Does decentralization increase spending on public infrastructure?
It is commonly argued that when the benefits of an infrastructure service are mostly local and there is little scope for economies of scale - as in urban transit, road maintenance, water supply, and solid waste management - decentralization is the most effective way to deliver service. Those services have been decentralized in many countries, and many others are rapidly decentralizing. The central government is still responsible for many other infrastructure services, such as power and telecommunications, but this too is changing as the responsibility is increasingly transferred to subnational governments. Recent technological innovations reduce the need for services to be provided by monopolistic utilities. Power generation and distribution can now be handled competitively by decentralized units, and parts of some local telephone monopolies will increasingly meet competition from wireless telephones and rival wireline systems. How has increased decentralization affected spending levels on infrastructure? The outcome reflects the net outcome of opposing effects. Spending increases if the subnational government makes infrastructure a higher priority than the federal government did, if they are less effective at delivering services, or if they give up the benefits of economies of scale to get more autonomy. Spending decreases if they assign infrastructure a lower priority, or if most projects are most cost-effective. In their analysis, the authors focus on spending levels and ignore the reasons these levels change, so no conclusions can be made about whether decentralization makes spending more of less efficient. Among the conclusions they offer the following. First, decentralization tends to increase both total and subnational spending on infrastructure - possibly because the preferences of subnational governments in terms of quality and quantity of infrastructure are different from the central government's preferences. Second, the conventional wisdom is true: for decentralization, policymakers everywhere must guarantee a balance between revenue and spending assignment. A good way to offset the impact of decentralization on spending levels is to increase the imbalance between revenue and spending assignments. Third, be careful about applying lessons learned in industrial countries to decentralization in developing countries. What happens in industrial countries may help assess the decentralization's impact on total spending in developing countries, because the elasticity of per capita infrastructure spending is roughly similar in both countries. But that is not a good indicator for subnational spending, for which the elasticity is greater than 1 in developing countries and less than 1 in industrial countries.
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"Fiscal Policy and Economic Growth: An Empirical Investigation,"
CEPR Discussion Papers
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