Political Decentralization and its Economic Potential for Developing Countries

Economics, Medium Reads
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The fundamental question of politics is the distribution of political power in a society. Economists want a distribution of political power which best facilitates economic development and meets individuals’ material needs. In developing countries, the alleviation of poverty and the provision of basic services and infrastructure are pressing policy issues. Government devolution or decentralization refers to the transfer of power, resources and responsibilities away from federal bodies, usually concentrated in capital cities, towards more local bodies that are more proximate to the places they govern. In most cases, if certain conditions are met, decentralization provides economic advantages for these countries.

The Rationale Behind Decentralization

The failure of centralized governments, such as those in India, Columbia and Brazil, to avoid macroeconomic instability and to provide public services have led many countries to pursue decentralization as a potential solution (Serdar et al., 2002). In 2001, sixty-three out of seventy-five developing countries were undergoing some form of decentralization (Garman et al., 2001).

Decentralized governments improve economic efficiency in three ways. First, a greater diversity of fiscal and economic policies across regions results in greater efficiency when citizens are offered greater choices in terms of the systems they wish to live in. Policy pluralism promotes competition between governments to provide better services (Smith 1985). Secondly, local governments have an informational advantage due to their greater proximity: local representatives are better placed to know issues and most cost-effective solutions. In general, local governments tend to outperform central ones in collecting revenue and allocating resources (Oates, 2005). Finally, decentralization and a diverse set of policies allows for greater experimentation and innovation: regions can learn from each other and disseminate better practices when they seek individual solutions, as opposed to the ‘one-size-fits-all’ nature of centralized policy.

Furthermore, greater local accountability results in a better distribution of public investment. During Bolivia’s centralized government, policymakers had incentives to appeal to the most wealthy, connected and populated areas over all others. By contrast, the transfer of power to hundreds of local governments meant that politics was more accessible to poorer rural communities, and more sensitive to grass-roots pressure. The result was a more equitable allocation of public funds, and improvements in public education and sanitation (Faguet, 2005). In Cambodia, political decentralization resulted in policy that was significantly more responsive to the needs of the poorest and had a positive effect on

poverty alleviation (Westphal, 2011). This is because it encouraged a more inclusive, accessible decision-making process that more accurately reflected citizens’ goals.

When does Decentralization Work?

Decentralization has, however, produced mixed results. Proponents of centralization point out the economies of scale and improved national coordination by deciding policy and providing services on a national level. This is advantageous when a single set of policies is able to broadly benefit the entirety of a country’s citizens. An examination of government decentralization in Indonesia during the early 2000s and its effect on public infrastructure found that decentralization had a positive effect because no such optimal national policy existed: rather, the diverse preferences and needs of individual communities necessitated individual solutions (Chowdhury et al., 2009). The majority of developing countries are similar, with differing parts of countries at varying levels of income, urbanization and industrialization. This heterogeneity is an important condition for decentralization.

Closer examinations of fiscal decentralization, or the devolution of tax collection and government finances, suggest that not all kinds of decentralization are beneficial. Firstly, without a centralized distribution of grants and budgets, naturally the wealthiest areas would always receive the largest amount of investment as they produce the greatest tax revenue. Secondly, the tax power of regional or local governments should be limited to certain sectors, such as for example immobile assets. Varying tax levels on mobile assets would distort national economies, potentially resulting in tax havens as regions compete to attract such assets (Serdar et al., 2002). Thirdly, to stabilize national economies, it is advantageous for central governments to control expenditures that have wide impacts on demand and changes in business cycles, such as unemployment benefits (Ter-Minassian, 1997).

Not all public efforts can or should be decentralized. In the case of clearly national interests such as defense, regional autonomy creates a collective action or free-rider problem which is solved when such interests are collectivized and met on the national level. Furthermore, when centralized governments can hierarchically manage issues such as national and international trade, coordination often results in greater efficiency. In 2016, the objections of the Belgian region of Wallonia posed a major barrier to a large EU-Canada trade agreement. The ability of centralized government to mediate disputes between regional governments, and in certain cases overrule local objections when the entire country significantly benefits, is particularly valuable for developing countries which depend on and seek to facilitate trade in order to achieve economic prosperity.

Finally, there are crucial democratic, administrative and institutional prerequisites to decentralization. Studies have pointed to the roles played by high adult literacy, multi-party systems and local interest in politics in encouraging participation and making decentralization work (Kulipossa, 2004). The pace of decentralization should be gradual to allow individuals to acquire information and become accommodated to new political arrangements. In the Philippines, Ethiopia and Brazil, certain powers and resources were recentralized, arguably because decentralization had been done ‘too quickly’ (Smoke, 2001).


The decision by many developing countries to decentralize has reflected the economic merits of the concept, not only in terms of efficiency, competition and accountability, but also innovation: policy experimentation allows newer and less experienced states to improve governments over time. Whilst decentralization has its limits, at the end of the day, most developing countries possess the regional heterogeneity that demands devolved government. Although democratic politics in these countries is not always robust and experienced enough to allow for decentralization, a slower pace of decentralization allows for individuals to organize and institutions to develop.

For centuries, political theorists such as Alexis de Tocqueville have argued that political power should lie closest to whom it directly affects. Justifiably, many economists have come to agree.


Garman C, Haggard S, Willis E, 2001, “Fiscal decentralization: a political theory with Latin American cases” World Politics 53 205 ^ 236

Ebel, Robert & Yilmaz, Serdar. (2002). Concept of fiscal decentralization and worldwide overview. World Bank Institute.

Smith, Brian (1985) Decentralization: The Territorial Dimension of the State, London: George Allen & Unwin.

Escobar-Lemmon, M. (2003). Political Support for Decentralization: An Analysis of the Colombian and Venezuelan Legislatures. American Journal of Political Science, 47(4), 683- 697. doi:10.2307/3186127

Faguet, Jean-Paul. (2008). The effects of decentralisation on public investment:evidence and four lessons from Bolivia and Colombia. Journal of Development Studies. 44. 1100-1121.

Westphal, Nico (2011) : Political Decentralisation and Local Economic Development: Findings on the pro-poor responsiveness in 5 Cambodian communes, IEE Working Papers, No. 193, ISBN 978-3-927276-79-6, Ruhr-Universität Bochum, Institut für Entwicklungsforschung und Entwicklungspolitik (IEE), Bochum

Chowdhury, Shyamnal & Yamauchi, Futoshi & Dewina, Reno, 2009. “Governance decentralization and local infrastructure provision in Indonesia:,” IFPRI discussion papers 902, International Food Policy Research Institute (IFPRI). https://ideas.repec.org/p/fpr/ifprid/902.html

Fidelx Pius Kulipossa. (2004). Decentralisation and Democracy in Developing Countries: An Overview. Development in Practice, 14(6), 768-779. Retrieved April 24, 2021, from http://www.jstor.org/stable/4030022

Smoke, P. (2001). STRATEGIC IMPLEMENTATION OF FISCAL DECENTRALIZATION IN DEVELOPING COUNTRIES. Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of the National Tax Association, 94, 48-56. Retrieved April 24, 2021, from http://www.jstor.org/stable/41954702

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