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"Expenditure Decentralization and the Delivery of Public Services in Developing Countries"

Pranab Bardhan and Dilip Mookherjee

IED Discussion Paper 90, November 1998

Mismanagement of resources and corruption are two acute, well-documented problems facing the delivery of public services in developing countries. Most studies have attributed this to an important incentive problem within the centralized bureaucracies that have traditionally been entrusted with delivery: namely, the limited ability of governments to monitor local cost, need or delivery levels, and the resulting lack of accountability of bureaucrats. Consequently, many developing countries have begun to experiment with delegating authority over the delivery system to local governments.

Bardhan and Mookherjee’s paper argues that decentralization is also prone to a number of potential pitfalls, and thereafter provides a theoretical framework for appraising the trade-off between these alternative mechanisms. Their major conclusion is that there exists no a priori, unqualified verdict in favor of the decentralized system, and, in particular, its success depends crucially upon the existence of an appropriate set of political and economic institutions.

The presence of corruption leads to at least three important problems: targeting within and between communities (or local jurisdictions) and cost effectiveness. Bardhan and Mookhejee focus on two different kinds of public programs designed to highlight the nature of the issues involved. First, they consider a purely redistributive poverty alleviation program. Here the decentralized

mechanism achieves superior cost effectiveness. But it may be prone to greater targeting weaknesses, owing to the possibility of capture of local administrative machinery by the elite. The comparison between centralization and decentralization is shown to depend on relative proneness of national and local governments to capture by special interest groups, in addition to the characteristics of the service in question. This suggests that decentralization initiatives are more likely to succeed when accompanied by reforms that increase the scope of local democracy and reduce asset inequality.

Another kind of program is the delivery of a private service whose production is subject to large fixed costs,such as irrigation services in rural areas. Here, the problem with central bureaucrats is that they charge bribes for delivering the service, and end up behaving like unregulated private monopolists. Expenditure decentralization, on the other hand, is subject to a variety of alternative problems: (i) local capture by elites; (ii) local financing constraints; (iii) inter-jurisdictional conflict; and (iv) lack of adequate cost information or bargaining power of local government officials vis-à-vis service suppliers. They show that any one of these problems can be severe enough to render the decentralized system inferior to the centralized one. Hence successful decentralization initiatives need to be accompanied by appropriate institutions of local democracy and fiscal authority, and allocation of authority to local government officials vis-à-vis other governments and service suppliers. The paper concludes with a model of electoral competition in the spirit of the recent work of Grossman and Helpman, which helps identify some of the political determinants of capture of elected governments at local and national levels.