to the characteristics noted above, some types of local entities, such as local school committees, may be considered quasi-local government authorities. From decentralization to multilevel governance. During the of the new millennium. Within the global development second half of the twentieth century, decentralization (and community, attention shifted from the (largely politically driven) devolution) in particular, was a dominant public sector reform decentralization reforms of the 1990s towards a greater around the world, particularly in post-colonial developing sector focus based on the Millennium Development Goals countries in Africa and Asia. Similarly, decentralization was (MDGs). While major decentralization reforms continued to an important part of public sector reforms in former centrally be introduced in countries such as Kenya (2010) and Nepal planned economies and other authoritarian regimes that (2015), others such as the Russian Federation, and other sought to transition away from central planning and central countries in Central and Eastern Europe experienced a degree government dominance to more decentralized, market-based of re-centralization. economies. Use of the term, “democratic decentralization,” became especially common in the decade after the collapse of To some extent, the increased focused on development the Berlin Wall (Manor 1999; Crook and Manor 2000). Indeed, results – first under the MDGs, and now, under the Sustainable the twentieth century saw a string of decentralization reforms Development Goals (SDGs) – has been accompanied by a around the world focused on democratization, including major shift in tone when speaking about decentralization. Although decentralization reforms in the Philippines (1991), the Russian (democratic or political) decentralization was seen by some Federation (1993), South Africa (1993), and Indonesia (1999). as a goal in its own right, decentralization is increasingly understood as a means to an end, with the goal of greater Despite its continued importance as a major public sector public sector efficiency, a more inclusive and responsive reform, the momentum of decentralization reforms around public sector, greater political empowerment, or better service the world has waned somewhat during the first two decades delivery results. 7. For instance, municipalities in Afghanistan lack an elected mayor or council, but are nonetheless viewed as being local governments. In the Netherlands, while municipal councils are elected, mayors are appointed by the central government. In other countries, such as Botswana and Uganda, local governments lack an independent budget or control over their own officers and staff. In fact, it is quite common in many countries for local governments to be (largely) staffed by officers seconded by the central government. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 The World Development Report 2004, “Making Services In this context, the key underlying question is not necessarily Work for Poor People,” was an important inflection point in whether countries should decentralize or not, or even what the global policy debate surrounding decentralization. Prior model of decentralization should be followed, but rather that to this point, decentralization, or specifically, devolution, was public sector effectiveness requires practitioners to focus generally pursued as a governance-motivated reform, and the on identifying ways to improve capacity and coordination capacity of local government institutions was regarded as the among public stakeholders at different levels of government main binding constraint to successful devolution. WDR 2004 to increase the efficiency, equity, and sustainability of public articulated the more nuanced notion that decentralization spending in the context of a multilevel public sector (e.g., is a multilevel governance reform that has the potential to Charbit 2011; OECD 2019). improve public sector performance by shortening the “long route of accountability” between people, central government Emerging alternate definitions. In line with this evolving view of policy makers, and providers, but explicitly recognized that decentralization, Roy Bahl (2005) offered, by way of alternative decentralization is not a one-size-fits all solution. Instead, working definition for decentralization, that the concept entails in order to achieve the effective delivery of (pro-poor) “the empowerment of people by the empowerment of their public services in a multilevel public sector, simultaneous local governments.” This formulation was slightly generalized interventions would be required at three levels: empowering by Boex and Yilmaz (2010) to suggest that “decentralization is intergovernmental systems; effective, inclusive and responsive the empowerment of people through the empowerment of the local institutions; and an engaged civil society, citizenry, local public sector.” and private sector. The WDR (2004: 75) further explicitly acknowledged that under different stages of economic and These emerging alternate definitions should be seen as democratic development, resulting in different degrees of complements rather than as substitutes to Rondinelli’s original client empowerment, different approaches to decentralization definitions of decentralization. Whereas Rondinelli offered and localization would be appropriate. considerable detail on the “what” and “how,” the more recent definitions focus more on the “why” (empowerment), which The conceptual evolution in thinking about decentralization is a driving force not only behind today’s inclusive global was accompanied by an evolution in the terminology used Sustainable Development Agenda, but also fundamental to to discuss decentralization and intergovernmental relations. the World Bank’s desire to promote public sector performance. Whereas the terminology and definitions of decentralization are seen by some to imply a value-judgement that more decentralization is better, some global development actors 1.3 Decentralization, multilevel – including some UN agencies and United Cities and Local Governments (UCLG) – increasingly speak of “localization,” governance, and intergovernmental especially when it comes to the localized achievement of relations: An assessment framework the SDGs. Similarly, Boex (2012) adopted the more neutral terminology of the “local public sector,” while others consider As suggested by the discussion above, the analysis of the “territorial approach to local development” and “community- decentralization, multilevel governance, and intergovernmental led development” (Romeo 2014; THP). relations requires considering the effectiveness and inter- relationship between public sector stakeholders at different Researchers and practitioners also increasingly use the government levels. Furthermore, effective decentralized and/ term “multilevel governance” to refer to different aspects of or intergovernmental governance arrangements represent a intergovernmental (fiscal) relations, recognizing that public critical component in the efficient delivery of frontline services services are often co-produced by stakeholders at different and in achieving sustainable development results. As such, government levels, often simultaneously relying on different it is critical to place the different dimensions and elements of approaches to decentralization or localization, even within decentralization and intergovernmental relations in the larger the same sector. In turn, the effectiveness of subnational multilevel governance framework (Figure 1.2). governments is largely defined by the nature of multilevel governance arrangements and by the institutional background of the stakeholders at different government levels (Charbit 2011; Enderlein, Wälti and Zürn 2011). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 >>> Figure 1.2 A Traditional Framework for Assessing Decentralization, Intergovernmental Relations and the Local Public Sector Panel A: Dimensions of Panel B: Multilevel Panel C: Decentralization decentralization Governance systems assessment framework Source: Prepared by authors, based on World Bank (2008; 2009); Boex and Yilmaz (2010); and Boex et al (2015). The assessment framework for decentralization, bodies (central ministries, departments and agencies), which intergovernmental relations, and the local public sector sometimes collaborate towards a common purpose, while at presented above in Figure 1.2 combines two critical aspects other times (tacitly or actively) oppose each other.8 Likewise, of an effective system of intergovernmental relations. First, local governments are also not unified institutional entities: local decentralization has political, administrative and fiscal governments comprise of a number of different local political dimensions, which must be coordinated and balanced in order bodies or actors (the mayor, the council); local administrative for decentralization to be successful and effective (Panel A). actors or departments (chief administrative officer, chief Second, effective multigovernance systems require action planning officer, chief human resource officer, local sectoral and coordination across three levels, requiring empowering departments); and local financial actors (Finance Department, intergovernmental architecture and systems; efficient, Revenue Administration Unit, Internal Control Unit). inclusive and responsive local governments and/or other local institutions; and an engaged civil society, citizenry, and local In turn, each of the stakeholders at each level need three private sector (Panel B). The resulting assessment framework attributes in order to be effective across the spectrum of political, for decentralization, intergovernmental relations, and the local administrative, and fiscal decentralization and empowerment public sector is formed by a 3 X 3 matrix with 9 different cells, (World Bank 2008, 2009; Boex and Yilmaz 2010). First, each where each of these cells represents an integral part of an stakeholder needs the discretion and authority (the legal effective multilevel public sector. power and administrative discretion) to perform their functions or responsibilities. Second, stakeholders at each level need to Institutionally, each cell in this matrix corresponds to one or have the necessary organizational structure and systems in more different institutional stakeholders or actors at each place and the institutional capacity to perform their functions. level in the public sector. For instance, central government Third, accountability mechanisms need to be in place for is not a consolidated, institutional entity or actor, but rather, stakeholders at each level to be held accountable for their a constellation of different political, administrative, and fiscal performance. Furthermore, functioning arrangements for 8. For instance, Parliament, the Office of President or Prime Minister, and national political parties are key central-level political actors. The Ministry of Planning (or Planning Commission) and the Civil Service Department are key central-level administrative stakeholders or actors. The Ministry of Finance, the National Treasury (and/or the Accountant-General’s Officer), and the National Audit Office are key central-level finance stakeholders. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 inter- and intra-governmental coordination and cooperation level. This distinction is particularly relevant in places where are required across and between levels. frontline facilities have distinct de jure or de facto planning, budgeting, or administrative and managerial power. The analytical framework visualized in Figure 1.2 provides a general framework which may be fine-tuned to be suitable to Similarly, when the impact of decentralization or a specific country or sector context depending on the exact intergovernmental (fiscal) systems is discussed for one purpose or focus of intergovernmental fiscal analysis. For or more specific sectors, it might be useful to separate out instance, it may be useful to reflect the role of regional or decentralization concerns that apply to a single sector from intermediate level governments in the analytical framework. more general elements of administrative decentralization In other cases, it may be useful to divide the local government (such as the role of the Planning Commission or the Civil (or local administration) level into two distinct sublevels— Service Department) by adding a “sectoral decentralization the local government (administration) headquarters level as and empowerment” column in the diagram (see Figure 1.3). distinct from the frontline service delivery unit or local facility >>> Figure 1.3 An Expanded Framework for Assessing Decentralization, Intergovernmental Relations and the Local Public Sector Source: Prepared by authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 This allows for more detailed analysis of sector-specific preparation of a comprehensive overview of the different elements, as optimal sectoral arrangements may vary from stakeholders directly or indirectly involved in delivering sector to sector. This sectoral column can then allow a greater frontline public services. Such a public sector institutional focus on sector-specific subsystems, such as the formulation analysis should be done in such a way that allows policy and implementation of sectoral policies, plans and regulations; makers and policy analysts to not only consider the strengths sectoral HRM issues; and sector-specific supply chains; as and weaknesses of all stakeholders or public sector entities compared to administrative constraints outside the purview of involved, but also in a way that allows the team to identify the sector ministry. where the distribution of functions, powers, and resources—in addition to coordination among different stakeholders—may The framework presented in Figure 1.3 is largely conceptual form a binding constraint to effective and responsive service in nature. A first step applying this conceptual framework to delivery (Figure 1.4).9 a specific country and/or sector context would involve the >>> Figure 1.4 A multilevel governance stakeholder analysis 9. Please refer to the World Bank’s GovEnable documentation on decentralization and multi-level governance for more detailed guidance on how to operationalize related public institutional governance and expenditure reviews. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 1.4 The evolving nature of decentralization as a public sector reform What works in public sector reform is highly context dependent. Explicit evidence that one approach to decentralization or localization might be more effective than others in achieving development results is limited (Smoke et al, 2013). While decentralization is being pursued by countries around the world, decentralization processes and reforms of intergovernmental (fiscal) systems are not a linear process. Indeed, Wallace Oates (2005) suggests that “Contrasting forces, some leading to increased fiscal centralization and some to greater decentralization, are producing an ongoing restructuring of public sectors throughout the world.” From a technical viewpoint, public sector management reforms seek to improve public sector results by changing the way that governments work (World Bank 2012). Whereas most public sector reforms are initiated upstream by core central ministries, it is downstream where the public sector delivers outputs that directly matter to citizens and firms. As such, sustainable decentralization reforms require that thousands of public agents alter their behavior. A final takeaway is that during the design and implementation of major decentralization reforms, or in the subsequent fine-tuning of intergovernmental relations, political and institutional incentives may be at odds with improving public sector performance. It is not unusual for central government politicians and bureaucrats to support the concept of decentralization during the policy formulation stage only to oppose its implementation when the reforms threaten to limit their own political, financial, or institutional powers. As such, understanding the wider context of decentralization reforms, including its political, administrative, and fiscal dimensions, through a political economy lens is critical to understanding the real-world opportunities and potential limitations to a more decentralized public sector. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 2. >>> Placing country practices within a spectrum of intergovernmental institutional and fiscal arrangements Based on the general context provided by the different dimensions of decentralization or intergovernmental relations, the first step is to conduct an analysis to identify the exact nature of the multilevel public sector in the country. This can be done formally as part of exercise such as a Public Expenditure and Institutional Review (PEIR), a Decentralization Policy Review, or as part of a design process of a lending operation. 2.1 Intergovernmental arrangements tend to evolve with the state of development In some countries, decentralization reforms and the restructuring of intergovernmental arrangements are gradual processes that take years or even decades to complete, as in Ghana and Zambia, for example. In other countries, including Indonesia, Kenya, and Nepal, intergovernmental arrangements are completely changed from one year to the next (or in a few short years) following a “big bang” approach. Although decentralization and localization are not linear processes and each country’s decentralization trajectory is unique, it is useful to consider that the general nature and composition of intergovernmental institutional and fiscal arrangements tends to evolve over time and with a country’s state of development – or over time, with the level of urbanization – from a more centralized public sector to more a decentralized public sector governance system (Figure 2.1). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 Three specific institutional reforms and trends tend to capture hierarchical (top-down) and bureaucratic administrative the changing nature of decentralized or intergovernmental entities, which leave little or no decision-making arrangements over time: space for officials at lower levels of the administrative hierarchy. As a country moves along the development ● Decentralization and modernization within the central spectrum, central government administrators tend to public sector. First, within the central public sector, the adopt more results-oriented and collaborative public nature and balance of centralization versus localization administration approaches, and thus, start seeing tends to evolve along the development spectrum. In local level administrators and/or local governments as less developed, low-income country contexts, central potential partners within the public sector, rather than as government administrations tend to function as traditional, competitors for scarce resources. >>> Figure 2.1 Intergovernmental arrangements tend to evolve with the state of development Source: Authors. ● The nature of devolved institutions and finances in a consistent or linear manner. While local institutional tends to be associated with where countries are capacity is not just a function of overall development on the development spectrum. Second, to the extent progress, the administrative and governance capacity of that the public sector relies on elected subnational local governments tends to improve over time and with governments, the nature of devolved institutions and development progress. Similar to the central level, in devolved finance tends to evolve as countries move along low-income countries and low-empowerment contexts, the development spectrum albeit again, not necessarily local government administrations tend to function as EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 hierarchical, rule-based, and bureaucratic administrative 2.2 A typology of intergovernmental entities. In this kind of less developed context, public participation and bottom-up accountability is hard to (institutional and fiscal) achieve (Collier 2010). By contrast, in higher income arrangements countries and empowered intergovernmental contexts, local governments aim to function as collaborative, No two countries are exactly alike when it comes to the high-performing organizations which are capable of nature of their state of intergovernmental arrangements. proactively identifying and responding to the needs of Additionally, there is nothing automatic about the evolution local constituents. of intergovernmental arrangements as economic and social development takes place in a country. Nonetheless, it might be ● The shifting balance between centralized and devolved useful to specify six different generic types of decentralization institutions and expenditures. Third, as a country’s state and localization that reflect a “typical” state of institutional and of development evolves, the balance between different fiscal arrangements or expenditure approaches along the modalities of decentralization and localization tends to intergovernmental spectrum (Figure 2.2). shift from central government institutions towards greater reliance on devolved institutions, such as regional and The generic typology in Figure 2.2 presents six “textbook” local governments, and devolved financing mechanisms. types of intergovernmental arrangements. From a highly centralized institutional and fiscal system, where the While these three general decentralization trends tend to central government is paramount and the public sector’s take place as a country’s state of development evolves, the budgetary resources are fully contained in the budget of the three different trajectories of decentralization and localization central government without any further decentralization or do not necessarily evolve at the same speed. For instance, localization, arrangements can evolve to more decentralized devolution in any specific country may tend to progress or localized institutional and fiscal approaches. These more or less rapidly compared to the extent to which the approaches typically form intermediate steps on a long-term public sector is effectively deconcentrating. Considerations trajectory from more centralized to more decentralized public regarding the sequencing of decentralization reforms are sector institutions and expenditures. As suggested by the explored further below. typology, it is often the case that within a country, there is a simultaneous (and often messy) mix of central implementation, In addition, before getting into further detail, it is important to delegation, deconcentration, and decentralization happening recognize that it is not necessarily every country’s ambition all at once across and even within sectors, types, and levels to adopt a highly devolved public sector structure. Although of subnational government. there are certain benefits uniquely tied to democratic decentralization, devolution is merely one way to deal with the pressures on the public sector brought about by social and economic complexity. At the same time, because this analysis is partial to the fiscal features of decentralization, there might be important political or societal forces that provide a counterweight to demands for devolution. For instance, it is understandable for central officials to resist pressures to decentralize (by devolution) if this reform is expected to promote societal fragmentation and promote centrifugal forces (Brancati 2009). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 >>> Figure 2.2 A typology of intergovernmental institutional and fiscal arrangements Source: Authors. At the lowest state of development, when the central public may be coupled with delegation of service delivery functions sector has an extremely limited capacity – for instance, in an to dedicated service delivery authorities. For instance, in immediate post-conflict scenario – the public sector tends to Afghanistan, the National Solidary Program introduced organize itself in a highly centralized manner in order to use its Community Development Councils (CDCs) in 2003 in order to scarce human and financial resources as efficiently as possible. bring the public sector closer to the people (World Bank 2015). This was the case in post-conflict Sierra Leone, prior to the adoption of Local Government Act of 2004. Very few countries, if In turn, each next step in the typology resolves a common any, permanently remain in this state of complete centralization. (binding) constraint in the preceding intergovernmental arrangement as countries tend to move towards a more Despite some theoretical advantages to centralized governance decentralized and localized public sector as social and and administration, highly centralized and concentrated public economic conditions evolve with the overall level of sectors tend to have major challenges in effectively localizing development.10 For example, there tends to be a somewhat public services and achieving community engagement. Under natural progression in the nature and organization of the such conditions, a first step in improving public services and central public sector over time, where at each stage of increasing the legitimacy of state institutions can be achieved decentralization, the public sector tries to resolve the main through the development of an effective field administration, binding constraint of the previous one. so, the sector evolves along with the introduction of vertical sector programs and from a fully centralized institutional and fiscal structure to community-driven development (CDD) interventions. These administrative deconcentration, to vertical (sectoral) budgetary 10. Although it is difficult to precisely match real-world public sector systems to these textbook decentralization types, Bangladesh and Cambodia might serve as examples of limited decentralization (Type III); Mozambique might offer an example of partial devolution (Type IV); Indonesia, Kenya, Nepal are examples of full devolution (Type V), while Denmark might offer an example of an inclusive and responsive multilevel public sector (Type VI). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 deconcentration, and eventually, horizontal (territorial) the decentralization or localization reforms. For instance, deconcentration.11 In turn, a well-functioning system of in recent years, both Kenya and Nepal started their horizontal deconcentration is often considered a precondition constitutionally-driven devolution reforms with subnational for effective devolution (Bahl and Martinez-Vazquez 2006). government entities that were created de novo rather than relying on preexisting territorial-administrative jurisdictions. Similarly, the nature and level of spending of devolved local This meant that they had to “build the car while driving it”—that governments tends to be associated with where countries are is, build the institutional capacity of subnational governments on the development spectrum; in low-capacity development from scratch at the same time as functional responsibilities contexts, devolution efforts tend to focus on community-level were transferred. The decentralization process in these local jurisdictions, such as communes or villages, and often countries posed significantly greater challenges and risks to involve a limited set of functional responsibilities. As the service delivery outcomes when compared to more sequential institutional potential of local governments tends to grow along reforms. For example, the district-level local government with the state of development, local governments in more organizations empowered by the “big bang” decentralization advanced development contexts are able to incrementally take reforms in Indonesia in 2001 built on previously established on a more prominent role in public infrastructure development (territorially deconcentrated) district administration units. This and service delivery. meant that despite a considerable change in the local political system, the basic management of local administration and While it is possible to “jump” one or more stages of the local service delivery continued largely uninterrupted. decentralization process, doing so does typically complicate Box 2.1 Different types of deconcentration In countries that do not have elected local government levels, the local public sector is typically formed by “deconcentrated” subnational line departments or subnational territorial units of the national government, which form a hierarchical, administrative tier of the higher-level government. In these countries, these deconcentrated subnational administrative units are generally assigned the responsibility for delivering key government services such as education and health services within their respective geographic jurisdictions. As such, in a deconcentrated system, the provincial education department or the district education office (for instance) might be a suborganization of the national Ministry of Education, rather than reporting to any elected local council. Even in countries that do have elected local governments, some or most public services may be delivered through deconcentrated administration units. Because deconcentrated departments or jurisdictions are merely a hierarchical part of the next-higher government level, unlike local governments, deconcentrated units are not corporate bodies. Nor do deconcentrated jurisdictions have their own budgets; instead, their budgets are typically designated as suborganizations within the budget of the higher government level. In deconcentrated systems, “local” government officials are an integral part of the national public service, and local executives, such as regional or district governors, as well as local department heads, are generally appointed by the central government. In some countries, central line ministries are organized administratively or organizationally in a deconcentrated manner, while the deconcentrated entities are not recognized as separate budget entities in the country’s budget structure. This is generally known as administrative deconcentration. In contrast, budgetary deconcentration can be defined as a situation in which deconcentrated entities (i) form an organizational part of the national (state) administration; (ii) deliver public services or perform its functions in accordance with a territorial mandate; and (iii) constitute a formal budgetary entity in the Chart of Accounts (along the organizational dimension of the budget). In addition, it may be helpful to further divide deconcentrated public sector structures – or deconcentration of budget structures – into two different types of 11. Administrative deconcentration without corresponding budget deconcentration (i.e., relying on deconcentrated field offices without giving them some degree of resource autonomy) tends to result in vertical imbalances between human resources and finances within the government administration. This constraint can most easily be re- solved by introducing budgetary deconcentration within each sector ministry budget. However, because under a vertical or sectoral approach to deconcentration, each line ministry operates ‘vertically’ in a deconcentrated manner, this approach typically does not allow for much—if any—harmonization of planning and budgeting across sectors at the provincial or district level. In turn, this challenge can be resolved at the appropriate time by shifting from vertical (sectoral) deconcentration to horizontal or territorial deconcentration. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 deconcentration: vertical or sectoral deconcentration versus horizontal or territorial deconcentration. The hallmark of a vertical (or sectoral) deconcentrated structure is that line ministry budgets are organizationally distributed across different government levels or tiers, so that subnational (provincial or district) line departments service as separate suborganizations and cost centers within their line ministry budgets. From an institutional and budgetary viewpoint, this means that every line ministry follows a “silo-structure” or a “stove pipe” from the central level down to the province level, and possibly to district level. Vertical deconcentration allows line ministries a strong role in planning and implementing sectoral services. Under a horizontal (or territorial) deconcentrated budget structure, subnational line departments are not included in the budget under their parent ministries. Instead, subnational revenues and expenditures are included in the central budget and aggregated into territorial units, which are then broken down into subnational departments. As a result, under horizontal (or territorial) deconcentration, sectoral departments at each administrative level are administratively subordinate (for example) to the Provincial Governor or to the District Governor, respectively. As such, under horizontal deconcentration, the subnational budget reflects the aggregation of spending decisions made by the center to be executed within the subnational jurisdiction. However, since the subnational spending is no longer contained with the budget votes of individual line ministries, subnational officials are better able to coordinate their efforts across sectors and may have greater discretion over subnational expenditures in order to respond better to local priorities. Source: Authors. 2.3 Sequencing decentralization In reality, decentralization reforms are seldom sequenced in a linear fashion, with forward progress often achieved Although Figures 2.1 and 2.2 are highly stylized, and each when windows of opportunity for reform arise. There may be individual country determines its own objectives, path, and significant variances between the decentralization policies and destination when it comes to decentralization and localization legislation passed and their interpretation and implementation reforms, this typology provides useful guidance with respect to on the ground. Therefore, sometimes countries take two the gradual improvement of subnational and intergovernmental steps forward and one step back, while at other times taking institutions and (fiscal) management, as in reality, only a few one step forward and two steps back. Furthermore, while the countries (if any) transition from a complete centralized system long arc of multilevel governance bends towards devolution to a fully inclusive, responsive devolved public sector system as development progresses, the arc is long and, at any given in a single step. point in time, does not necessarily always point towards greater devolution. Instead, in the short term, the direction Instead, over the course of decades (or longer), countries may and nature of intergovernmental reforms is often dictated not adjust their intergovernmental systems to prevailing political, by what might be technically optimal, but by what is feasible economic and social conditions, often in an iterative manner. given the political realities of the time. Bahl and Martinez-Vazquez (2006) describe a normative approach to sequencing decentralization, containing a sequence of six steps, including: Step 1 - carry out a national debate on the issues related to decentralization policy; Step 2 - do the policy design and develop a White Paper; Step 3 - pass the Decentralization Law; Step 4 - develop the implementing regulations; Step 5 - implement the decentralization program; and Step 6 - monitor, evaluate, and retrofit. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 3. >>> Understanding the political economy of decentralization and intergovernmental relations Given that the direction of intergovernmental reforms is often dictated by political realities, the design and evolution of decentralization, or a country’s intergovernmental architecture, should not only be considered through a technical lens, but should also be understood in the context of the political economy forces that help define it. 3.1 Why is understanding the political economy of decentralization crucial?t Political economy relates to the prevailing political and economic processes in society by taking account of the incentives, relationships, distribution, and contestation of power between different groups and individuals (GSDRC 2014). The interaction between these forces generates particular policy outcomes that may encourage or hinder development (DFID 2009). Formal institutions – such as the rule of law, elections, and intergovernmental systems – and informal social, political, and cultural norms play key roles in shaping human interaction and political and economic competition. Decentralization reforms—as well as other public sector reforms—are not just technical processes to be decided by technocrats, but rather, reflect a political or institutional contestation of power between different groups and individuals across and within different government levels. They can restructure the local political setting, reshaping local actor and voter incentives in many ways, such as changing the size of municipalities, reformulating local electoral legislation, and redefining formal relationships between the representative and executive bodies (Keating, 1995). They can also change the structure of legislative bodies, the balance between elected EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 local authorities and local executives and administrators, the decentralization—as well as each other element of an effective way councils are elected, the way executives are elected or intergovernmental system—is not only related to other pillars of appointed, and the structures for local legislative and executive fiscal decentralization in terms of design and implementation, bodies to relate to citizens. but also to the other dimensions, such as political and administrative, of an effective intergovernmental system. Taking time to understand the political economy of decentralization reform is particularly useful for development Often problems in one dimension of decentralization or at one practitioners since it helps consider the drivers of political and government level are merely symptoms of more widespread institutional behavior, forces us to reflect on who the main systematic obstacles or failures. Weak service delivery is a “winners” and “losers” are within public sector systems, and symptom that is commonly identified in discussions on local how incentives and institutional relationships shapes the governance, decentralization, and localization as being a major design and implementation (or the lack of implementation) of problem at the local level. Similarly, weak local administration particular policies and programs (ODI 2009). In turn, this allows or weak local public financial management might be singled out us to evaluate and design better policy solutions by ruling out as challenges to be addressed. More often than not, however, reforms that are politically or institutionally not viable, and by these problems are merely the symptoms of problems in addressing, fine-tuning or working around processes where the political or administrative sphere. Without considering political and institutional motivations or incentives get in the the political economy context, the policy response would way of public sector efficiency. be to treat the issue narrowly as a technical problem, which would be inappropriate and ineffective. In some cases, fiscal Why is it important to consider political economy drivers across instruments—especially intergovernmental fiscal transfers— different dimensions of decentralization? Intergovernmental can be leveraged to improve constraints in the political and systems are highly interlinked. For instance, each pillar of fiscal administrative dimensions of intergovernmental relations. Box 3.1 The political economy of subnational government structures In addition to the influence of political economy forces on the design of the political, administrative, sectoral, and fiscal aspects of multilevel governance and intergovernmental relations, political economy forces often have a direct impact on the underlying intergovernmental architecture—that is, the number of subnational government levels, the number and size of governments at each level, their functional responsibilities, and the degree of their control over financial and human resources. It is not unusual for decentralization reforms to devolve powers to a lower government level for political reasons to circumvent possible political capture at a higher level. For example, Indonesia, during its “big bang” decentralization reforms, shifted powers and functions to the local government level in order to avoid potential centrifugal forces at the provincial level. Similar political economy forces helped to inform the post-conflict transition of state structures in Mozambique (preventing opposition capture of provincial governments), the nature of decentralization reforms during the Musharraf era in Pakistan (bypassing provincial structures in favor of the Tehsil and Zila), and the fragmented local government structure under the new federal system in Nepal. Another challenge common across many countries is that central government powerholders have a tendency to promote the creation of new local governments as a way of dispensing favor to different local jurisdictions. Uganda is a frequently cited example in this regard (Awortwi and Helmsing 2014). While this practice strengthens the central executive’s influence over subnational actors, the result is often an inefficient and excessively fragmented local government structure. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 A third political economy dynamic related to subnational government structures is the practice of politically ring-fencing the power of larger urban areas. In the United States, this phenomenon is known as “red states, blue cities,” and has been identified as an important factor in the state-level preemption of local government powers in many U.S. States (NLC 2018). Given that urban areas tend to be the springboard for opposition parties and politicians, it is not unusual for ruling political parties to be sensitive to preventing such subnational political space from emerging. There are examples to show that it is not unusual for larger city corporations to be assigned fewer functional powers than smaller municipalities (Bangladesh), redefining jurisdictional boundaries or breaking up the capital city into multiple jurisdictions (Tanzania), or placing the national capital—in part or in whole—under the purview of a Capital Authority rather than an elected body (Kampala). 3.2 Why is sound decentralization an unlikely reform? ● The extent of political decentralization may be limited, or local governments may not be meaningfully empowered Despite the many potential benefits of decentralization, over functional responsibilities. For instance, the the stakeholders most responsible for championing Constitution or Decentralization Law may be approved by decentralization reforms—elected national politicians and parliament but, in reality, not meaningfully implemented, national-level bureaucrats—often face diverse incentives to or there may be extensive conflicts between the pursue, to appear to pursue, and even to limit decentralization decentralization law and sectoral laws as to the actual reform (Eaton, Kaiser and Smoke 2011). role of local governments in key sectors. In other cases, elected local bodies may be introduced without being Decentralization, when implemented under the right given authoritative decision-making power, so that local circumstances, in a careful and balanced manner, has the plans and decisions may still need to be approved by the potential for long-term benefits to the country as a whole. But, central government, and can still be arbitrarily changed by in the short-run, it requires different national-level ministries higher-level officials. to give up some of their power and control over resources. For analytical purposes, it is useful to distinguish between the ● The decentralization of administrative powers may be motivations facing elected politicians at the central government limited. Similarly, despite functional assignments in the level, and the motivations and incentives being faced by constitution or legal framework, sector ministries may, appointed central bureaucrats tasked with representing in practice, retain effective control over key sectoral specific government departments or units. Politicians have functions. In fact, it is not uncommon for higher-level to deal with electoral, partisan, institutional, and coalitional governments to have full (or nearly full) control over local incentives and constraints; bureaucrats are primarily government staff that is responsible for the delivery of concerned about advancing narrower institutional powers and legally devolved local public services as pertains in India, interests; improving career trajectories for themselves and Sierra Leone, and Tanzania. their teams; and preventing rival agencies from interfering in their responsibilities, powers and resources. ● Even in places where political and administrative powers and functions have been devolved, central authorities Despite the long-term benefits, then, why would elected political can retain substantial control over the local public sector leaders and national-level bureaucrats pursue decentralization simply by failing to decentralize adequate fiscal powers reforms if this means giving up power and control? Indeed, in and resources. Starved of financial resources, the central practice, we often see that central government stakeholders government can introduce highly earmarked grants to are not fully committed to decentralization: micro-manage local decision-making, or simply declare EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 local governments incapable of delivering services and 3.3 Different political economy allow sector ministries to retain or retrench the de facto responsibility for front-line service delivery. This de facto viewpoints on decentralization at the degree of control can vary significantly from sector to sector. local level Furthermore, within the central government, different Local governments, like their higher-level counterparts, are stakeholders may have different motivations and concerns not a monolithic entity. As such, local governments should be in supporting decentralization reforms. In fact, rather than understood as political bodies with complex internal workings: as champions for decentralization, Bahl (1999) considers while working together, the motivations and incentives acting most central government ministries as potentially weak on the mayor or executive; the council or assembly; the local or ambivalent supporters of decentralization reforms. For administrative officers; local department heads; and local instance, as the steward of a country’s finances, the main front-line staff are all likely to differ slightly depending on their concerns of the Ministry of Finance include fiduciary control, location in the organization. macro-fiscal stability, and efficient public resource utilization. As such, the Finance Ministry might propose strict limits to It is again useful to distinguish between the motivations decentralization in order to hold on to the main fiscal tools for facing elected local politicians—who are facing electoral, stabilization policy purposes. Likewise, central line ministries party-political, and other incentives and constraints (both may only weakly support decentralization, unless they are locally and from above)—and the motivations and incentives assured substantial control of the standards of local public faced by appointed local bureaucrats and administrators— service delivery, including direct or indirect power over local who may be more interested in advancing a more limited staff or front-line service delivery decisions. In fact, even agenda (consolidating institutional or personal power, the Ministry of Local Government is often only seen as an improving career trajectories, and checking rival agencies) ambivalent supporter of decentralization reform. While the than with the overarching mission and vision of the local or ministry would generally favor greater functional powers and a regional government. greater guaranteed share of resources for local governments, it would often like to ensure top-down oversight by the It is important in political economy analysis to set value Ministry over local government activities, while controlling the judgements aside. While we would like to believe that a mayor distribution of those resources to the local level itself. should care about clean water and sanitation as a human right for her constituents, the real question is: Is she able to care It was noted earlier in this document that in order to reap about such long-term sectoral investments when faced with the benefit from decentralization, the intergovernmental competing demands over scarce resources, including demands architecture should balance authority and accountability from her political party headquarters, or incentives to spend across the political (or governance), administrative, and available resources on projects that have a more immediate fiscal aspects of decentralization. From a political economy impact of the livelihoods of her constituents, and thus help angle, however, Eaton and Schroeder (2010) suggest that it secure re-election? Likewise, we know that as professionals, is not unusual for central government stakeholders to give teachers and medical workers should be committed to effectively the appearance of pursuing decentralization, while in reality providing public services to their students and patients, but clinging to power in at least some dimension of decentralization. it is nonetheless important to explore what incentives and This allows the central government to appear as a champion institutional constraints cause the absenteeism and weak local of decentralization, while effectively maintaining power service delivery performance at the front line in education and over the local public sector by its control over the political, health identified in so many countries. administrative, or fiscal levers (Boex and Yilmaz 2010; Boex and Simatupang 2015). In fact, the incentive being faced by local stakeholders— including local politicians, local administrators, as well as citizens and local civil society actors—is likely to be highly context specific. For instance, a big city mayor may be a EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 champion of decentralization, but will mainly be interested positive light, but—lacking a strong economic base—is likely in more own source revenue instruments. By contrast, a to be interested in receiving more unconditional equalization chairman of a rural district may see decentralization in a grants (Bahl 1999).12 Box 3.2 Background and resources on (general) political economy analysis of decentralization ● Implementation Rules for Fiscal Decentralization (Roy Bahl): World Bank, 1999. ● Making Decentralization Work: Democracy, Development, and Security (Ed Connerley, Kent Eaton, and Paul Smoke, eds.): Lynne Rienner, 2010. ● The Political Economy of Decentralization Reforms: Implications for Aid Effectiveness (Kent Eaton, Kai- Alexander Kaiser, Paul J. Smoke): World Bank, 2011. ● A Comparative Overview of Local Governance Systems in Selected Countries (Jamie Boex and Renata Simatupang 2015): Local Public Sector Initiative, 2015. ● The Technical Is Political - Why Understanding the Political Implications of Technical Characteristics Can Help Improve Service Delivery (Daniel Harris, Claire Mcloughlin and Leni Wild): ODI, 2013. 12. Similarly, the willingness of citizens or civil society to be part of local participatory processes will depend on the effectiveness of vertical or intergovernmental mecha- nisms. Anecdotal evidence suggests that citizens and community leaders may not care to be involved in local planning or oversight activities—for instance, as part of health facility committees or as part of user committees—if local officials have no meaningful discretion to improve frontline services. In these cases, such committee may exist and function on paper only. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 4. >>> Promoting resilient, inclusive, sustainable, and efficient development in a multilevel public sector As noted at the beginning of this document, the main objective of this overview of decentralization and intergovernmental relations is to enable policy practitioners and policy analysts—such as World Bank task teams and their counterparts)—to systematically identify the strengths and weaknesses of a country’s approach(es) to decentralization and to leverage, whenever possible, a country’s intergovernmental systems in order to promote resilient, inclusive, sustainable, and efficient development in the context of the multilevel public sector. In addition to the technical and political economy perspectives provided on the topic in the previous sections, it is useful to address two relevant issues related to the implementation of decentralization reforms in the real world. First, it is important to recognize that the global context within which decentralization and localization reforms are understood is changing quite rapidly. Second, it is important to give thought to the specific political economy dynamics and challenges faced by the World Bank and other providers of external development assistance when operating and seeking to promote decentralized development outcomes in a multilevel public sector. 4.1 Decentralization in a changing world Although the understanding of decentralization has evolved over time, the basics of decentralization have not changed all that much in the past twenty years. However, the global context within which decentralization reforms are pursued has changed significantly in a number of different ways: EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 Considerable development progress has been made finance and targeting these resources on a number of specific around the world. Many developing, and transition economies objectives. At the same time, many observers felt that the have experienced tremendous economic transformation and development impact of the additional resources was limited growth over the past 25 years, evolving from economies by the fact that a disproportionate share of the resources relying heavily on the primary sector of the economy, to was getting stuck at the national level rather than funding more productive, diverse, and complex economies. More improvements in front-line services. In contrast to the MDGs, diverse economic structures and rising productivity require the 2030 global Agenda for Sustainable Development (the greater and more responsive public sector infrastructure SDGs) actively considers the need to “localize” inclusive and investments, while higher household incomes and a sharp sustainable development by ensuring the transformation of reduction in global poverty have often triggered increased public sector resources into development results. public participation and demand for better public services. Recognition of the preeminent role of macro-fiscal Cities and urbanization. Until 2007, more people lived in stability. A major concern related to (fiscal) decentralization rural areas than in cities. By 2050, it is projected that two- is the fact that a more decentralized public sector could thirds of the global population will live in cities, with most of potentially reduce the ability of central finance authorities that increase expected to occur in African and Asian countries to ensure macro-fiscal stability. This concern was driven (UNDESA 2018). Urban areas offer a unique context for to a large extent by fiscal crises associated with fiscal decentralization and localization, as they often function as decentralization in Latin America in the 1980s and 1990s the engines of national economic growth, while at the same (Ter-Minassian and Jimenez 2011). Macro-fiscal stability is time acting as a space for social mobility and transformation increasingly understood as a foundational requirement for where local self-governance is facilitated, and possibly even sustainable development success, especially as inflation and encouraged, by the density of population and economic unemployment tend to have a disproportionate impact on the activity. It is often assumed that mayors and city leaders have poor. As a result, considerable emphasis has been placed the power to shape their own affairs. In reality, however, the in the run-up to decentralization reforms on the preeminent ingredients for city competitiveness are distributed between need to pursue decentralization in a way that preserves various tiers of government and between various entities. This macro-fiscal stability—for example, as happened in Indonesia means that mayors and other leaders of competitive cities will and Kenya. Important parts of this effort have been to focus need to complement their own “wedge” of decision-making decentralization reforms on expenditure devolution over powers in economic development by leveraging other tiers of revenue devolution; the emphasis on subnational fiscal rules government and private sector partners to generate outcomes to limit subnational borrowing and the associated risks to that are more than the sum of their parts (World Bank 2015). macro-fiscal stability (IMF 2020); and efforts to ensure that there is a balance between the function responsibilities and The role of conflict, fragility and increase in finances devolved, so that the decentralization process is (in authoritarianism. The increase in terrorist activities in the aggregate) fiscally neutral and does not result in increasing last two decades have had a destabilizing effect in countries deficits at the national government level. around the world and have caused or contributed to fragility and conflicts in numerous other countries. By 2020, the Climate adaptation and mitigation. Cities consume over economic and physical insecurity brought about by conflict two-thirds of the world’s energy and account for more than and violence had shifted the international balance in favor 70 percent of global CO2 emissions. At the same time, the of authoritarianism. This was worsened by the COVID-19 effects of the changing climate are already experienced by pandemic which ravaged the world from 2020 (Freedom 70 percent of cities worldwide, with 77 percent expected to House 2021). undergo a dramatic change in climate conditions (CCFLA 2021). Common hazards to cities and local governments Focus on inclusive (equitable) and sustainable include becoming an urban heat island, flooding, landslides, development. The Millennium Development Goals (MDGs) sea level rises, storm surges, tsunamis, wildfires, droughts, were quite successful at increasing the quantum of development earthquakes, and volcanos. Building cities that are green, EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 inclusive, and sustainable should be the foundation of any external development assistance to recognize the political local and national climate change agenda. economy forces influence their own actions and interventions. Some of the issues and challenges likely faced by task teams In many countries, the role of international financial when operating in a multilevel public sector include: institutions and development assistance is changing. As countries move up the economic ladder, the role of international ● The World Bank’s central government counterparts financial institutions and development agencies evolves from are not neutral actors. Without exception, the institutional primarily serving as a funder of capital infrastructure to acting entry point for the World Bank’s task teams as well as for as champions of public sector efficiency and catalysts for other international development agencies is the central or systems transformation. national government level—either Ministry of Finance or Ministry of Planning). Whereas in the case of centralized COVID-19. The global coronavirus pandemic has created public sector interventions, the central government – the a global humanitarian and economic crisis of proportions counterpart ministry – is often also the main beneficiary without precedent in recent times. Local governments of the World Bank program, this is not necessarily and local administrations around the world have been at the case for Bank operations that aim to strengthen the front line in responding to the pandemic by: providing decentralized governance, administration, or service emergency and curative health services and other public delivery. While there are many examples where central health services; enforcing compliance with social distancing government counterparts have strongly supported World and public hygiene measures; mitigating the impact of the Bank projects that strengthen decentralized systems, pandemic on other local public services; or by supporting there are also a large number of examples where the social and economic relief activities within their local centralized viewpoints or narrow institutional interests of communities. As such, the pandemic has reminded central ministry counterparts formed an important political policymakers all around the world that out of all government economy obstacle in project design and implementation. levels, the local level is closest to home and, in many cases, best positioned to respond to specific challenges. ● The centralizing bias of the international development By highlighting the potential value of local governments community. There is no doubt that it is easier to design and other local actors to the people, in many different and manage a development project that has a single countries the pandemic is also highlighting the obstacles central government counterpart versus a project that that stand in the way of local governments performing their needs to be implemented by dozens or possibly even functions in an inclusive, effective and responsive manner hundreds of local governments. Given that donor (Yilmaz and Boex 2021). Research suggests that effective agencies and international financial institutions need to intergovernmental systems and coordination mechanisms have their primary counterparts at the central government and local government capacity are two preconditions for level, a combination of institutional self-interests—by deploying local governments effectively in the fight against the donor agency as well as their counterparts at the pandemics (Yilmaz and Boex 2021). central government level—can bias the implementation of development projects to the central government level (Boex 2010). 4.2 Political economy challenges faced ● Strengthening decentralized systems requires a by the World Bank and other providers solid technical understanding of intergovernmental of external development assistance systems as well as political economy incentives faced by subnational stakeholders. While World In addition to understanding the political economy dynamic Bank task teams are well-equipped to design and of domestic actors and stakeholders in the context of deliver technical interventions, task teams are often not decentralization reforms, it is important for World Bank task equally well equipped to identify and deal with political teams and other development partners and providers of economy constraints, which tend to be more prevalent in EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 multilevel public sectors. In fact, in countries where public successful task teams to work across different sectoral or service delivery responsibilities are devolved to local thematic stovepipes, both at the central government level governments, technical obstacles, such as institutional as well as at the subnational level. capacity limitation or inadequate resources, as well as political economy obstacles need to be considered. For instance, a local government’s failure to deliver public 4.3 Concluding thoughts services in an efficient, inclusive or accountable manner may not be caused by technical limitations per se, but Decentralization is quintessentially a cross-cutting public- may find its origins in local political priorities or political sector governance topic that is at the intersection of multiple economy forces acting on local leaders.13 disciplines including, economics, political science, public administration, and management. It is a broad and complex ● World Bank support and other development partner area of public sector reform encompassing wide-ranging programs can legitimize or delegitimize certain issues from public financial management to human resource players. Whether intentional or not, the development management, procurement, and beyond. and implementation of World Bank programs often has important implications on public sector governance. In the last two decades, while less attention is being paid For instance, by focusing their dialogue and resources to decentralized governance by the global development on the central government level instead of transferring community, there has been growing recognition within the their funds to the local government level through the global development community outside the governance intergovernmental transfer system, World Bank programs stovepipe that there is a need to strengthen multilevel wittingly or unwittingly alter the balance of power and governance and intergovernmental systems in developing and resources among stakeholders at different levels of transition countries to make them function more effectively and the public sector. The situation is complicated further efficiently in pursuit of the Sustainable Development Goals by the fact that the World Bank and other international (SDGs), since most (pro-poor) public services are delivered development agencies are internally fragmented into silos at the local level, whether by the deconcentrated departments or stove-pipes (typically by sector), and that the bulk of of line ministries, devolved local government authorities, or external assistance therefore focuses on sectors and so, through other mechanisms. by definition, is earmarked. Although a sector program to provide funding to, say, local health facilities may be presented as “governance-neutral” because it by-passes the local government level, by the very fact that the program introduces a new funding stream, the program is likely to have a significant impact (for better or for worse) on the incentives and accountability relationship in the public sector. ● Improving the effectiveness of intergovernmental or vertical service delivery systems often requires working across stovepipes at different government levels. As suggested by the typology in Section 2, it is often the case that within a country and even within the same sector, there is a messy and simultaneous mix of central implementation, delegation, deconcentration, and devolution happening all at once. This means that efforts to improve the effectiveness of intergovernmental or vertical service delivery systems will often require 13. 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