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Subnational Governments

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The type, functions and size of government have been the center of fierce economic discussions since the beginnings of economic theory. Traditionally discussions took place in the context of public finance with the focus of the discussions on the function of the state and its size. The structure of the state was considered given, which evolved over time through cultural and political development and influenced by outside factors. The question of federalism or centralism seemed to be a matter of principle rather than reasoning. However, more and more decentralization is seen as an economic tool, to improve efficiency of the government. By transferring revenue and expenditure decision making onto lower administrative levels, a better allocation of resources might be possible through a participatory approach in the respective level. However, decentralization is not a panacea, and it does have potential disadvantages. Decentralization may not always be efficient, especially for standardized, routine, network-based services. It can result in the loss of economies of scale and control over scarce financial resources by the central government. Weak administrative or technical capacity at local levels may result in services being delivered less efficiently and effectively in some areas of the country. Administrative responsibilities may be transferred to local levels without adequate financial resources and make equitable distribution or provision of services more difficult. Decentralization can sometimes make coordination of national policies more complex and may allow functions to be captured by local elites. Also, distrust between public and private sectors may undermine cooperation at the local level. To harvest the benefits of decentralization a balance needs to be found between the economic, political, cultural and social concerns that influence decentralization.

What the World Bank is doing in this area?

The World Bank supports state decentralization as a means to strengthen democracy, enhance transparency and pursue efficiency and competitiveness gains. The World Bank has also been extremely careful in supporting fiscal sustainability during the transition from centralized to decentralized public management. For the Bank, decentralization is a complex, medium-to-long term process that needs legal and constitutional reforms, cuts across sector ministries, involves numbers of stakeholders, entails adjustment at the central or federal level and requires strengthening of subnational government capacity. Decentralization usually precipitates or makes more evident the demand for overall public sector reform. It is also a good -but ordinarily risky-- entry point for modernization of the public sector. The World Bank reinforces support for decentralization strategies with change management and communication components geared to ensuring the smooth transfer of responsibilities and resources to lower levels of government. Solid governance capacity is usually a sine qua non when the Bank supports decentralization efforts.

Latin American and Caribbean (LAC) countries have been enacting state decentralization policies for the last 20 years. By now the region presents a multicolor mosaic of approaches to and models of decentralization. Most countries have taken the decision to decentralize as part of a broader movement of return to or strengthening of democracy. Once the political decision to decentralize has been taken, countries begin to explore ways to make the theoretical benefits of decentralization come true. Those benefits include higher government response to citizens' demands, allocation and production efficiency, transparency, civil society participation and additional mobilization of public and private resources. At the end of the day, the minimum test for successful decentralization is improvement in service delivery. Latin America and the Caribbean have produced a good number of showpieces or best practice cases of service delivery at subnational levels and inter-government coordination. However, the transition to decentralization has often created fiscal imbalances, unequal distribution of resources, additional fiscal pressure, stakeholder resistance or over-indebtedness of subnational governments. Uniform standards for accounting, budgeting and reporting are just being introduced in conjunction with fiscal responsibility laws, e-government and integrated financial management systems.

The World Bank support for decentralization consists frequently of:

  • programmatic loans in support of policy reform processes that extend over three or more years;
  • technical assistance loans that strengthen government capacity and incorporate good practices from all over the world;
  • economic and sector work in preparation of complex decentralization reforms such the reform of inter-government fiscal transfers or budget reform for coordinated inter-government monitoring and evaluation of public expenditure.
  • Challenges ahead

Subnational Government Development in Latin America

State decentralization in Latin America and the Caribbean is just completing the reforms of the first generation, consisting of effective financial and control measures. Still, most subnational governments have yet to demonstrate their capacity and willingness to do additional tax and fee efforts. Second and third generation reforms shall necessarily address the issues of adjusting the central government to policy making, planning and evaluation while subnational governments consolidate their own management capacity. The pace of decentralization has to be further adjusted to unequal capacities of subnational governments. The principle of subsidiarity will probably call for a more prominent role of national or regional governments during the transition to the decentralized state. In any case, second and third generation reforms will probably build upon a solid fiscal basis created by first generation reforms. If this is the case, the balance the reform movement will likely be more inclined towards public administration issues including quality of public expenditure, enhanced transparency in accounting and reporting and better utilization of integrated financial management systems and e-government.

The focus of the Bank in Latin America is not furthering decentralization, but to strengthen subnational governments.

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