Journalof Economic Perspectives—Volume 16,Number 4—Fall 2002—Pages 185– 205

Decentralizationof Governance and Development

Pranab Bardhan

llaround theworld in mattersof governance, decentralization is therage. Evenapart fromthe widely debated issues ofsubsidiarityand devolutionin A theEuropean Union and states’rights in the United States, decentraliza- tionhas beenat thecenter stage of policy experiments in thelast two decades in alargenumber of developing and transitioneconomies in Latin America, Africa and Asia. TheWorld Bank, forexample, has embracedit as oneof the major governancereforms on itsagenda (forexample, World Bank, 2000;Burki, Perry and Dillinger,1999). Take also theexamples of the two largest countries of the world,China and India. Decentralizationhas beenregarded as themajor institu- tionalframework for the phenomenal industrialgrowth in thelast two decades in China, takingplace largely in the nonstate nonprivatesector. India usheredin a landmarkconstitutional reformin favorof decentralizationaround thesame time itlaunched amajor programof economic reform in the early 1990s. On account ofits many failures,the centralized state everywhere has losta greatdeal of legitimacy,and decentralizationis widely believed to promisea range ofbeneŽ ts. It isoften suggested as awayof reducing the role of the state in general, byfragmenting central authority and introducingmore intergovernmental com- petitionand checks and balances. It isviewed as awayto make government more responsiveand efŽcient. Technological changes have also madeit somewhateasier than beforeto provide public services (like electricity and watersupply) relatively efŽciently in smaller market areas, and thelower levels of governmenthave now a greaterability to handle certaintasks. In aworldof rampant ethniccon icts and separatistmovements, decentralization is also regardedas awayof diffusingsocial and politicaltensions and ensuringlocal cultural and politicalautonomy. Thesepotential beneŽ ts ofdecentralization have attracteda verydiverse range y PranabBardhan is Professorof Economics,University of California, Berkeley, California. 186Journal of Economic Perspectives

ofsupporters. Forexample, free-market economists tend toemphasize the bene Ž ts ofreducing the power of the overextended or predatory state. In someinterna- tionalorganizations pushing structuraladjustment and transitionalreform, decen- tralizationhas sometimesbeen used almostas asynonym forprivatization; similarly, intheliterature on mechanism design,an informationallydecentralized system of individualdecisions coordinated by a pricemechanism ispittedagainst asystemof centralcommands and plans. Eventhose who areconvinced ofthe pervasiveness of marketfailures are increasingly turning for their resolution to the government at thelocal level, where the transaction costs arerelatively low and theinformation problemsthat can contributeto central government failures are less acute. They arejoined bya diversearray of social thinkers: postmodernists, multicultural advocates, grassrootsenvironmental activists and supportersof the cause ofindig- enous peoplesand technologies.In theabsence ofa betterunifying name, Iwould describethis lattergroup as “anarcho-communitarians. ” Theyare usually both anti-marketand anti-centralizedstate, and theyenergetically support assignment of controlto local self-governing communities. As isusually the case when asubject draws advocates fromsharply different viewpoints,different people mean differentthings bydecentralization. In this paper, weshall focus on aparticularkind of decentralization in developing and transitioneconomies, the devolution of political decision-making power to local- level,small-scale entities. In countrieswith a longhistory of centralizedcontrol —as inthe old empire states ofRussia, China orIndia —publicadministrators often mean bydecentralizationthe dispersion of some responsibilities to regional branch ofŽ cesat thelocal level of implementation on aparticularproject. Forthe purpose ofdiscussion inthis paper, weshall distinguishdecentralization in the sense of devolutionof political decision-making power from such mereadministrative del- egationof functions ofthe central government to local branches. Weshould also separatethe political and administrativeaspects ofdecentralization from those of Ž scal decentralizationand, inthe latter, the more numerous cases ofdecentraliza- tionof public expenditure from those involvingdecentralization of both taxand expenditureassignments. Weshall includecases wherelocal community organiza- tions becomeformally involved in the implementation of some centrally directed orfunded projects. Notall these aspects ofdecentralization operate simultaneously inany particularcase, and itis quite possible that agiveneconomy may be decentralizedin somerespects, not inothers. It should also beclear that theeffects ofa policyof deliberate decentralization —which isour concern here —can be qualitativelydifferent from those followingfrom an anarchic erosionof central control, which can bedue either to the collapse of the state, as has happened in somecountries in Africa, or lackof administrative or Ž scal capacity onthepart of thecentral authority leading to abandonment ofsocialprotection functions, as has happened insometransition economies. Theterritorial domain ofsubnational governments,of course, variesenor- mouslyfrom country tocountry. Atypicalprovince in India orChina islarger in population than mostcountries in the world, and so federalismin the sense of PranabBardhan 187

devolutionof powerto theprovincial state governments may still keep power over peoplepretty centralized. Unfortunately, data belowthe provincial government levelare often very scarce, and mostquantitative studies of decentralization —for example,those based onshare ofthe central government in total expenditure or revenues—do not pertainto the issues at thelocal community level (even apart fromthe fact that theshare ofexpenditure or revenues is not agood indexof decision-makingauthority). Evenat thelatter level, the units arediverse, ranging frommegacities to small villages, and theboundaries areoften determined by accidents ofhistory and geography,not byconcerns ofdecentralizationof admin- istration.In this paper, weshall ingeneral con Ž nethe analytical focus ofdecen- tralizationto the governing authority at thelocal community level: say, village, municipalityor county levelsof administration. Our discussion beginswith a descriptionof why decentralization poses some differentissues in theinstitutional context of developing and transitioncountries and, thus, whyit maysometimes be hazardous todraw lessons forthem from, say, theexperiences of U.S. states and citygovernments. We try to give the  avor of somenew theoretical models that extendthe discussion topolitical agency prob- lemsthat mayresonate more in the context of developing and transitionecono- mies.We then referto some of theongoing empirical work in evaluatingthe impact ofdecentralization on deliveryof public services and localbusiness development. Decentralizationhas undoubted meritsand strengths. However,the idea of decentralizationmay need some protection against itsown enthusiasts, both from freemarket advocates who seeit as an opportunityto cripple the state and from those anarcho-communitarians who ignorethe “communityfailures ” that maybe as seriousas themarket failures or government failures that economistscommonly analyze.

Departures from the Fiscal Federalism Literature

Thereis a largeliterature on decentralization,often referred to as “Ž scal federalism, ” mostlyrelating to the case ofthe United States. 1 Theprinciples discussed inthis literaturehave beenfruitfully applied to the national-provincial relationsin developing countries like Argentina, Brazil, Colombia, South Africa, India orChina, but inthis paper, weshall gobeyond this and stressthe special issues that arisein decentralization in developing and transitioneconomies pri- marilybecause theinstitutional context, and thereforethe structure of incentives and organization,are in some respects qualitatively different from that inthe classical U.S. case orthe recent case ofthe European Union. Much of the Ž scal federalismliterature focuses on theeconomic ef Ž ciency of intergovernmentalcompetition, which oftenstarts witha marketmetaphor that is

1 Many ofthe issueshave beenwell surveyed in the JEP “Symposiumon FiscalFederalism ” in the Fall 1997 issue. 188Journal of Economic Perspectives

rationalizedby the well-worn Tiebout (1956) model. In this approach, different localgovernments offer different public tax-expenditure bundles, and mobile individualsare supposed toallocate themselves according totheirpreferences. The assumptions requiredfor the Tiebout model are, however, much toostringent, particularlyfor poor countries. 2 First,the crucial assumption ofpopulation mobility —fullyinformed citizens “votingwith their feet ” inresponse to differential public performance —that en- ablesgovernments in theTiebout framework to overcomethe well-known problem ofinducing citizensto revealtheir preferences for public goods largelyfails in poor countries.In any case, many ofthe public goods inquestion are community- and site-speciŽ c, and itisoftenpossible to exclude nonresidents. Ruralcommunities of poorcountries, in particular, are often face-to-face, and socialnorms sharply distinguish “outsiders” from “insiders,” especiallywith respect to entitlement to communityservices. Secondly,the information and accounting systemsand mechanisms ofmoni- toringpublic bureaucrats aremuch weakerin low-income countries. In thestan- dard literatureon decentralizationand Ž scal federalism,the focus ison allocation offunds, and itisimplicitlyassumed that allocatedfunds automaticallyreach their intendedbene Ž ciaries.This assumption needsto be drastically quali Ž ed in devel- opingcountries, where attention must bepaid tospecial incentives and devicesto checkbureaucratic corruption —and thus thedifferential ef Ž cacy ofsuch mecha- nisms undercentralization and decentralizationbecomes important. Third, evenin therelatively few democratic developing countries, the institu- tions oflocaldemocracy and mechanisms ofpolitical accountability are often weak. Thus, any discussion ofdelivery of public services has tograpple with issues of captureof governments at differenttiers by elite groups moreseriously than isthe custom inthe traditional decentralization literature. Fourth, thetraditional literature on decentralization,even though not imper- viousto issues ofdistribution, is usually preoccupied with those ofef Ž ciency in publicprovision. When amajor goalof decentralizationin developingcountries is toeffectively reach out tothe poor (or to diffuse unrest among disadvantaged minoritygroups), oftenin remote backward areas, targetingsuccess inpoverty alleviationprograms is a moreimportant performance criterion than theef Ž ciency ofinterregional resource allocation. In thetraditional discussion ofdecentraliza- tionand federalism,the focus ison checks and balances, on how torestrain the centralgovernment ’spower,whereas in many situations indeveloping countries, thepoor and theminorities, oppressed by the local power groups, maybe looking tothe central state for protection and relief.Stepan (forthcoming)has madea usefuldistinction between “coming-togetherfederalism ” likethe United States, wherepreviously sovereign polities gave up part oftheir sovereignty for ef Ž ciency

2 Thereare doubts about just howthe Tieboutmechanism operates even in relatively mobile societies likethat ofthe United States. Forinstance, veryfew poor people move from state tostate insearch of higherwelfare bene Ž ts (Hanson and Hartman, 1994). Decentralizationof Governance andDevelopment 189

gains fromresource pooling and acommon market,and “holding-togetherfeder- alism” likethe multinational democracies of India, Belgiumand Spain, wherethe emphasis ison redistributiveor compensating transfersto keep the contending politiestogether. In heterogeneoussocieties, such redistributivepressures some- times lead Ž scal decentralizationto allowfor state and localborrowing that maybe largeenough tocause problemsof macroeconomic stabilization, as has happened inSouth Africa,Brazil and Argentina. 3 Notall state-mandated redistribution, however,is in  ationaryor unproductive rent creation, as isusually presumed in the traditionalliterature. Some redistribution to disadvantaged groups orregions — say inthe form of decentralized delivery of health, education orinfrastructural services—neednot beat theexpense of ef Ž ciencyand mayeven improve the potentialfor productive investment, innovation and human resourcedevelopment on thepart ofcommunities long bypassed bythe elite or the mainstream. Fifth, the Ž scal federalismliterature typically assumes that lowerlevels of governmentboth collecttaxes and spend funds, so localitiescan beclassi Ž ed as low tax/lowservice or high tax/high service.This connection betweenlocal revenues and spending isactually rather tenuous. In mostcountries, much ofthe more elastic(and progressive)sources oftax revenue lie with the central government, and thereis a built-intendency toward vertical Ž scal imbalance.Income isoften geographicallyconcentrated, both because ofagglomeration economies and initial endowmentsof natural resourcesand infrastructuralfacilities. Thus, certainlocal areas will Ž nd itmuch easierto raise signi Ž cant taxrevenue than others. In addition, thereare limits to interregional tax competition. In many low-income countries,the decentralization issues discussed thereare primarily about providing centrallycollected tax revenue to lower levels of government, rather than seeking toempower lower levels of government to collect taxes. The focus ison public expenditureassignments, unaccompanied byany signi Ž cant Ž nancial devolution. Sixth,the decentralization literature typically assumes that differentlevels of governmentall have similarlevels of technical and administrativecapacity. This assumption isquestionablefor all countries. On account ofagglomeration econo- miesin attractingquali Ž edpeople,in mostcountries, central bureaucracies attract bettertalent. But the problem is especially severe in many developingcountries, wherethe quality of staff inlocalbureaucracies —includingbasic tasks likeaccount- ingand recordkeeping —isvery low. Even their more professional and technical peoplesuffer from the disadvantages ofisolation, poor training and lowinteraction withother professionals. As Bird(1995) puts it,information asymmetry thus works both ways: thecentral government may not know what todo; thelocal government

3 This paperwill not have muchto say onthe impactof decentralizationon macroeconomic stabiliza- tion. Fora game-theoreticmodel of how decentralization or localdemocratization may increase the level ofcentralredistribution to prevent spirals of regional revolt and howthe macroeconomicconsequences dependon the initiallevels of cultural division and decentralization,see Treisman (1999). 190Journal of Economic Perspectives

may not know how to do it.4 Of course, this problemis of differential importance indifferent services. Providing for street cleaning or garbage collection may not requiresophisticated expertise,but powerproduction and transmission, bulk supply ofclean water and publicsanitation do. Decentralizationto the local level willoften work better in the former kind of services than thelatter. In oursubsequent discussion, weshall considerthe issues of decentralization indeveloping countries, keeping in mind these points ofdifference with the traditionalliterature.

Adapting the Theory of Decentralization for Developing Countries

Theconventional wisdomin the Ž scal federalismliterature, as inOates (1972), isthat decentralizationis to be preferred when tastes areheterogeneous and there areno spilloversacross jurisdictions. Withspillovers and no heterogeneity,a central governmentproviding a common levelof public goods and servicesfor all localities is more efŽ cient;with spillovers, decentralization leads to underprovision of local publicgoods, as localdecision makers do not takeinto account bene Ž ts going to otherdistricts. The issue of spillovers is relevantto investmentin certainareas, like highwaytransport and communication, publicresearch and extensionand con- trollingpollution or epidemics. It islessrelevant when thepublic goods aremore local,as inlocal roads, minorirrigation, village health clinics,sanitation and identiŽ cation ofbene Ž ciariesof public transfer programs. Centralizationcan also exploiteconomies of scale better in the construction of overheadfacilities, but theseeconomies of scale are less important in local man- agementand maintenance. In acanal irrigationsystem —forexample, the one in South Koreadescribed by Wade (1997) — construction was inthehands ofcentral authority, but maintenance was devolvedto local communities. Similarly, in pri- maryeducation, whilethe local government may run theday-to-day functioning of schools, theupper-tier government can have theeconomies of scale in designing curriculaand prescribingand enforcingminimum quality standards. In thepublic deliveryof electricity, economies of scale in generation and transmission maybe theresponsibility of centralized power plants and grids,while the distribution may bedecentralized to local governments. Thetraditional theory of Ž scal federalismis now beingextended to apolitical economysetting, with the introduction of transaction costs inthepolitical markets orpolitical agency problems between the ruler and theruled, between the politi-

4 Occasionally,however, the localpeople come up with ingeniouslow-cost solutions, whereas centralized systems useunnecessarily expensive services of specializedtechnicians. Forsome of the basicneeds for poorpeople, local youths with someminimum training as primaryhealth workersor primary school teacherscan beadequate.In other,more technical, projectsthere is a lotof scope for improving access toengineering, project design and administrativeskills. Organizations likeAGETIP in Africa orthe Brazil-basedIBAM have inrecent years been helpful in developing local technical capacity. PranabBardhan 191

cians/bureaucrats and theelectorate, and forreasons mentionedabove these transaction and agencycosts maybe much moreserious in the context of devel- opingcountries. It isusually argued that thelocal government has an information advantage overthe upper-tier governments. But it may be asked why a central governmentcannot procurefor itself the same information advantage ofproximity through localagents. In somecountries, the central government uses such repre- sentativesat thelocal level for this purpose, likethe pre´fets inFranceand Italyor the intendentes inChile. It mayeven be argued that thecentral government can have economiesof scope inthe collection of information. But the main reason whyin practicethe local government still retains the informational advantage has todo withpolitical accountability. In democraticcountries, the local politicians may have moreincentive to use local information than national orprovincial politicians, sincethe former are answerable to the local electorate while the latter have wider constituencies, wherethe local issues may get diluted. Focusing onaccountability, ratherthan informationper se, leadsto thinking about how thepublic can monitorand affectelected of Ž cialsat differentlevels of government.Seabright (1996) discusses theproblem of political accountability theoreticallyin terms of allocation of control rights in the context of incomplete contracts, wherebreaches of contract areobservable, though not veri Ž able in administrativeor judicial review, and aresubject toperiodic electoral review. His modelhas both centraland localelected of Ž cials. In his framework,centralization allows beneŽ ts frompolicy coordination, which isespeciallyimportant if thereare spilloversacross jurisdictions. However,centralization has costs intermsof dimin- ishedaccountability, inthe sense of reduced probability that thewelfare of a given localitycan determinethe re-election of the government. Elections are, of course, extremelyblunt instrumentsof political accountability, and otherinstitutional devicesand unelectedcommunity organizations (like nongovernmental organiza- tions) maybe deployed to strengthen local accountability. Themechanism ofaccountability may also bestrengthened by “yardstick competition, ” wherejurisdictions are compared to each other(for example, Besley and Case, 1995).The effort or competence of public of Ž cialsis not directly observableby citizens, and ifpoor results occur, publicof Ž cialscan always plead that theydid the best that was possibleunder the circumstances. However,if the shocks that createa wedgebetween effort and outcomesare correlated across jurisdictions, then yardstickcompetition can act as an indicatorof relative effort on thepart ofagents. As Seabright(1996) points out, this argumentof yardstick competitionunder decentralization, which mayhelp voters to knowwhether they should seekto replace their governments, is to be distinguished from his own argumentthat decentralizationmay increase their ability to do so. Thecombination ofdecentralization and yardstickcompetition allows the possibilityof experimentation in theway a givenpublic service is providedand then demonstrationand learningfrom other jurisdictions. In China intheearly years of itsmarket reforms, decentralization with jurisdictional competition allowed some coastal areasto experiment with institutional reform, the success ofwhich showed 192Journal of Economic Perspectives

theway for the rest of the country. Economichistorians have pointedto the fragmentationand decentralizationin early modern Europe, sometimes called “parcelizedsovereignty ”—see,for example, the discussion inNorth and Thomas (1973)—as asourceof strength, in enabling experimentation and competition, leadingto technological and institutionalinnovations that helpedEurope ulti- matelyto overtake the more centralized empire states ofAsia. Tommasiand Weinschelbaum(1999) pose thepolitical agency problem in termsof the number of principals (relative to agents)in comparingcentralization and decentralization.Citizens are viewed as principalsand theirelected represen- tativesas agents. Thelocal government has bettermeans (inthe form of informa- tion)to be responsive, also better(electoral) incentives. In thecase ofcentraliza- tion, thenumber of principals is very large, while the number of agents arefew, whereasin the case ofdecentralization,there is oneagent per locality. The larger thenumber of principals, themore serious is theproblem of lackof coordination incontracting withagents. Decentralizationis preferableto centralization when the problemof interjurisdictional externality is less important than thecoordination effect.5 Besleyand Coate(2000) focus on theimportance of political aggregation mechanisms inthe trade-off between centralized and decentralizedprovision of localpublic goods. Underdecentralization, locally elected representatives select publicgoods. Undera centralizedsystem, policy choices aredetermined by a legislatureconsisting ofelectedrepresentatives from each district,so that con  icts ofinterest between citizens of different jurisdictions play out inthe legislature. Theythen reconsiderthe traditional questions ofthe Ž scal federalismliterature in termsof alternative models of legislative behavior, one in which thedecisions are takenby a minimumwinning coalition of representatives and theother where legislatorsreach abargainingsolution. Theyshow that thefamiliar presumption that largerspillovers across jurisdictionshelp the case forcentralization is not so clearunder such politicaleconomy considerations. Politicalaccountability in poor countries is particularly affected by the likeli- hood ofcorruption or capture by interest groups. Whilelocal governments may have betterlocal information and accountabilitypressure, they may be more vulnerableto captureby local elites, who willthen receivea disproportionateshare ofspending on publicgoods. 6 (This isin contrast tothe Seabright (1996) model

5 Theidea of fewer principals in smaller jurisdictions having morepolitical control clearly resembles the relationshipbetween group size and freeriding in the voluntary provisionof a publicgood Ž rst discussedby Olson(1965). As iswell known, this relationshipcan beambiguous. 6 In the FederalistPapers (no. 10), JamesMadison comments on the notionthat localgovernments are moreprone to capture by elitesand specialinterests: “Thesmaller the society,the fewerprobably will bethe distinct partiesand interestscomposing it; the fewerthe distinct partiesand interests, the more frequentlywill a majoritybe found of the sameparty; and the smallerthe numberof individuals composinga majority, and the smallerthe compasswithin whichthey areplaced, the moreeasily will they concertand executetheir plans ofoppression. Extend the sphereand youtake in agreatervariety ofpartiesand interests; youmake it lessprobable that amajorityof the wholewill have acommonmotive Decentralizationof Governance andDevelopment 193

wherepolitical accountability is always greater at thelocal level.) On theother hand, thecentral bureaucrat who isinchargeof the delivery of, say, an infrastruc- turalservice like electricity, telecommunications or canal irrigationmay be corrupt inawaythat leadsto cost padding, targetingfailures and generallyan inef Ž ciently lowand inequitableservice delivery. The problem for the central government that employsthe bureaucrat is that ithas verylittle information on thelocal needs, deliverycosts and theamount actuallydelivered. Thus, many programsin devel- opingcountries have alargegap betweena commitmentof resources at thecentral leveland deliveryof services at thelocal level. For a particularlyegregious example, seeReinikka and Svensson (2001),who study theleakage in the  owof educational funds fromthe central government to schools inUganda intheperiod 1991 –1995. Theyfound that only13 percent of the total grant transferred from the central governmentfor nonwage expendituresin schools on itemslike textbooks, instruc- tionalmaterials and othercosts actuallyreached the schools. Themajority of schools actuallyreceived no moneyat allfrom the central transfers for nonwage expenditures. Bardhan and Mookherjee(2000a) develop an analyticalframework that for- malizesthe tradeoff between these con  ictingaspects ofcentralized and decen- tralizeddelivery systems. Decentralization,by shifting control rights from the centralbureaucrat (who otherwiseacts likean unregulatedmonopolist) to a local government,typically tends toexpand servicedeliveries as authoritygoes to those moreresponsive to user needs. Butwith capture of the local government, in the senseof elites receiving a largerweight in the local government ’smaximand ofa weightedsum ofwelfare, there is atendencyfor the local government to overpro- videthe service to local elites at theexpense of the non-elite. The extent of such inefŽ cientand inequitablecross-subsidization willdepend on theextent of local captureand on thedegree of Ž scal autonomy ofthe local government. On thelatter question, weconsider three different Ž nancing mechanisms for localgovernments: local taxes, userfees and centralgrants. Withlocal tax Ž nanc- ing,there is therisk that thecaptured localgovernment may resort to aregressive Ž nancing patternwhereby the non-elite bear the tax burden ofproviding services tothe elite. Restrictions on theability of local governments to levytaxes may then bedesirable, even at thecost ofreducing  exibilityof service provision to local need. Usercharges may be a usefulcompromise between the need for matching provisionto local needs and avoidingan unduly heavyburden on thelocal poor. Sinceno useris compelled to use the service, user charges impose a limiton the extentof cross-subsidization foistedon thepoor. Sowith user fees, Ž nancing decentralizationunambiguously welfare-dominatescentralization as wellas local tax-Ž nanced decentralization,irrespective of the extent of local capture. Central grant Ž nancing, on theother hand, mayencourage local governments to claim

toinvade the rights ofothercitizens; orif such acommonmotive exists, itwillbe moredif Ž cult for all whofeel it todiscover their own strength and toact inunison with eachother. ” 194Journal of Economic Perspectives

higherlocal need or cost, leadingto a restrictionof the level of service delivery; the welfareimplications are ambiguous, dependingon arangeof relevantpolitical and Ž nancing parameters. Usercharges cannot, however,be used to Ž nance antipovertyprograms such as targetedpublic distribution of food, education orhealth servicesthat bytheir verynature are targeted at groups that do not have theability to pay forthe service (orto pay bribesto thecentral bureaucrats). In such cases, as isshown inBardhan and Mookherjee(2000b), the extent of capture of local governments relative to that ofthe central government is a criticaldeterminant of the welfare impact of decentralization.If localgovernments are equally or less vulnerable to capturethan thecentral government, decentralization is then likelyto improve both ef Ž ciency and equity.But the opposite may be the case when captureat thelocal level is much greaterthan at thecentral level. Eventhough theextent of relative capture of governments at differentlevels iscrucial in understanding thelikely impact of decentralization initiatives, there has beenvery little work on thesubject, eithertheoretical 7 orempirical. The extent ofcapture of local governments by local elites depends on levelsof social and economicinequality within communities, traditions of political participation and voterawareness, fairnessand regularityof elections,transparency inlocaldecision- makingprocesses and governmentaccounts, mediaattention and otherfactors. Thesefactors varywidely across communitiesand countries,as documentedin numerous case studies(for example, Crook and Manor, 1998;Conning and Ke- vane, 2001).Of course, centralgovernments are also subject tocapture and perhaps evento a greaterextent than at thelocal level on account ofthe larger importanceof campaign funds innational electionsand betterinformation about candidates and issues inlocal elections based on informalsources. On theother hand, particularlyin large heterogeneous societies, the elites are usually more dividedat thenational level,with more competing and heterogeneousgroups neutralizingone another. Atthe local level in situations ofhigh inequality,collu- sion maybe easier to organize and enforcein small proximate groups involving ofŽ cials, politicians,contractors and interestgroups; risksof being caught and reportedare easier to manage, and themultiplex interlocking social and economic relationshipsamong localin  uentialpeople may act as formidablebarriers to entry intothese cozy rental havens. Atthe central level in democratic countries, more institutionalmechanisms forchecks and balances areusually at place: theseinclude variousconstitutional formsof separation ofpowers and adjudicatory systemsin somecountries, more regular auditing of public accounts and morevigilance by

7 Forone theoretical analysis ofthe problem,see Bardhan and Mookherjee(2000c). Weargue that the overallcomparison of capture at centraland locallevels in a democracywould depend on the interplay ofalargenumber of underlying institutional factors, such as relativedegrees of voter awareness and cohesivenessof special interest groups, the extentof heterogeneityacross districts and the natureof the national electoralsystem, and sothe issueis ultimately context- and system-speci Ž c. PranabBardhan 195

national media.Such mechanisms areoften absent orhighly ineffective at thelocal level. Evenin undemocratic but largelyegalitarian societies, the problem of local capturemay be less acute. It isgenerally overlooked in the widely noted success storyof decentralized rural-industrial development of China overthe last two decades that thedecollectivization of agriculture since 1978 represented one of the world’smostegalitarian distributions of land cultivationrights (with the size of land cultivatedby a household assigned almostalways strictly in termsof itsdemographic size),and this mayhave substantiallymitigated the problem of capture of local governmentsand otherinstitutions by the oligarchic owners of immobile factors of production (likeland), which af  ictsother rural economies (for example, India). When thepotential for capture of local governments is serious, decentraliza- tionprograms have tofocus agreatdeal of attention to strengthening local accountabilitymechanisms. In fact, inpolicy debates, when weconsider the costs and beneŽ tsofredistributive policies (like land reforms,public health campaigns orliteracy movements), we often ignore their substantial positivespillover effects in termsof enlarging the stake of large numbers of the poor in the system and strengtheningthe institutions of local democracy. Comparing across thevarious states inIndia, itis clearthat localdemocracy and institutionsof decentralization aremore effective in the states (likeKerala and WestBengal) where land reforms and mass movementsfor raising political awareness have beenmore active. The 1996National Election Survey data inIndia suggestthat inWestBengal, 51 percent ofthe respondent votersexpressed a high levelof trust in theirlocal government, whereasin the adjoining stateof Bihar (where both land reformsand local democracyinstitutions have beenvery weak), the corresponding Ž gure is 30 percent(Mitra and Singh, 1999).Near-universal literacy in Kerala has helped sustain widespreadnewspaper readership, which has encourageda vigilantpress on issueslike corruption in local governments. In both Keralaand WestBengal, it has also beenobserved that theftand corruptionat thelocal level are more effectively resisted if regularlocal elections to selectrepresentatives in the local bodies are supplemented by an institutionalized systemof periodic public hearings on itemsof major publicexpenditure. But even that monitoringdevice is inadequate if the complaints madein public are not acted upon bythe ruling party. Thereis evidence that sometimesthe opposition partiesor minority factions stop attendingthe village council meetingsor the publichearings, as theyperceive that theycannot do much about theruling party’sspending ofpublic funds that takesthe form of widespreaddistribution of patronage—like “jobs forthe boys, ” orwhat Italians call lottizzazione —which some- timesconsolidates itselectoral advantage. It isimportantto installpublic accounts committeesat thelocal legislative level with their leading members taken from the opposition party, as isthe case at thecentral parliamentary committees in India or Britain.In general,the auditing process at thelocal level is extremelyde Ž cient, not always bydesign, but bythe sheer dearth in the villages of technical capacity for accounting, recordkeeping and auditing. 196Journal of Economic Perspectives

In sum, inconsideringthe theory of decentralizationin developingcountries, itis important to move beyond thetraditional tradeoff of how centralizationis betterfor dealing with spillovers and decentralizationis better for dealing with heterogeneity.It isnecessaryto delveinto political economy issues of institutional process and accountabilityat both thelocal and centrallevel.

Empirical Evaluation of Decentralized Delivery of Public Services

In this section, weshall indicatesome of theattempts that have beenmade to evaluateempirically the impact of decentralization on thedelivery of socialservices indevelopingcountries. Even though decentralizationexperiments are going on in many ofthese countries, hard quantitativeevidence on theirimpact is rather scarce. Thereare a numberof scattered studies that wewillarrange in termsof the natureof empirical methodology followed. In twosuccessful cases ofdecentralization in Latin America, there is some evidenceavailable on the “before-after ” comparison ofservice delivery outcomes. One isthewidely noted case ofparticipatory budgeting in municipal government inthe city of Porto Alegre in Brazil; the other is the less well-known but quite dramaticsuccess ofthe post-1994 decentralization initiative in Bolivia. In Porto Alegre,where assembly meetings of local citizens and neighborhoodassociations in differentregions discuss investmentpriorities, review accounts and electrepresen- tativesto acitywidecouncil that allocatesavailable resources across wards, impres- siveresults have followed:between 1989 and 1996,access tobasic sanitation (water and sewage)as wellas enrollmentin elementary or secondary schools nearly doubled, whileincreasing revenue collection by 48 percent (Santos, 1998).Al- though itis dif Ž cultfrom this study toisolate the impact of participatory budgeting reformsfrom those ofother ongoing changes, itseems likely that therehas beena substantial impacton thepattern of resource allocation across localities,particu- larlyto poor ones, and inthe lessening of the misappropriation of resources comparedto the past and toother areas inBrazil. In Boliviain 1994, the number of municipalitiesas wellas theshare ofnational taxrevenue allocated to municipalities doubled, alongwith devolution to the municipalitiesof administrative authority, investmentresponsibility and titleto localinfrastructural facilities. This change has beenassociated witha massiveshift ofpublic resources in favor of the smaller and poorermunicipalities and from large-scaleproduction tosocial sectors. Faguet(2001) Ž nds that publicinvestment ineducation, waterand sanitation rosesigni Ž cantly inthree-quartersof all munic- ipalities,and investmentsresponded tomeasures of local need; forexample, the expansion inpublic education spending was largeron averagein municipalities witha lowerliteracy rate or with fewer private schools. Faguet ’sanalysis isinterms oflevels of publicspending, ratherthan outcomevariables like school enrollments orschool performanceor access towaterand sanitation services.In thestudies of PortoAlegre or Bolivia, not much informationis available on theallocation of Decentralizationof Governance andDevelopment 197

resourceswithin a communityacross households indifferent socioeconomic classes. This means that issues likecost-effectiveness of programs, targeting perfor- mance orthe extent of capture of localgovernments cannot beaddressed. Without household-leveldata on access topublic services, these crucial aspects ofthe impact ofdecentralization cannot beproperly assessed. Thereis hardly any household-levelanalysis inthe literature of the compara- tiveeffects of centralized versus decentralized delivery. One detailedstudy of targetingperformance of adecentralizedprogram using household-levelinforma- tionin a developingcountry isthat ofGalasso and Ravallion(2001) studying a decentralizedfood-for-education programin Bangladesh. In this centralgovern- mentprogram, in which twomillion children participated in 1995 –1996, the identiŽ cation ofbene Ž ciaryhouseholds withina selectedcommunity was made typicallyby a localschool managementcommittee consisting ofparents, teachers, education specialistsand school donors. Galasso and Ravallionuse data froma 1995–1996Household ExpenditureSurvey to assess thetargeting performance of theprogram. They Ž nd that theprogram was mildlypro-poor; that is, takingall villages,a somewhatlarger fraction of the poor received bene Ž ts fromthe program than did thenonpoor. Theyalso Ž nd someevidence of localcapture. Forexample, withinthe set of participating villages, targeting performance was worsein com- munitieswith larger land inequalityor in remote locations. Butthe targeting improvedas theprogram expanded, suggestingthat theprogram shifted the balance ofpower in favor of the poor. It isalso clearlythe case that thelevel of targeting within communitieswas superiorto that achieved across communitiesby centralallocation, thus offeringlittle support forthe view that thecentral govern- mentis more accountable tothe poor than localcommunities. This Ž nding isin some contrast tothe experience of the widely acclaimed antipovertytransfer program of Progresa inMexico.The program follows a two-stage targetingprocess. Coady (2001) Ž nds that mostof Progresa’stargetingeffectiveness isachieved at the Ž rststage when poorlocalities are selected, rather than inthe second stagewhen households areselected within localities, not on thebasis of identiŽ cation ofbene Ž ciariesby local communities as inthe food-for-education programin Bangladesh, but on thebasis ofinformation collected from a census undertakenfor this purpose. Alderman(1998) examines, on thebasis ofa household surveyconducted in 1996,a targetedsocial assistance program( NdihmeEkonomika )inAlbania that was decentralizedin 1995. He Ž nds that therehave beenmodest gains intargeting efŽ ciencyand cost-effectivenessfollowing decentralization, that localauthorities usesome additional informationin allocatingprogram bene Ž ts among households and that thecentral allocation of social assistance funds tolocal authorities is ad hoc and not stronglycorrelated with the level of poverty in the local commu- nities.He does not Ž nd evidencethat thedecentralization initiative caused the well-offmembers of the community to capture the bene Ž ts ofthe program. Thereis some quantitative evidence on theimpact of mandated representa- tions ofhistorically disadvantaged groups likewomen in leadership positions in 198Journal of Economic Perspectives

localgovernance in India. Since1998, one-third of all positions ofchief of the villagecouncils inIndia have beenreserved for women: only women may be candidates forthe position of chief in a reservedvillage council, and thecouncil selectsthe latter randomly. Takingadvantage ofthis random assignment(and thus avoidingan econometricproblem in usual cross-section studieson this typeof questionthat communitiesthat aremore likely to take women ’sneedsinto account mayalso bemore willing to let them be in leadership positions), Chattopadhyay and Du o(2001)have measuredthe impact of this politicalreservation policy on outcomesof decentralizationwith data collectedfrom a surveyof all investments in localpublic goods madeby village councils inone district in West Bengal. They Ž nd that thewomen leaders of village councils investmore in infrastructure that is directlyrelevant to the needs of ruralwomen, like drinking water, fuel and roads, and that villagewomen are more likely to participate in thepolicymaking process iftheleader of their village council isawoman. However,without direct evidence on thenature of women ’spreferencesrelative to men ’sand sincewomen ’s reser- vationin the leadership positions inlocal government was not linkedto the distributionof women in the village, this study does not quiteaddress how local democracyaffects the ability of underrepresented groups inthe village to imple- menttheir desired outcomes. Fosterand Rosenzweig(2001) use a panel dataset ofvillages across India to examinethe consequences ofdemocratization and Ž scal decentralization.They Ž nd that an increasein the demographic weight of the landless households ina villageunder democratic decentralization has apositiveeffect on allocationof publicresources to road construction (which, according tothem, primarily bene Ž ts thelandless workers)and anegativeeffect on that toirrigation facilities (which primarilybene Ž tthelanded). Buttheir dataset does not contain themany severe institutionallapses inthe implementation of decentralization across India, partic- ularlyin manipulations ofthelocal electoral process and intherange of authority and Ž nances devolvedto local governments, making democratic decentralization not yeta realityin most parts ofIndia. It isnot clear,for example, how much ofa leewayelected local village councils have inmatters of allocation to projects like road construction, which areoften centrally sponsored and quitebureaucratically controlledfrom above. Atmost the local government gets involved only in the decisionwhere to locate the road and toidentify the bene Ž ciaryworkers. Somecase studiesalso existon theeffects of decentralization in differentparts ofthe world, which providesome descriptive and suggestivecorrelations, but not enough toclinch any hypothesis. Azfar,Ka ¨hko¨nen and Meagher(2000) survey households and governmentof Ž cialsat municipaland provinciallevels in the Philippineswith respect to the stated publicinvestment priorities in a givenlocality. Statedpriorities of of Ž cialsat themunicipal level turned out tomatch weaklythose oflocal residents, while those ofof Ž cialsat theprovincial level did not, suggesting that decentralizationmay improve the quality of information of Ž cialsuse in public investmentdecisions. Thereis also someevidence in the survey of more perceived corruptionat thecentral level than at thelocal level. A similarsurvey was carried PranabBardhan 199

out byAzfar, Ka ¨hko¨nen and Meagherin Uganda withqualitatively similar results. They also Ž nd inUganda agreaterreliance on communityleaders for news concerninglocal corruption and localelections than fornational news, which they interpretas evidenceof greater potential for local capture. In the1990s, Nicaragua starteda programof transferring key management tasks inpublic schools fromcentral authorities to localcouncils involvingparents. An evaluationof this programby King and O ¨ zler(1998) on thebasis ofschool and household surveysand student achievementtests suggests that defacto autonomy has not yetbeen given to many ofthe councils, but whereit has been,there is a signiŽ cant positiveeffect on student performance. TheWorld Development Report 1994 on Infrastructurecited several cases of qualityimprovement and cost savings ininfrastructureprojects afterlocal commu- nitieswere given part ofthe responsibility in management.A reviewof WorldBank data for42 developing countries found that whereroad maintenance was decen- tralized,backlogs were lower and thecondition ofroads better.Data fora groupof developingcountries revealed that percapita costs ofwaterin World Bank –funded waterprojects werefour times higher in centralized than infully decentralized systems.A study of121 completed rural water supply projects, Ž nanced byvarious agencies,showed that projects withhigh participationin project selection and designwere much morelikely to have thewater supply maintainedin good condition than wouldbe the case withmore centralized decision-making. Wade’s(1997)contrasting account ofthe operations of irrigation bureaucracy inSouth Koreaand insouth India bringsout theimportance of local accountability indelivery of infrastructural services. The Indian canal systemsare large, central- izedhierarchies in charge of all functions, operationsand maintenance as wellas designand construction. Theirways ofoperation —includingthe promotion and transferrules for of Ž cials, rulesdesigned to minimize identi Ž cation betweenthe irrigationpatrollers and thelocal farmers, and thefrequent use of low-trust managementand supervisionmethods —and sourceof Ž nance (mostof the irriga- tiondepartment ’sbudgetcomes in the form of a grantfrom the state treasury) are insensitiveto the need for developing local trust and cooperation. In Korea,on the otherhand, thereare, according tothis account, functionallyseparate organiza- tions inthecanal systems. Theimplementation and routinemaintenance tasks (as opposed topolicymaking and technicaldesign work) are delegated to the Farm- land ImprovementAssociations, oneper catchment area, which arestaffed by local part-timefarmers selected by the village chiefs, knowledgeableabout changing localconditions, dependentfor their salary and operationalbudget largely on the userfees paid bythe farmers and continuallydrawing upon localtrust relation- ships. Koreaat thetime of the study didnot have ademocraticpolitical regime or afreepress, but farmerswere better informed about and had betteraccess tothe localirrigation organization. This exampleshows that thereis no one-to-one relationshipbetween the strength of democracy at thenational politicallevel and that ofinstitutions of accountability at thelocal level. Asimilarstory on accountabilitycan betold in the Ž eldof education and 200Journal of Economic Perspectives

health, comparingnorth India withsome authoritarian countries.Institutions of localaccountability are rather weak in large parts ofnorth India, and itis common toobserve, for example, the serious problem of absenteeism of salaried teachers in villagepublic schools and ofdoctors inrural public health clinics. 8 Thevillagers are usuallyaware of the problem but do not have theinstitutional means ofcorrecting it,as thestate-funded teachersand doctors arenot answerableto the villagers in the insufŽ cientlydecentralized system. On theother hand, innondemocratic China, thelocal Communist Party of Ž cialshave sometimesbeen quite responsive to local needs(at leastas longas theyare not con  ictingwith the party ’sprogram),as the comparativestudy oftwo villages in China and India byDre `zeand Saran (1995) show inthe context of China ’sfarbetter performance in the provision of primary education at thelocal level. Similar accounts areavailable of moreeffective public pressurein ruralbasic education and health servicesin Cuba comparedwith some ofthe more democratic regimes in Latin America. There are, of course, many authoritarian countrieswhere local accountability is completely absent and the situation ismuch worsethan innorth India. Takenas agroup, thesestudies suggest generally positive effects of decentral- ization,but itis hard todraw conclusive lessons. Many ofthe studies are largely descriptive,not analytical, and oftensuggest correlations rather than causal pro- cesses. Most ofthem are not based on household surveydata, makingthe compar- ativeimpact of centralized versus decentralized programs on differentsocioeco- nomicgroups ofhouseholds dif Ž cultto assess.

Decentralization and Local BusinessDevelopment

Most ofthecases ofdecentralizationin developing countries examined in the theoreticaland empiricalliterature relate to delivery of social services. But in recent years,there has beenan extensionof thetraditional literature on federalismto the case ofthe role of local government in promoting local business development, particularlyin the context of transition economies, especially China, and this has potentialimplications for developing countries where so farpublic delivery issues have beenmore prominent. In Qian and Weingast(1997) and Qian and Roland (1998),for example, decentralizationof information and authorityand interjurisdictionalcompetition inChina have beenconsidered as commitmentdevices on thepart ofthe central orprovincial government to provide market incentives, both the “positive” incen- tiverewarding economic success at thelocal level and the “negative” incentivein termsof punishing economicfailure. The local government-run township and villageenterprises that servedas theengine of growth in China inthe last two decades have beencited as amajor exampleof the outcome of a successful

8 See,for example, PROBE (1999) onthe basisof an intensivesurvey of 234 randomly selected villages innorth India carriedout in 1996. Decentralizationof Governance andDevelopment 201

“market-preservingfederalism. ” In termsof positive market incentives, the town- ship and villageenterprises had fullcontrol over their assets and werelargely left alone(as aresidualclaimant) to “getrich gloriously, ” and thelimited knowledge of theupper-tier governments about theextra-budget and off-budgetaccounts oflocal governmentsacted as checkon theupper-tier interventionism. In contrast, an econometricstudy ofthe Ž scal relationsbetween local and regionalgovernments in Russia byZhuravskaya (2000)on thebasis ofa panel dataset for35 large cities shows that localgovernments could retainonly about 10percent of their revenues at the margin,thus providingonly weak incentives to foster local business development and thus toincrease their tax base. In termsof the “negative” incentive,Chinese upper-tiergovernments, by denying bailout to many failingtownship and village enterprises,enforced a dynamic commitment.Having no access tostate banks and facingmobility of capital across jurisdictionsraised the opportunity costs oflocal governmentsfor rescuing inef Ž cient Ž rms,thus leadingto the endogenous emer- genceof a hard budgetconstraint. Without denyingthe importance of these market incentives, it is possible to argue,however, that thecase ofmarket-preserving federalism is institutionally underspeciŽ edin these studies. Dependingon thepolitical-institutional complex indifferent countries, the same market incentives may have differentef Ž cacy. As Rodden and Rose-Ackerman(1997) have pointedout ina critiqueof market- preservingfederalism, whether political leaders of a localgovernment respond to highlymobile investors or instead pay moreattention to the demands ofstrong distributivecoalitions dominated by owners of lessmobile factors depends onthe institutionalmilieu. Owners of capital vary widely in the speci Ž cityof their assets, and institutionalincentives facing political leaders may vary even for the same jurisdictionalcompetitive pressure. Even in a democracy,not tospeak ofauthori- tarian systems, electoralcompetition does not necessarilypunish localleaders who failto respond toexit threats of mobile asset ownersand areinstead more responsiveto coalition building and thevoice of well-organized lobbies. We have pointedout earlierthe problem of local capture by the oligarchic owners of immobilefactors ofproduction, likeland inrural India, and how inthe Chinese case, thelack of such strongrural lobbies (owing largely to the egalitarian land distribution)may have madea differencein the local governments ’ vigorous pursuitof rural industrialization. 9 In Russia, many have pointedout that overmuch ofthe 1990s, local governments have shown featuresof beingcaptured byerstwhile rent-holdersand old Ž rms,which sometimesblocked the rise of new Ž rms that could competeaway theirrents. 1 0 Of course, evenin China bysome accounts (for

9 Evenin India, inareas where land distributionis relatively egalitarian and localdemocracy is more solidaristic,as inKerala, thereare now some instances ofmunicipalgovernments taking aleadingrole, incollaboration with bankersand socialgroups, in localbusiness development. For some examples, see Das (2000). 1 0 Theexplanation of China ’srelativesuccess attributed to political centralization in Blanchardand Shleifer(2000) doesnot seemvery plausible. A strongcentral political authority can punish local 202Journal of Economic Perspectives

example,Shirk, 1993), local of Ž cialshave oftenused their Ž nancial authorityunder decentralizationto buildpolitical machines, collectingrents in exchange of selec- tive beneŽ ts and patronagedistribution, and federalismmay not always have been that marketpreserving. It seemsjurisdictional competition is not enough toexplain the emergence of endogenous hard budgetconstraints forlocal governments without a lotmore speciŽ cation ofthe local political process. Evenignoring the lobbies of land oligarchies,if alocalbusiness fails,threatening the livelihood of thousands ofpoor people,the local government (or if thelatter is bankrupt, upper-tiergovernments) willhave dif Ž cultyignoring the political pressure that willbe generated in favorof bailingthem out. Wildasin(1997) has rightlypointed out that federalgrants to localgovernments may be less “soft” inthe small jurisdictions as opposed tothe large(which are “too bigto fail ”),but evensmall jurisdictions may have key politiciansrepresenting (or lobbying for) them —and inany case, itis cheaper to cometo their rescue.

Conclusion

It isquiteplausible to argue that inthematter of service deliveries as wellas in localbusiness development,control rights in governance structures should be assigned topeople who have therequisite information and incentivesand at the sametime will bear responsibility for the (political and economic)consequences of theirdecisions. In many situations, this insightcalls for more devolution of power tolocal authorities and communities. Butat thesame time, it is important to keep in mind that structuresof local accountabilityare not inplace in many developingcountries, and localgovern- mentsare often at themercy of local power elites who mayfrustrate the goal of achievingpublic delivery to the general populace ofsocialservices, infrastructural facilitiesand conditions conducive tolocal business development.This means that decentralization,to bereallyeffective, has toaccompany seriousattempts to change theexisting structures of power within communities and toimprove the opportu- nitiesfor participation and voiceand engagingthe hitherto disadvantaged or disenfranchised inthepolitical process. Afterall, the logic behind decentralization isnot just about weakeningthe central authority, nor isit about preferringlocal elitesto central authority, but itisfundamentallyabout makinggovernance at the locallevel more responsive to thefelt needs of thelarge majority of thepopulation. Tofacilitate this, thestate, farfrom retreating into the minimalist role of classical liberalism,may sometimes have toplay certain activist roles: enabling (if only as a catalyst) mobilizationof people in local participatory development; neutralizing

governments(reducing the riskof theircapture and the scopeof theirrent seeking), but one needs a plausiblestory ofa benevolentnonrentier central authority togo with it. PranabBardhan 203

thepower of local oligarchs; providing supralocal support inthe form of pump- priminglocal Ž nance; supplyingtechnical and professionalservices toward build- inglocal capacity; actingas awatchdog forservice quality standards, evaluationand auditing; investingin larger infrastructure; and providingsome coordination inthe faceof externalities across localities. Theliterature on decentralizationin thecontext of developmentis still in its infancy. On thetheoretical side, perhaps thekey challenge is to Ž nd betterways to modelthe complex organizational and incentiveproblems that areinvolved, in a situation withpervasive problems of monitoring and enforcement.On theempir- icalside, there is a greatdeal of scope forrigorous work in evaluating the impact ofongoing decentralization initiatives, using detailedhousehold and community surveys,comparing it with the experience with centralization or some other coun- terfactual.In such empiricalwork, one has tobe particularly wary of several econometricproblems. One issueis that someof the data involvedin evaluating communityparticipation and projectperformance may be subjective.For instance, someinvestigators start with the prior belief that participationis good, which creates a “halo effect” intheir observations. Asecond problemis one of simulta- neity:better bene Ž ciaryparticipation may cause improvedproject performance, but improvedproject performance often also encourageshigher participation. 11 Finally,there is the commonly encountered endogeneity problem. Before being too quickto claim that decentralizationbrought about certainoutcomes, itis worth consideringthat decentralizationmay have resultedfrom ongoing political and economicchanges that also affectedthese same outcomes. Separatingdecentral- izationfrom its political and economiccauses, so that decentralizationis not just a proxyfor an ill-de Ž ned broad packageof social and economicreforms, is adelicate task. y Iam gratefulto Brad De Long,Timothy Taylor and Michael Waldman for editorial suggestionsand to DilipMookherjee for substantive discussion (and joint research) on issues relatingto this paper.

1 1 Foran attempt totake this latter set ofeconometricproblems into account in an evaluationof 121 ruralwater projects, see Isham, Narayan and Pritchett (1995). 204Journal of Economic Perspectives

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