WTP188Nov. 1992

WORLD BANK TECHNICAL PAPER NUMBER 188

AFRICA TECHNICAL DEPARTMENT SERIES

Economic Policy and Sector Investment Programs

Jerry M. Silverman

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WORLD BANK TECHNICAL PAPER NUMBER 188AFRICA TECHNICAL DEPARTMENT SERIES

Public Sector DecentralizationEconomic Policy and Sector Investment Programs

Jerry M. Silverman

The World BankWashington, D.C.

Copyright i 1992The International Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

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Jerry M. Silverman is Principal Institutional Development Specialist in the Institutional Development andManagement Division of the Southern Africa Department of the World Bank.

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Silverman, Jerry M.Public sector decentralization: economic policy and sector

investment programs / Jerry M. Silverman. - [Revised ed.]p. cm. - (World Bank technical paper ; no. 188. Africa

Technical Department series)Includes bibliographical references.ISBN 0-8213-2279-61. Decentralization in government-Developing countries.

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FOREWORD

This paper summarizes experience with alternative decentralizationarrangements and suggests a new analytical framework for assessing the impact of sucharrangements on the performance of economic development programs and projects.Consideration of alternative forms of decentralization reveals the need to clarify andestablish priorities among multiple economic development and political objectives. Thepaper describes the potential for conflict among these multiple objectives and emphasizesthe need to assess decentralization policies through acceptable trade-offs.

This paper also seeks to resolve two deficiencies in much of the currentliterature on decentralization: (1) advocacy of changes in public sector structures withoutaddressing broader changes in public sector roles and (2) a focus on alternativedecentralization arrangements as ends in themselves. These deficiencies have causedcontinuing debate between theorists and practitioners on the effectiveness ofdecentralization. Theorists argue that decentralizing government operations will improveefficiency and effectiveness, theorists provide no practical operational guidance todevelopment practitioners. Practitioners continue to encounter difficulties whenattempting to achieve program or project objectives within decentralized or decentralizingsystems.

This paper attempts to resolve this tension between theoretical and practicalconcerns. It provides a practical approach that should be useful to the broad audienceof development professionals who must consider both the substance of decentralizationissues and their impact on economic development.

Ismail SerageldinDirector

Africa Technical DepartmentAfrica Region

vi

ACKNOWLEDGEMENTS

I wish to thank Hans Wyss, former Director, and Ismail Serageldin, current Director, ofthe Africa Technical Department, the members of the Africa Region's Group Team 2, Myrna Alexanderand Mamadou Dia, former and current Chiefs, respectively, of AFTIM, for providing me, as an operationsstaff, with the opportunity, time, and resources to prepare this paper. Mamadou Dia, in particular, hascontributed important insights.

Shahid Chaudhry, Martha de Melo, Ben Fisher, George Gattoni, and Michael Stevens servedas the World Bank Peer Review Committee for this study. Both individually and collectively, theircomments in response to earlier drafts assisted in broadening my view of decentralization issues andcontributed substantially to my thinking about them. Andrea Jones Silverman (LA2AG) read this andearlier versions of the paper and provided valuable editorial and substantive comments. Louis de Merode(AFTIM) commented on earlier versions of Chapter IV, Section E and reviewed subsequent revisions.

Among the resources provided prior to completion of the White Cover draft of this paperwas the research assistance of Julie Burland (M.A. student at American University), Kojo Hagan (SeniorLecturer, Ghana Institute of Management and Public Administration), Karen Hendrixson (consultant), KimJohnston (M.A. student at American University), Richard Moore (Professor at American University andconsultant), and Roberto Schatan (Ph.D. student at UCLA). Karen Hendrixson joined this effort at itsearliest stage and was primarily responsible for organizing the distribution of the study questionnaire withinthe Bank and keeping track of and recording and summarizing the responses. Roberto Schatan wasexceptionally Lelpful during the early stage of conceptualization and kept me honest when my ownpreconceived ideas would get the better of me. Richard Moore, as a published scholar on issues of urbanpolicy and intergovernmental relations in developed and developing countries, contributed in the same wayat a later stage. Julie Burland and Kim Johnston reviewed every Country Economic Memorandum (CEM),Public Expenditure Review (PER), Public Investment Program (PIP) report, Structural Adjustment Loan(or credit/SAL) report, and Technical Assistance Loan (or credit/TAL) report produced within the Bankduring calendar year 1988 and every Policy Framework Paper (PFP) to which the Bank was a party duringthat same year (a total of 104 documents) and noted patterns in their treatment of decentralization issues.

Myma Alexander, Arturo Israel, and John Nellis reviewed my original draft outline for thisstudy and offered valuable comments. I am grateful to Dennis Rondinelli, Research Triangle Institute(RTI), for a one-on-one full day discussion of decentralization issues in February 1989 and Ken Kornherof the United States Agency for International Development (USAID) who shared several documents insupport of that agency's 'Decentralization: Finance and Management Project."

I also owe a debt of gratitude to the 106 Bank staff who responded to the complex andlengthy study questionnaire distributed to every country officer and country economist, and each sectoroperations division, within the Operations complex of the Bank. Their observations made a valuablecontribution, as clearly shown by the numerous references to the questionnaire responses in the text andannexes. In particular, I want to thank Michael Azefor; Jagdish K. Bahal; Eleotario Cadato; Ben Fisher;James Hicks; John Kendall; Franco Lucca; Hope Thavaraj; and Ai Chin Wee who attended a half-daymeeting on June 8, 1989 during which a number of significant issues were identified and discussed.

Mary Abu Zeid and Nadege Thadey organized and typed the various tables and LeoDemesmaker and Alicia Hetzner served as editors for this published version of the paper.

All of the assistance described above notwithstanding, I am solely responsible for any errorsof omission, fact, or analysis in the paper.

Jerry Silverman

'ii

ABSTRACT

The paper summarizes experience with alternative decentralization arrangements and suggestsa new analytical framework for assessing the impact of such arrangements on the performance of economicdevelopment programs and projects. Consideration of alternative forms of decentralization reveals the needto clarify and establish priorities among multiple economic development and political objectives. Thepotential for conflict among multiple objectives and the need to assess decentralization policies in terms ofacceptable trade-offs among those objectives summarizes the importance of this paper. This paper isaddressed to the broad audience of development professionals who are interested in both the substance ofdecentralization issues and their impact on economic development.

NOTE FOR THIS REVISED EDITION

Two earlier versions of this paper (November 1990 and reformatted December 12, 1991) have beencirculated, under the same title, as Study Paper No. 1 of the Public Sector Management Division, AfricaTechnical Department. Only a few substantive changes have been made for this publication: two additionaltypes of decentralization, top-down and bottom-up principal agency, have been identified and discussed(Chapter I and passim) and a checklist of technical criteria for the assignment of functions among levelsof government has also been added (Chapter III). Those additions to the text reflect work undertakenduring 1991 and early 1992 with regard to decentralization issues in Bangladesh, China, Ghana, India,Laos, The Philippines, The Republic of South Africa, and Tanzania.

viii

ACRONYMS

AFITIN Infrastructure Division, Technical Department, Africa Region (World Bank)AFTPS Public Sector Management Division, Technical Department, Africa Region (World

Bank)BOAL Basic Organization of Associated Labor (Yugoslavia)CEM Country Economic Memorandum (World Bank)CT Country Team (World Bank)EDI Economic Development institute (World Bank)EMENA Europe, Middle East, and North Africa Region (World Bank)ERP Economic Reform ProgramESAMI Eastem and Southern Africa Management InstituteESW Economic and Sector Work (World Bank)EWO Economic Work (World Bank)GDP Gross Domestic ProductIMF Intemational Monetary FundIARD Integrated Area Rural DevelopmentIRD Integrated Rural DevelopmentLAC Latin America and Caribbean Region (World Bank)LDC Lesser Developed CountryMPLD Ministry of Panchayat and Local Government (Nepal)NGO Nongovernmental OrganizationO&M Operations and MaintenanceOAU Organization of African UnityOECD Organization for Economic Cooperation and DevelopmentOED Operations Evaluation Department (World Bank)PCR Project Completion Report (World Bank)PE Public Enterprise (or parastatal)PER Public Expenditure Review (World Bank)PFP Policy Framework Paper (a strategy paper agreed among a Government, the IMF,

and the World Bank)PIP Public Investment Program (World Bank)P1U Project Implementation UnitPPAR Project Performance Audit ReportPRE Policy, Research, and External Affairs (Vice-Presidency, World Bank)PSM Public Sector ManagementRD Rural DevelopmentRegl Regional (level)SAL Structural Adjustment Loan (or Credit/SAC; World Bank)SECAL Sectoral Adjustment Loan (or Credit; World Bank)SOD Sector Operations Division (World Bank)SRA Sector Review (World Bank)TAL Technical Assistance Loan (or Credit; World Bank)USAID United States Agency for International DevelopmentWHO World Health Organization

ix

CONTENTS

FOREWORD v

ACKNOWLEDGEMENTS vi

ABSTRACT vii

NOTE FOR THIS REVISED EDITION vii

ACRONYMS viii

L INTRODUCTION 1Definitions of Decentralization 1Scope and Outline of Paper 2

II. OBJECTIVES: DECENTRALIZATION AND THE CHANGINGROLE OF THE PUBLIC SECTOR 4Decentralization Objectives 4Clarifying Conflicting Objectives 6Implications of Macroeconomic Reform 7Linking Decentralization to MacroEconomic Policy 9Resistance to Change 13Summary Conclusions 13

in. ALTERNATIVE DECENTRALIZATION ARRANGEMENTS 15Hybrid Decentralization 15Linking Micro and Macroinstitutional Arrangements 16Organizing for Implementation and Sustainability 22Constitutional Structures 23Summary Conclusions 23

IV. ECONOMIC MANAGEMENT FUNCTIONS 25Overview 25Planning 26Fiscal Policy and Revenue Generation 28Public Expenditure 33Public Sector Staffing 35Operations and Maintenance 37Summary Conclusions 39

V. ABSORPTIVE CAPACITY AND INCENTIVES 41Public Sector Management and Institutional Environments 41Incentives and Motivation 44Decentralization and Labor Markets 45

SUMMARY CONCLUSIONS 48

x

FIGURES

11.1 Decentralization: Location in Hierarchy of Goals and Objectives 5Hi. 1 Alternative Structures of Subnational Governments 24

NOTES

Chapter I 49Chapter 11 50Chapter m 54Chapter IV 56Chapter V 60

APPENDICES

1. Decentralized Structures and Functions 62

2. Decentralization by Countries

(a). Political and Administrative Structures (1989) 68(b). Countries Engaged in both Structural Adjustment (1985)

and Decentralization (1989) 71

3. Statistical Tables

(a). Percentage Contribution of Autonomous Local Agencies toConsolidated Local Government Spending in Selected Cities 72

(b) Financing of Local Public Expenditures In Selected Cities:Percentage Distribution By Type of Revenue 74

(c) Importance of Intergovernmental Transfer in Local Government Finance 76(d) Grants Distributed on a Formula or Ad Hoc Basis 78(e) Pure Tax Sharing Arrangements With Local Governments 83(f) Percentage Distribution of Local Tax Revenues by Source

For Selected Cities 85(g) Government Wages Relative to Total Wages, National Income,

and GDP (1983) 87(h) Government Employees by Level of Government (1983) 88(i) Share of Government Employment in Total Nonagricultural

Sector Employment and Population, by Level of Governmentand Region: Means and Standard Deviations (1983) 89

(I) Share of Different Units of Government in Total Employment ofGeneral Government and the Public Sector, by Level of Governmentand Region: Means and Standard Deviations (1983) 90

(k) Central Government Employees per 100 Inhabitants (1983) 91

REFERENCES 93

INTRODUCTION

and despite masses of central governmentThis paper argues that alternative forms of employees stationed in branch offices, the impact

public sector decentralization have important of such a structure is to centralize power withindifferential effects on the performance of economic central government.development programs and projects and suggests anew conceptual framework and improved analytical Delegation: Independent Subsidiary Modelmethods for assessing such effects.

Delegation is the form decentralization takesConsideration of alternative forms of when parastatals and other semi-autonomous

decentralization reveals the need to clarify and government agencies are assigned responsibility forestablish priorities among multiple economic implementing or maintaining sector investments.4development and political objectives. It is the Such arrangements occur primarily in the energy,potential for conflict among multiple objectives and communications, ports, and transport sectors.the need to assess decentralization policies in terms Functions are sometimes delegated to a parastatalof the most acceptable trade-offs among those which, in turn, deconcentrates responsibility forobjectives that summarizes the importance of this internal managerial and administrative systems topaper for the design and implementation of its own subnational units. The act of delegatingeconomic development programs and projects. responsibility to an organization, however, does

not, in itself, ensure intemal deconcentration withinIt is only insofar as decentralized that organization. One form of delegation, limited

institutional arrangements within the public sector to the project implementation phase, has come tohave a significant impact on policy choices be known as "enclave' projects. On a territorialaffecting the achievement of specific economic basis, such arrangements are most prevalent in thedevelopment goals and objectives that they are of integrated rural development sector. Historically,concern to us here. the establishment of independent project

management units has also been employed withinthe national headquarters of sector ministries in

Definitions of Decentralization other sectors, but such practices are declining (withthe exception of the urban development sector).

Although the term "decentralization' hasbeen used to encompass a variety of alternative Devolution: Discretionary Authority Modelinstitutional structures,!' three types are oftendifferentiated in the literature: deconcentration; In a minority of cases, decentralizeddelegation; and devolution.2' Two additional organizational arrangements within sectors are of atypes, top-down prncipal agency and bottom-up purely devolved type. Devolution of at least someprincipal Agency, are also important because they functions is found primarily in the urbanidentify real situations which are not captured by development sector (while other functions arethe other three labels.3' delegated to project implementation units at the

national level in that sector) and, with respect toDeconcentration: Branch Office Model operations and maintenance, in the rural and urban

roads subsectors. The essence of devolution isDeconcentration is the most common form discretionary authority. In devolved systems,

of decentralization employed in the agriculture responsibilities for a range of operationsservices, primary education, preventive health, and encompassing more than one sector are assigned topopulation subsectors. In such systems, selected local governments. To the extent that localfunctions are assigned to subnational units within governments have discretionary authority, they cansector ministries or other sector-specific national do essentially what they decide to do; bound onlyagencies. One way to think about deconcentrated by: (1) broad national policy guidelines; (2) theirinstitutional arrangements is in terms of a Branch own financial, human, and material capacities; andOffice system. In deconcentrated systems, local (3) the physical environment within which theygovernments do not exist as discrete entities; at must operate. An essential characteristic ofleast with respect to the specific functions for discretionary authority is that the oversight role ofwhich central government ministries are central governments is limited to ensuring that localresponsible. Thus, with respect to those functions, governments operate within very broad nationalGovernment exists at local levels in the form of policy guidelines; at least with respect to thosediscrete ministry offices; without any mechanism at functions for which local governments have thethe local level for mandatory horizontal integration. authority to exercise discretion. The exercise ofDespite geographic dispersion of ministry offices effective discretion by local governments depends,

2

to a significant extent, on their ability to generate government agency contracting with anotherthe financial and staff resources to implement the government agency to perform on its behalf isdecisions which they, themselves, make. known as 'force-account." Thus, a local

government's Health Department might contractIn these devolved systems, project with a Ministry of Public Works to construct a

implementing agencies are responsible to provincial clinic on its behalf, with the understanding thator local governments rather than to sector payment to the latter would be made by budgetministries. In such cases, specific functions are transfer from the former. The model introducedrarely further devolved. Either management of here includes such force-accounts, but it alsoprojects is integrated within the established encompasses a much broader range ofstructure of local governments or autonomy is arrangements between lower-level governmentgranted to project-specific management units agencies, local communities, or individualresponsible to local governments. In the former users/clients and higher-level government agencies.case, project management has been centralized atthe local government level. In the latter case, As in the case of top-down principal agency,management has been delegated or deconcentrated the characteristics of bottom-up principal agencyto project mnanagers by local government. summarized above do not depend on the extent to

which individuals, communities, or localTop-Down Principal Agency governments are, or are not, subordinate to higher-

levels of government with respect to otherWithin the context of the top-down principal functions they might perform.

agency model, local governments exerciseresponsibility on behalf of central governments or, The bottom-up form of principal agency issometimes, parastatals (such as electricity important conceptually; especially whencorporations). When acting as Principal Agents considering a fresh perspective on alternatives tounder such circumstances, local governments do so the failed way in which the provision of healthunder the direction and supervision of central services is organized in many African countries.government agencies. An important expectation However, there are few actual examples of it.concerning the relationship between local and Where some attempt has been made to providecentral governments is that, when local such services as primary health care in formsgovernments are acting as no more than agents of similar to, if not in exactly the same manner as,central governments, the latter remain primarily the model introduced here, results have beenresponsible for financing the costs associated with encouraging.whatever programs are involved. Thecharacteristics of principal agency summarized These five sub-definitions of decentralizationabove do not depend on the extent to which local will be employed in this paper as a starting point;governments are, or are not, autonomous with an important refinement will be suggested with therespect to any other functions they might introduction of the concept of "Hybrid"undertake. Thus, in some cases, local governments decentralization (Chapter III).are, in their entirety, no more than principal agentsof central governments; in other cases they serve asprincipal agents in parallel with the performance of Scope and Outline of Paperother roles as well.

This paper is meant for the broad audienceBottom-Up Principal Agency Model of development professionals having an interest in

the substance of decentralization issues and theirThe bottom-up form of principal agency impact on the achievement of economic

reverses many of the characteristics of top-down development objectives. The paper sunmarizsprincipal agency noted above. With respect to experience with alternative decentralizationbottom-up principal agency, various levels of arrangements and suggests a new analyticalgovernment or t a framework for assessing the impact of such

-uf1 dy1ii ki,fgow~wment-or4i yasage ts arrangements on the achievement of economic,of1t]iariefasrsPus, a of development objectives.

bottom-up principal agency iS significaly differentfrom the top-down version because of the source of From a practical concern for achievingdiscretionary authority to initiate contracts with economic development objectives, the analyticalgovernment agencies and supervise their framework presented in this paper is based on theimplementation. In some countries, one following propositions:

3

(a) Achievement of economic policy goals and expenditure programming and management,required changes in the role of the public fiscal policy formulation and revenuesector are the criteria against which generation, public sector staffing, anddecentralization should be assessed operations and maintenance; Chapter IV);(Chapter II); and

(b) Appropriate changes in the role of the (d) Organizations and individuals responsiblepublic sector require compatible institutional for performing such functions within thosestructures, including elements of structures must have the capacity anddecentralization (Chapter II); motivation to do so efficiently and

effectively (Chapter V).(c) Appropriate changes in the role and

structure of the public sector require the Chapters II - V of this Volume expand on theperformance of five key economic analytical framework. Chapter VI summarizes themanagement functions (planning, public conclusions.

OBJECTIVES: DECENTRALIZATION AND TIE CHANGINGROLE OF TILE PUBLIC SECTOR

Consideration of decentralization issues Improing Management Efficiencyreveals many potential trade-offs among multipleobjectives. Thus, clarifying objectives is necessary Within the development literature,because multiple objectives are often established decentralization issues are often viewed inwithout explicit determination of feasibility or the instrumental, and thus, technical terms. From thatnature of systematic links among them. perspective, the objective of decentralization is

increased efficiency and effectiveness of economicCurrent approaches to decentral-izaticn can and social development programs.' Technical

be criticized for: advocating changes in public arguments in favor of decentralization normallysector structures without addressing broader stress such benefits as: reduction of overload andchanges in public sector roles and (ii) focusing on congestion in the channels of administration andalternative decentralization arrangements as ends in communications; timely reaction to unanticipatedthemselves. A more fruitful approach relates problems that inevitably arise duringconcern for decentralization issues to current implementation; improved technical capacity tothinking about the institutional requirements for deliver services at field levels; and improvedachieving economic and other objectives. administrative and managerial capacity.

This Chapter starts with a description of Improved performance is also expected toobjectives most often advocated for programs of result from: improved information about local ordecentralization, discusses the linkages between regional conditions for more effective anddecentralization and economic policy objectives, appropriate economic development planning andand concludes with a summary analysis of decision-making and increased monitoring, exerciseresistance to change. of influence, and support by beneficiaries for

national development policies through participationin planning and decision-making. Assumptions

Decentralization Objectives concerning how alternative forms ofdecentralization contribute to administrative

This section identifies those objectives most efficiency and effectiveness vary significantly.often advanced as justification for decentralization.The relationships between those decentralization Serving Polihcal Interestsobjectives and economic policy objectives arediscussed in Section D, as illustrated in Figure 1. 1. The political interest most often advanced in

favor of decentralization is improved equity in theImproved economic and managerial allocation of government resources for investment

efficiency or effectiveness is most often advanced and the delivery of services as the result ofas the primary justification for decentralization. enhanced representation of a wide variety ofNevertheless, different parties, although ostensibly political, religious, ethnic, and other socialjoined in support of decentralization, can be groups.Y Thus, the political effects ofmotivated by quite different objectives. Thus, it is decentralization can include the transfer of poweruseful to distinguish between the three most to persons at the periphery who would notcommon objectives of decentralization: improving otherwise have influence on decision-making at themanagement efficiency; serving political interests; national level.3'and improving financial performance throughincreased revenue generation and rational In this way, decentralization has theexpenditure decisions. The first two of those potential to be a powerful instrument for betterobjectives are discussed in this Section; the third governance. Nevertheless, the reinforcement of theobjective is summarized in Section C and discussed power of locally established elites or ethnic groupsmore fully in Chapter IV.

5

Figure 11.1

DECENTRALIZATION: LOCATION IN HIERARCHY OF GOALS AND OBJECTIVES

POLITICAL GOaLS

Defend Social/Physical PopularRetain Political Territorial Econoric lelfare of Participatienl

Pouer Pouer Equity Population Deincracy

ECONOMIC DEVELOPMENT OBJECTIVES

NediuimTermEcnomic Growth

PreserveProvide PhysicalEnabling Envi rolrent

Provide Envi rormentPublic GoodB forwd Services Private Sector

FISCAL STABILIZATION OBJECTIVES

Restrict ErihanceApprepriate Limit Reform Strea line Eliminate Discretionary Competitive

Excuege Public Public Increase Public Price Nonetary FinancialRates ExpNditure Enterprise Revenue Service Controls Aggregates Intermediation

|ISTITUTIOIAL PERFORMANCE

Fiscal

I I ~Pal icyand Public operationsPublic Revemse Sector and

Plaming Expenditure Generation Staffing Maintenance

|Atternative |IDecentralization|

|Arrangements|

r: ~~~~IIn Support of Next Highest Item in Hierarchy.

-- = Potential Trade-Offs Among Item.

6

at the expense of broad-based participation and Competing political interests can motivateequity can also occur. support or opposition to decentralization programs.

Thus, it is important to distinguish between thePossibilities of significant changes in the desire of development professionals to avoid

structure of political incentives, and hence advocacy of specific political objectives from theobjectives, as they affect support or opposition to importance of identifying and assessing existingdecentralization should not be overlooked. The political objectives among various groups. Indeed,conventional wisdom that senior central economic and administrative rationales for orgovernment officials are most likely to oppose against decentralization are often advanced to maskdecentralization and that local government officials the primacy of political issues. These politicalare most likely to support it should not be assumed. considerations are compounded whenTo the extent that political power within the public decentralization efforts are undertaken in thebureaucracy is transformed from a reward to a context of building national unity; such effortsburden, responsibility for the performance of public often result in the allocation of resources andfunctions becomes something to be avoided rather benefits to a particular region, tribe, or otherthan sought after. Thus, central government subset of a country's population.officials sometimes want to transfer such burdensonto reluctant local officials.

Clarifying Conflicting ObjectivesAs only one example, the credit for delivery

of goods and services at the national level is The multiple objectives associated withchanging, in some circumstances, to blame for the economic reform and decentralization programsinefficient and ineffective delivery of such services. need to be identified and the appropriateness ofThat change in political incentives is being relationships among them clarified. Tanzania'sreinforced in some countries by the practical experience with several successive attempts atconsequences of economic reform measures. In decentralization illustrates both the necessity andsuch countries, some national political leaders are difficulty of distinguishing among multipleattempting to escape responsibility for the delivery objectives.of services by shifting the blame for poorperformance to local governments through The most recent reorganization ofdecentralization. Tanzania's public sector was initiated in 1983 when

responsibilities distributed among central andThus, in circumstances of substantially regional governments were reshuffled and

reduced public expenditure, the previous rewards redistributed among central government and districtof political support and enhanced influence over councils. It has been argued by Walakira of thepeoples' lives is often transformed into opposition Eastern and Southern African Management Institutedue to the increased financial costs of such services (ESAMI) that these various attempts ator the political costs of services reduced or decentralization through alternative arrangementseliminated. Sharing responsibilities for such have been characterized by a multiplicity ofservices provides an argument for, at a minimum, objectives. He has classified these objectives undersharing the blame or, with respect to some the headings of political, administrative, andservices, escaping the blame altogether. In economic goals, as follows:countries as disparate as Zambia and Guatemala,central governments are responding to citizen On the political level the reformscomplaints by shifting responsibilities to local aim at wider and more constructivegovernments; 'don't complain to us; complain to popular participation in planyour responsible local governments." In fact, formulation and implementationcentral government spokespersons often join the within the limits implied by: anchorus of complaints by publicly exhorting local enhanced leading role for the party;governments to respond positively to such citizen and a redistribution of developmentcomplaints. Nevertheless, central governments more equally in the country. The~rarely support these exhortations with a transfer of administrative goals of the reformsresources commensurate with the transfer of may be summarized as: (1) increasedresponsibilities. effectiveness and efficiency in the

7

operations of government; (2) more Inplications of Macroeconomic Reformeffective integration of governmentprogrammes; and (3) increased The literature on adjustment labelsgovernment accountability. From appropriate economic policy objectives in differentan economic point of view, the ways. While the much larger number of specificreforms are intended to: (1) increase policy reforms established to achieve thesegovernment capacity to implement objectives are not always classified under the sameproductive projects successfully; (2) headings, their content remains essentially theto increase the capacity to assist same. Thus, two important assumptions underpinvillages and institutions in their many macroeconomic reform programs (ERPs): theproductive efforts; and more public sector is seriously overextended in mostgenerally (3) to facilitate rural social LDCs and the private sector is, at the aggregateand economic development.Y level, vastly more efficient in the production of

goods and the provision of services than is theWhen twenty-five Tanzanian government public sector.!' Such assumptions lead inevitably

officials, from both central and local levels, were to considerations of the proper scope of the publicasked to identify the objectives of the current sector. The remainder of this Section focuses on:decentralization program in March 1990, they short-term fiscal stabilization objectives and longer-listed eleven distinct objectives.5' However, when term changes in the role of the public sector.asked to establish three priorities among the list ofeleven objectives to establish a foundation for an Improving Financial Performance:effective intervention strategy to improve Fiscal StabUizationdecentralization, the group selected: (1) people'sparticipation, democracy, and self-governance; (2) To achieve longer-term macro-economicenhancement of socioeconomic well-being of the objectives, emphasis is often placed on achievingpeople; and (3) provision of services to the people fiscal stabilization in the short-term in order toin the most efficient manner.0' Those selected establish a firm foundation for sustainablepriorities clearly illustrate the multiple, and economic growth. Such measures can have apotentially conflicting, objectives often established direct impact on the role of the public sectorfor decentralization programs. It is unlikely that because necessary reductions in expenditure requireany program of decentralization will be able to decisions about priorities among public goodsachieve all the objectives of the Tanzania program. which governments might ideally provide.

The absence of prioritization among The primary objective of fiscal stabilizationobjectives is likely to hinder efficient policies is to reduce public sector deficits byimplementation of both ERPs and sector investment bringing government revenues and expendituresprojects. Even when specific objectives have been into balance. The measures intended to do thisclarified and ranked, interpretations of how best to often include some combination of the followingachieve them are often undetermined. The specific objectives: (1) establishing appropriatedifficulty of transforming specific objectives into exchange rates; (2) limiting public expenditurepractical programs to achieve them is illustrated by (recurrent and investment, including reduction orthe concern for equity as a goal. For example, elimination of subsidies); (3) reforming the publicwhen establishing the source of local revenues and enterprise (PE)/parastatal sector; (4) increasingthe rates to be paid, equity can be understood as public sector revenue (without creatingeither fiscal equivalence or as income disincentives for private sector investment); (5)redistribution. Should those who benefit pay the streamlining the public service bureaucracy; (6)costs of providing public goods and services and eliminating government controls over marketthose who do not benefit not pay such costs or determined pricing mechanisms in both domesticshould those who are wealthier pay a different and international trade; (7) restricting discretion inproportion of the costs of provision than those who the administration of monetary aggregates; and (8)are less wealthy?.' The choice is inherently enhancing competitive financial intermediation.subjective; but it is of the essence in choosingfinancing mechanisms in the context of a concern It is generally understood that the genericfor equity. macroeconomic model summarized here should not

be employed rigidly. It should serve only as a

8

basis for analyses to be tested and refined in the public sector. These can be identified byfield as the assumptions underlying such models are considering: the factors which differentiate betweencompared to the realities of specific circumstances. the public or private nature of goods and services;The result, in practice, should be policies and (ii) the distinction between the provision andprograms which are, in important respects, unique producion of such goods and services; and (iii) theto a particular country at a specific time. extent to which decentralized structures are

potentially supportive of such changes in roles.Role of The Public Sector

Public Goods and SericesThe debate concerning the proper role of

government in society has been ongoing since the Neither the economics literature nor theintroduction of the written word (and, no doubt public finance literature are consistent in specifyingbefore that) and it can be expected to continue for the attributes that differentiate public and privateat least as long a period of time. It is generally goods and services. Nevertheless, most wouldaccepted that the resolution of that debate within agree that:any particular society is not primarily a function oftechnical considerations, but of the tradeoffs among (e) Goods or services characterized by inabilitycompeting values. The ultimate resolution of that to exclude large numbers of people fromissue is not the purpose of this paper. receiving the benefit, whether they pay for

it or not, should be considered public goodsNevertheless, the question of the role of the because there is no incentive for the private

public sector in society cannot be avoided sector to provide them;92

completely because a salient feature of ERPs is apackage of structural reforms leading to a (f) Where the goods or services are consumedsubstantial reduction of governmental manipulation jointly and simultaneously by many peopleof economic activity. Many economic reform and the quantity and differential quality ofpolicies require both qualitative reforms of such goods received by individualgovernmental roles and responsibilities and consumers are relatively difficult tocomplementary changes in the organization of measure, then such goods should mostgovernments. appropriately be considered public

goods;'0 'The political requirement underlying ERPs

is that governments must shift from attempts to (g) When people have no choice in thecontrol economic behavior through regulation or consumption of a good or service becausethrough direct and dominant participation in the exposure to it is the equivalent ofproduction of goods and services to the more consuming it, the good or service should belimited, if still crucial, role of providing an considered a public good;-U andenabling environment for private sector economiccompetition. Such a shift is expected to result in (h) When, within the normal operation ofimproved economic efficiency and growth through market mechanisms, economies of scale inthe operation of market mechanisms. This requires the production of goods or services can bethe public sector to limit its role to: (1) establishing expected to lead to 'natural monopolies,"appropriate policies and regulations for the efficient the good or service is essentially a publicand effective operation of market mechanisms; (2) good; even if the other criteria given do notdeveloping human resources (i.e., human apply.'2'infrastructure); (3) providing for the constructionand maintenance of appropriate physical Many analysts also agree that governmentsinfrastructure; and (4) providing appropriate have an appropriate role in providing goods orservices. These objectives are essentially medium services in one or more of the following cases:or longer term and are assumed to correlatedirectly with enhanced possibilities for economicgrowth. (a) The assets necessary to the production of an

important good or service are so specializedSuch macroeconomic reform policies that it does not make economic sense for

provide implicit criteria for evaluating the private entrepreneurs to acquire suchappropriate role of decentralization within the assetsW' or such assets must be linked

9

together with other assets in a complex and in much the same way as central governments.mutually contingent management system to Subnational governments can and do: (1) establishbe used effectively;L4' parastatals, monopolize productive sectors and/or

distort the terms of private sector participation and(b) The provision of the good or service has competition; (2) impose prohibitive disincentives

"high political saliency or sensitivity for investment on the private sector throughsuch as those from which a politically distortive regulations and/or extortionate taxationimportant group such as the poor or a regimes; (3) engage in deficit financing of theirminority would be excluded if they were expenditures; (4) receive preferential treatment byprovided privately; 'L5 or financial institutions and borrow a disproportionate

share of available credit; (5) employ excess staff(c) The intervention of government is necessary with inappropriate qualifications; and (6) attempt to

to maintain at least minimally acceptable implement their responsibilities throughlevels of public health, safety or inappropriate institutional structures and inefficientwelfare.L'' procedures. Thus, changing the structure of the

public sector through decentralization does notProvision and Production necessarily result in changes in macroeconomic

policy or behavior that could foster greaterIt is axiomatic that governments are efficiency.

responsible for the provision of public goods;although it is not necessary that they be directly Unless radical new approaches are taken toinvolved in producing them. Provision is the the structure and objectives of decentralizationdecision to and actual allocation of resources to a programs, increased participation in public sectorparticular good or service and the monitoring of its investment and service delivery decisions is likelyuse; production is the transformation of those to increase demand pressures on governmentresources into the delivery of those goods or resources. It is also likely that, without such newservices.!2" approaches, decentralization will increase, rather

than decrease, aggregate public sector employment.Distinguishing between the functions of

providing public goods and services and producing Experience with the first structuralsuch goods and services helps to identify the types adjustment program in Yugoslavia provides anof economic management function which ought to example of the need for central government, withinbe maintained and improved within the public a substantially devolved system, to retain a key rolesector in support of economic reform measures, in the formulation and implementation of demandand those functions which ought to be reassigned to management policies if stabilization programs arethe private sector. Such distinctions also help to to be effective. It became clear during the decadefocus assessments of the potential impact of before 1974, that integrating decentralized workers'alternative decentralization arrangements on the self-management and some mechanism forachievement of economic policy objectives. macroeconomic management for short-term

economic stability would require new institutionalarrangements. A principle underlying changes was

Linking Decentralization to that they were not to result in the re-emergence ofMacroeconomic Policy central government control.

Negative Implications The result is a complex, non-hierarchical,system of planning characterized by a high degree

Although it will be argued that some forms of participation through an iterative process ofof decentralization are, at least theoretically, negotiated plans among economic agents.necessary for the achievement of economic growth Decisions flow from the micro to the macro-levelwith equity, decentralizing economic management on virtually all matters. Planning and policy-functions can also result in maintaining many making occurs at all levels simultaneously. Co-historically-rooted public sector inefficiencies. ordinating or harmonizing individual plans at all

levels is a continual process of multiple iterationsDepending on the type of decentralization, concluded through a combination of social

subnational government units can affect compacts or self-management agreements.macroeconomic policy and program implementation

10

It is within this complex system that the market surrogate strategies: (1) alteration of thefunctions of macroeconomic adjustment and external environment in ways which placedemand management must be performed. The pressures on the public sector to improve itsresult has been that the capacity to manage demand delivery of services in order to compete (which, inthrough the use of fiscal policy measures has been turn, requires that public sector agencies be subjectextremely difficult to apply because the sources of to the consequences of failure) and (2) restructuringdemand are diffused and little is provided in the of internal institutional arrangements within publicway of prioritized expenditure by a central source sector organizations so as to reinforce externalwith legitimacy for establishing such priorities. competitive pressures.91

Although the form decentralization has taken in To the extent that some significant level ofYugoslavia is unique, it illustrates the severe decentralization can be expected to reinforceupward pressures on expenditures which can appear effective functioning of a market-based economy,in decentralized systems. Management of it is in some sense inevitable. To fully appreciateinflationary pressures generated by autarkic this perspective, it is useful to consider the concerndecisions and budget controls is likely to be for parallel economies in current economic reformprofoundly difficult in such systems. programs.

Positive Implications Parallel Economies. An importantassumption underlying economic policy

Despite the potential negative effects of liberalization is that a relatively free market alwaysdecentralization on short-term fiscal stabilization exists for the performance of some economicmeasures, decentralized political and administrative activities. Where governments attempt to tightlysystems appear to be a necessary element of control economic activities and, thus, createchanges required in the public sector to support the distortions in the operation of the market, authenticefficient and effective operation of market economic activities are performed, although lessdetermined economic systems.L- The potential efficiently, within parallel (black or informal, butbenefits of decentralization for economic growth not necessarily illegal) economic systems.m4' Ancan best be understood in the context of the important function of ERPs is to recognize thebroader changes in the role and structure of the reality of the market-oriented parallel economy andpublic sector. integrate it into the formal, and officially

sanctioned, economic system. By so doing, aIf government structures are to complement mutually supportive relationship can be established

and support a pluralistic economic system, it should between the interests of the public and privatemirror, to the extent possible, such a system.)' sectors. For example, if government is able toThus, governmental efficiency should also be legitimate and regularize economic 'activitiesenhanced through competition within a pluralistic undertaken in the parallel system, it should be ablepublic sector. Governmental jurisdictions and to increase its tax revenues while reducing tjIe costpolitical interest groups should compete for the of operations for the private sector. /legitimate receipts of public revenue and for theauthority to decide allocations. Such arrangements Parallel Government. A similarcould serve as one type of public sector proxy for Xphenomenon operates with-egard to the civiceconomic competition in the private sector res sib ilities overnments. In spite of themarketplace.&' The importance of such desires of many utopian political theorists, somecompetition is a principal tenet of public choice form of government exists universally in humantheory2 ' and of the market surrogate society. Most people understand intuitively whatapproach.2' Decentralized public sector $unctions, at a minimum, governments shouldstructural arrangements provide such competition. perform. It is from that understanding that

governments derive their legitimacy. WhenMarket Surrogates. The essence of a market governments do not perform their necessary

surrogate approach is that improvement of functions or where they do so in substantiallyperformance in the non-market public sector arena ineffective ways, many of those functions will becan be assisted by the selective introduction of performed in one way or another outside thecompetition, choice, and accountability mechanisms formally and officially sanctioned governmentalinto the institutional structures of government. system.&' Thus, Elinor Ostrom, LarryGabriel Roth identifies two principal components of Schroeder, and Susan Wynne argue that 'the fact

11

that social life has not totally disintegrated even services ought to be provided in what quantity andunder the impact of the most repressive regimes quality, how to finance the production of suchimplies that small-scale organization that allows goods and services, and how to monitor andpeople to maintain some of the most basic functions regulate the production of such goods and services,exists everywhere. "2' actual production can be left to the private sector.

The importance of that perspective for both The current literature suggests that many ofERPs and the role of decentralized governmental the reasons, both technical and political, given assystems is illustrated by the emergence of parallel justification for decentralization relate to theauthority structures within poor urban provision function while much of the criticismneighborhoods in Latin America. In summary, relates to lack of capacity to perform what are,rapid urbanization combined with insufficient essentially, production functions. Removingopportunities for employment resulted in the responsibility for production from localmarginalization of many people. That segment of governments reduces the need for many types ofthe population was highly dependent on services technical capacity at local government levels.historically provided by the public sector.However, the economic and debt crisis beginning Once this is accepted, the skills requiredduring the mid-1970s resulted in significant within the public sector become primarily those ofdeterioration of governments' provision of such political decision-making, planning, and financingservices. As a result, that marginalized segment of rather than those of physical infrastructurethe population had to establish alternative strategies construction or management of service delivery.for survival.27' The former skills are precisely those in which local

authorities share a mutually supporting advantageOne school of thought holds that these survival with national governments. Where the focus of

strategies have relied mostly on collective action at political decisions is on national integration issues,local neighborhood levels through exchanges of central governments have the comparativelabor-intensive services, communal kitchens, advantage; where the focus is on location-specificcollective workshops, shopping cooperatives and so issues, local authorities have the comparativeforth. This required the establishment of advantage. Where the focus of planning is onidentifiable structures of authority which, within macroeconomic priority-setting and inter-sectoralsuch neighborhoods, provide the functional integration, central governments have theequivalent of government. comparative advantage; where the focus is on

location-specific investments and service deliveryJust as one objective of ERPs is to co-opt the within such national guidelines, local authorities

informal economic system, many governments have have the comparative advantage. In the case ofas an objective of decentralization the co-optation financing, comparative advantage is largelyof such parallel political systems. Effective determined by the sources of such financing.implementation of such political and administrativedecentralization strategies will require the Unfortunately,manydecentralizationsystemsestablishment of positive relationships with such in LDCs reverse this relationship between local andcommunities, rather than attempts to replace such central governments; giving central governmentsorganizations by externally manufactured responsibilities for provision and assigning localstructures. governments responsibilities for production.

Changing the allocation of responsibilities so as toDecentralization and Provision benefit from the comparative advantages of the

various levels of government and the private sectorThe mutually reinforcing relationship between should result in the enhanced performance of local

pluralistic economic and political systems has been governments. If that were accomplished, it woulddiscussed. It remains to summarize conclusions not be necessary to avoid decentralizing certainfrom the earlier discussion of public goods and functions to subnational governments because ofservices and the distinction between the provision lack of capacity nor would it be necessary toand production of those goods or services. undertake massive institutional development

programs at subnational levels.If the public sector's responsibilities in the

directly productive segment of the economy are Demand by local governments for privatelimited largely to deciding what public goods and sector production of public goods and services

12

should result, eventually, in the decentralization of payoff from training in the private sector, inmuch of the private sector itself. Dispersion of improved efficiency of road construction anddemand territorially should result in the dispersion maintenance, is likely to be higher than fromof opportunities for the involvement of smaller- equivalent training in the public sector. That, inscale enterprises which operate within local turn, is due to the expectation that, skills andboundaries as well as deconcentration or delegation capacities being essentially equal, the incentives inwithin large enterprises located in capital cities to the private sector are more supportive of suchbranches located within local jurisdictions. Such efficiencies than in the public sector.changes in the role of the public sector could resultin the creation of mutual dependencies among both In addition to training, consideration is beinglocal governments and the private sector and in given to renting equipment owned by the publicenhancing competition in the private sector itself. sector to private sector firms in Burundi, Guinea,The rise of what can be termed 'public sector Tanzania, and Zaire, a practice which is already inservice industries" within most non-communist place in Ghana. In Guinea and Zaire, pilotdeveloped countries suggests a model whereby projects have been initiated to privatize mechanizedcompetition among private sector enterprises for brigades currently maintained within the publicproduction contracts with the public sector is service.fostered within the bounds of governmentregulation and auditing of performance. Unfortunately, several of the earliest

initiatives (for example in Ethiopia and Ghana)Examples of public and private sector have been unsuccessful due to subsequent changes

partnerships which might emerge if clear in economic policy and/or the inefficientdistinctions between provision and production performance of the provision role by governments.functions are explicitly drawn are provided by For example, in Ethiopia, parastatal companiesinitiatives undertaken for road construction and assumed the responsibilities of private contractorsmaintenance in Africa; a responsibility often following the 1976 revolution and, in Ghana,assigned to local governments.m' The approximately one-third of the contractors traineddevelopment of capacity among private sector firms to perform road maintenance have gone out ofto perform road maintenance activities under business because of long delays in payments by thecontract to the public sector in Ethiopia, Ghana, Government. That highlights the importance ofand Kenya was well underway twenty years ago. getting the incentives right. Nevertheless, in the

context of current economic policy reformAn example of how capacities of local firms programs, such negative incentives should be

are often underestimated by central government reduced.ministries is provided by Burundi and Tanzania,where private sector firms have been contracted by In summary, there are at least sevenlocal governments to build sections of roads even important implications of an approach which limitsas their respective Highway Authorities were the responsibilities of local governments to theunaware of such activities and did not know that provision of public goods and services:such private contractors were available with theirown road equipment. Indeed, the aggregate (a) The functions of governments, includingproduction capacity of domestic road maintenance local governments, would be substantiallycontractors in Tanzania has been estimated at nine reduced in scope in many LDCs;million dollars per year.

(b) Local governments would be more likely toThe expected efficiencies of assigning road have the capacity to perform the more

construction and maintenance responsibilities limited range of economic management(production) to private sector firms under contract activities required;to the public sector is attested to by recentinvestments in training managers and construction (c) Local government expenditures on a broadpersonnel of such firms at public sector expense in range of commercially viable investments inBurundi, the Central African Republic, Ghana, private goods and services and theKenya, Tanzania, Uganda, and Zaire; while public maintenance of such investments would beworks training centers are open to the staff of reduced in favor of private sectorprivate contractors in Madagascar and Tanzania. investment;Such investment is due to the expectation that the

13

(d) As a result of withdrawing from sort of fundamental institutional reforms discussedresponsibilities for providing and maintaining here requires a long-term perspective.private goods and services and for producingand maintaining public goods and services, In many countries, it is no small undertakinglocal government expenditures on staffing to transform the role of the public sector from anshould be substantially reduced; important producer of goods and services to the

more limited, although still crucial, role of(e) The impact of local government expenditures providing an appropriate policy and regulatory

on aggregate public sector deficits should be environment, an increased emphasis on humanreduced (if not eliminated altogether, as they resource development and appropriate physicalhave been for urban authorities in Zimbabwe) infrastructure. It is not surprising that institutionalwith positive results for the availability of resistance is a major constraint to efficient andfinance for the private sector; effective performance of ERPs.

(f) A public sector service industry can be Joan Nelson suggests that resistance toexpected to evolve in the private sector to changes in economic policy is inherent inproduce public sector goods and services established institutions and can be substantiallyprovided by local governments, with the avoided through sharp breaks in the continuity ofeconomic benefits which should accrue from such institutional arrangements and traditions.2'competition in response to public sector It could be argued that local governments do notdemand; and have the same degree of established tradition or

entrenched interests in production activities as do(g) Competition within the private sector would be central government bureaucracies. A program of

both enhanced and dispersed. increasing local government responsibilities forprovision would not involve relinquishing

Although limiting the role of the public sector responsibilities for production which they have not(and local governments more specifically) to had the opportunity to exercise to any great degree.provision of public goods is an ideal which, in its The introduction of decentralized institutionalmost strict definition, is unlikely to be achieved, it arrangements could serve as the sort of regimeis a standard against which appropriate trade-offs break referred to by Nelson. A major problem iscan be identified and weighed in the balance for that those with entrenched interests in productionpractical decision-making. Investments for within the central bureaucracy will opposeimproving the capacity of local governments should decentralization precisely because it wouldbe limited to those functions required for efficient represent such a significant regime break.and effective provision, rather than for improvingcapacity for production.

Summary Conclusions

Resistance to Change This chapter has stressed the necessity ofidentifying a wide range of political, economic, and

This chapter has argued that efficient and institutional goals and objectives and clarifying theeffective government performance of its new roles relationships among them. Such clarification isrequires that, as economic activity is diffused, important because agreement on a longpublic sector institutions must also be diffused to undifferentiated list of goals and objectives mightbe compatible. Nevertheless, the discussion of easily be reached among parties advocating somechanging roles and responsibilities of the public vague notion of decentralization as a means to thesector, in the context of longer-term economic achievement of their own particular, and potentiallydevelopment objectives, does not suggest that conflicting, objectives. Problems, includingcommon agreements and understandings exist political conflict, are then likely to arise as theamong political leaders and external analysts in differential impact of alternative decentralizationcountries initiating or undergoing economic reform arrangements on competing objectives emergesprograms. Indeed, the absence of such common during implementation.understandings goes far to explain the slow pace atwhich implementation of even the most obvious This paper advocates the view thatand marginal institutional changes proceed. Full alternative forms of decentralization should beappreciation, acceptance, and implementation of the assessed according to their relative contributions to

14

the achievement of specific economic policy goals, comparative advantage in the performance of manywhich require specific changes in the role of the of the elements of such a reduced role compared topublic sector. Nevertheless, the theme presented in national governments.this paper that decentralization issues should beaddressed in terms of their impact on the Prescribed changes in the role of the publicachievement of specific economic goals and sector in the economy do not imply thatobjectives does not mean that other goals and governments should abandon all involvement in theobjectives are in some sense illegitimate. economy. Rather, the reduction of state

intervention in favor of individual decision-makingAn important element of the argument is that in the market place is expected to enhance

achievement of the ultimate goals of many governments' ability to implement effectiveeconomic reform programs implicitly requires economic policies and efficiently provide thosegovernments to shift from attempts to control services which appropriately remain theeconomic behavior through direct and dominant responsibility of government.participation in the production of goods andservices to providing an enabling environment for While some forms of decentralization mightprivate sector economic competition, and that some be a necessary condition for sustaining the benefitsforms of decentralized political and administrative of ERPs, decentralization is by no meanssystems are necessary requirements. sufficient. Thus, changing the structure of the

public sector through decentralization does notDistinguishing between provision and necessarily result in changes in macroeconomic

production and limiting local authorities to policy or behavior. Improved policies andprovision substantially resolves many of the issues performance also require supporting incentivesrelated to inadequate capacity at subnational which are, in turn, affected by structures.government levels. From that perspective, two Therefore, incentives are discussed further infurther insights emerge: local governments should Chapter V, following discussions of alternativebe limited in the same manner as the overall decentralization arrangements (Chapter III) and thelimitations on the role of the public sector more characteristics of key economic managementgenerally and local governments have a functions (Chapter IV).

ALTERNATIVE DECENTRALIZATION ARRANGEMENTS

To this point in the paper, distinctions between comprehensive macroinstitutional level, allthe four pure types of decentralization have not decentralized systems can be expected to be hybrid.been stressed. Nevertheless, decentralization is a Decentralized systems at the comprehensiveconcept encompassing myriad alternative sectoral level are most often hybrid.institutional arrangements mirroring the multiplicityof objectives identified in Chapter II. Examples of hybrid decentralization at the

systems-wide level are provided by experience inThis Chapter summarizes the importance of Nepal and Guatemala. In Nepal, the example is of

structural arrangements by examining: the alternative allocations of responsibility for differentintroduction of hyhid-deszaiionasa lx functions. In Guatemala, the example relates totype; the need to link discrete institutio 1 differences in the allocation of responsibilities forarrangements at both the macro and micro-levels the same function (financing local governmentthroughout the entire institutional system; the n expenditures).to relate short-term project implementationobjectives to longer-term sustainability issues; and The Decentralization Act of 1982 in Nepalaltemative types of constitutional structures within increased devolution of authority and thecountries. assignment of staff to positions outside Kathmandu.

The Ministry of Panchayat and Local GovernmentThe discussion which follows is concerned (MPLD) was established to lead and organize

with the actual structure and behavior of the public decentralization and a decentralization plan wassector rather than formally established systems. It incorporated into Nepal's Basic Needs Program.is often the case that actual and nominal As part of the decentralization plan, responsibilitybureaucratic systems do not coincide. for planning and implementing projects was

devolved to the local level. That was reinforced bythe Basic Needs Plan, which assigned responsibility

Hybrid Decentralization for delivering goods and services to localgovernments. It was expected that local

Five types of decentralization were introduced communities would become more autonomous inand defined in Chapter I: deconcentration; managing and implementing projects, but resourcedelegation; devolution; and both top-down and allocation remained centralized. The planning,bottom-up principal agency. Nevertheless, in budget formulation, and personnel managementpractice, it is not possible to assess the impact of functions were devolved. Nevertheless, the centraldecentralization on either ERPs or investment government retained responsibility for budgetprograms at the macro-level only in terms of these approval, revenue generation, and manpowerfive types. Most system-wide institutional employment.l' However, that experiment inarrangements are characterized by the coexistence decentralization was interrupted with the election ofof elements of at least four of those forms of a new Government in Nepal in 1990. Thatdecentralization, together with other highly Government is once again designing a newcentralized government functions. Such systems decentralization program for Nepal.will be referred to as Hybrid.

There are four different sources of financeWithin hybrid systems, some functions are for public sector development activities at the local

decentralized in one way and other functions level in Guatemala: the budgets of centraldecentralized in other ways. For example, one ministries or "institutes' (a form of semi-common form of hybrid system results when autonomous agency); transfers from the eightgovernments assign responsibility for financing and percent ("8%") of central government revenuessupervising investment projects to local required by the Constitution to be transferred togovernments, while retaining responsibility for local governments; credit borrowed from theplanning investments, technical staff employment Municipal Institute; and revenues generated throughand career advancement, as well as technical local taxes. With regard to finance from thesupport, in central sector ministries. Various budgets of central govemment entities,elements of the same function (such as financing) municipalities need the approvals of bothcan be managed in different ways. At the

16

departmental and regional councils before viewed, requires the identification of each piecerequesting such assistance from the center. and its proper placement.Transfers from the "8 %" allow complete discretionto municipal govermments, but limited to capital By presenting data on the impact ofinvestment (most often in the form of city halls, autonomous local agencies on local governmentcommunity centers, rural water systems, and farm expenditures (see Appendix 3, Table 3[a])), Bahlto market roads). The recurrent costs of operation and Linn illustrate the complexity of hybridand maintenance of such capital investments remain systems. Thus, for example, in Bogota, Colombiathe responsibility of the local government. during 1972, twelve different autonomous agenciesHowever, because the budget received from the to which expenditure authority had been delegated"8%" is significantly higher than local by the central government accounted for 79.3governments' own tax revenue, many local percent of local government spending in that city.governments have been diverted from attention toOperations and Maintenance (O&M).

Linking Micro and Macro-InstitutionalLocal revenues also allow for complete Arrangements

discretion to local governments, but because the"8%" transfers are so much larger compared to Ultimately, the performance of economiclocal tax revenues, the need to provide O&M for functions at the macro-level is the result of thethose investments dominates and, thus restricts, activities of large numbers of individuallocal discretionary decisions over the longer-term. organizations (the micro-level). Although theFinally, for the purpose of receiving credit from routine functions of government in basicthe Municipal Institute, final decisions are in the administration and service delivery are oftenhands of the Institute in response to requests from viewed as containable within single organizationsindividual local governments. such as sector ministries or specific parastatals,

actual experience suggests otherwise.Y Thus, theAs the Nepalese and Guatemalan cases show, importance of linking individual organizations or

it is only at the subsectoral level, with reference to subnational governments to the broader institutionalthe performance of specific functions, that one or environment has been recognized as critical foranother of the three pure types of decentralization efficient and effective performance.3' The naturecan be identified. It is useful to focus on the of institutions at the micro-level must bemanner in which authority is structured in each understood in terms of both internal organizationalsubsector for the performance of each of the operations and their links to the externalfollowing five key economic managements environment. As noted in a World Bank Stafffunctions: planning; public expenditure Working Paper in 1980:programming and management; fiscal policyformulation and revenue generation; public sector Many of the factors that influencedstaffing; and operations and maintenance (O&M). management performance were not in

fact subject to management control....The manner in which authority is structured Increasingly, ... practitioners found

for the performance of each economic management that ... projects, in spite of theirfunction can be viewed as a discrete module in the design, were subject to influenceoverall system. It is the unique combination of from entities outside theirthese modules which describe the actual organizational boundaries and in turncharacteristics of a decentralized system at the had to exercise influence over thosesystem-wide level and, therefore, the specific entities.... Moreover, project successimpact of that system on the achievement of was determined as much by skillfuleconomic policy and sector investment objectives. handling of such external influenceThus, some understanding of the comprehensive relationships as it was by projectsystem in any particular country can be derived by resources under the control ofre-aggregating the characteristics of those management.'functonal modules once these are understood. Atthe comprehensive level, any decentralized system No single institution within any country hasis a unique picture puzzle which, to be properly control over all of the variables affecting the

achievement of either their own or more

17

comprehensive policy objectivesY Effective be efficient or effective because too manyinstitutions are characterized by an ability to opportunities exist to subvert program goals wheninfluence and appreciate their environmentY The the center cannot impose the penalties necessary tohuman tendency to define a management problem elicit compliance.as being caused by insufficient control and,therefore, to see the solution as expansion of As part of the diagnosis of the broadercontrol rather than influence is a recipe for failure. institutional context within which organizationsThis has obvious and profound implications for function in decentralized systems, it is important toeconomic policy and sector investment decision- focus on the linkages among organizationsmaking, the programs and projects established to horizontally and vertically within the entire systemimplement them, and the structural arrangements rather than primarily or exclusively on the internalwhich provide the institutional context for efficiencies within local governments or individualimplementation.2' parastatals or specialized agencies. This means

focusing on the entire decentralized system ratherIntegrating Horizontal and Vertical Linkages than limiting attention to local governments

themselves. This is parfcularly important whenThe hybrid nature of decentralized systems at considering potential trade-offs between short-term

the systems-wide level provides the context within project implementation objectives and longer termwhich sector-specific organizations must function to sustainability.influence and appreciate their environment.Individual organizations which do not link Assignment of Functionseffectively to the broader institutional environmentcan be expected to face serious implementation and A vertically integrated system also requiresoperational difficulties. Institutional arrangements judgements about which functions, in whichat the system-wide level influence, and in turn are subsectors, ought to be delegated to whichinfluenced by, performance at the level of organizations or be deconcentrated or be devolvedindividual organizations or sectors. For example, to which level of government. The performance ofsystem-wide policies regarding the terms and every function at local levels should not be anconditions of public sector employment directly objective of decentralization programs. Someaffect the flexibility enjoyed within single functions are clearly national in scope andorganizations or specific sectors to make responsibilities for them ought to be retained byfundamental institutional changes. Conversely, central governments. The negative results ofsingle institutions or sectors can take unilateral devolving responsibility for an inherently nationalactions, for example incurring debt, that have an function to local governments is illustrated byimportant impact on the larger system. It is critical assignment of responsibilities for ports