Conference on fiscal decentralization addresses preconditions and country experiences

• Author: Matt Davies
• Position: IMF Fiscal Affairs Department
• Pages: 394-395

Page 394

Fiscal decentralization is assuming increasing importance in many parts of the world and in the IMF’s policy dialogue with a number of member countries. At the request of members of the Executive Board, the IMF’s Fiscal Affairs Department (FAD) hosted a conference on fiscal decentralization in November to discuss the requirements for effective service delivery, macroeconomic management, and good governance in an increasingly decentralized world.

Opening the conference, IMF Managing Director Horst Köhler called on participants to identify necessary preconditions for successful decentralization. He asked whether decentralization would enhance transparency and accountability at the local government level and whether it would lead to poverty reduction and better macroeconomic management. He also asked how the IMF’s macroeconomic surveillance role should extend to fiscal decentralization, and about cooperation between the IMF and the World Bank and regional development banks in this area.

Vito Tanzi, retiring as Director of FAD, outlined issues to consider when countries decentralize. Dangers exist if decentralization is pursued without correct initial conditions. But acknowledging that decentralization is here to stay in many countries, Tanzi focused on the appropriate sequencing of measures to minimize the risks.

Does decentralization work?

Albert Breton (University of Toronto) made a clear case that intergovernmental competition must be the primary reason for decentralization—to check the self-interest of policymakers and promote the common good. Decentralization can fail, as can markets, and for similar reasons, involving information, coordination, and diminishing supply costs and a race to the bottom.

In his empirical analysis, Daniel Treisman (University of California at Los Angeles) did not find that competition between decentralized jurisdictions created greater efficiency in governance. Countries with more tiers of government tend to have higher perceived corruption and appear more ineffective at service provision. Joachim von Braun of the University of Bonn found that fiscal decentralization in itself is unlikely to benefit the poor without prior—and effective—political and administrative decentralization. In contrast, Tugrul Gurgur and Anwar Shah, both of the World Bank, found that decentralization supports greater accountability and reduced corruption.

In his...