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When Does decentralization deliver? The Dilemma of Design

Listed author(s):
  • Sharma, Chanchal Kumar

Decentralization since early 1990s has become one of the buzzwords of the development paradigms. Among all ingredients of decentralization, the fiscal component of it has a special significance. Not surprisingly the literature unanimously recognizes that it is the regulation of intergovernmental relationships in the fiscal arena that can strike the right balance among different objectives of each level and resolve tensions between them. Thus, the fiscal decentralization is in vogue. The trend that began in 90s has only gained momentum at the turn of the century. Yet the outcome of adopting similar policies has not been uniform across the globe. Some have succeeded, some are stumbling and some others have failed. In fact, the success of decentralization depends on its design. The paper looks into various questions associated with the dilemma of designing decentralization instruments for the success of fiscal decentralization These include the question of designing the right mix of policies, the questions of sequencing and synchronization, the question of pace and that of balancing the contrasting forces of centralization and decentralization. The paper offers the insight to the policymakersthat while designing fiscal decentralization they should not try to replicate any ‘idealtype’ solution. Though the ideal types can be powerful analytical tools, yet they do not lead to solutions for specific situations Real world fiscal arrangements rarely follow the idealized model; they are loaded with historical developments and political ad hocsolutions. It is simply not realistic to start from tabula rasa. The paper emphasizes that there is no “one size fits all” type answer to decentralization question. All systems will have to work out their own style of going about decentralization and restructuring of intergovernmental relations depending on the context and conditions peculiar to their own situation. The paper also argues that any attempt towards fiscal decentralization must be firmly grounded in the basic principles of fiscal federalism, irrespective of the fact whether the country in question is an officially declared federal state or not. Thus while implementing decentralization policies, the need isto ‘bring the federal back in’.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 250.

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Date of creation: Jan 2005
Date of revision: Jun 2005
Publication status: Published in South Asian Journal of Socio-political studies (SAJOSPS) No:1.Vol:6(2005): pp. 38-45
Handle: RePEc:pra:mprapa:250
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  1. Ernesto Stein, 1999. "Fiscal Decentralization and Government Size in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 2, pages 357-391, November.
  2. Hayek, F. A., 1996. "Individualism and Economic Order," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226320939, April.
  3. Olivier Blanchard & Andrei Shleifer, 2001. "Federalism With and Without Political Centralization: China Versus Russia," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 1-8.
  4. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
  5. Dilip Mookherjee & Pranab K. Bardhan, 2000. "Capture and Governance at Local and National Levels," American Economic Review, American Economic Association, vol. 90(2), pages 135-139, May.
  6. Roger H. Gordon, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 567-586.
  7. Bird, Richard M., 1993. "Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization," National Tax Journal, National Tax Association, vol. 46(2), pages 207-27, June.
  8. Fox, William*Wallich, Christine, 1997. "Fiscal federalism in Bosnia-Herzegovina : The Dayton challenge," Policy Research Working Paper Series 1714, The World Bank.
  9. Inman, Robert P. & Rubinfeld, Daniel L., 1992. "Fiscal federalism in Europe : Lessons from the United States experience," European Economic Review, Elsevier, vol. 36(2-3), pages 654-660, April.
  10. Shang-Jin Wei, 1997. "Gradualism versus Big Bang: Speed and Sustainability of Reforms," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1234-1247, November.
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