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 twodecades 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 ofbene 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 efcient. Technological changes have also madeit somewhateasier than beforeto provide public services (like electricity and watersupply) relatively efciently 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 bene 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 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 of 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 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 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 nethe analytical focus ofdecen- tralizationto the governing authority at thelocal community level: say, village, municipalityor county levelsof administration. Our discussion beginswith a descriptionof why decentralizationposes some differentissues intheinstitutional 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 “ 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 scal federalismliterature focuses on theeconomic ef 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-speci 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