Sound Public Financial Management Systems are a Key Element to the Successful Fiscal Decentralization Process
Posted by Mario Pessoa
Arguments in favor of decentralization range from devolving political decision making to the periphery to improving the provision of public services. However, the availability or lack of technical, human and financial resources and implementation quality seem to be critical to the success of the process. Even in places in which decentralization fails, the tendency is to continue implementation of the process because decentralization is often considered as one of the most important elements of a democratic system. So, the question raised is how to be more efficient in the decentralization process in order to prevent repetition of past failures.
Jean-Paul Faguet argues that for decentralization to work well (i) local democracy must be free, fair, transparent, and competitive; (ii) sub-national governments must face hard budget constraints; (iii) central government must scale back; and (iv) significant tax-raising powers must be devolved to the periphery.
Roy Bahl and Jorge Martinez-Vazquez consider a good sequencing of decentralization to be crucial to implementation success. They argue that poor sequencing can generate delays and complications, create inefficiencies and macroeconomic stability problems, or even degradation in the provision of public services. They propose six successive steps: (i) carrying out a national debate on the issues related to decentralization policy; (ii) doing the political design and developing a white paper; (iii) passing a decentralization law; (iv) developing the implementation regulations; (v) implementing the decentralization program; and (vi) monitoring, evaluating and retrofitting.
Public financial management has also a key role to play in the success of decentralization. A sound PFM system seems to be a key element in the process. Lack of a transparent budgetary process and fiscal objectives, poor financial information systems, absence of periodic fiscal reporting, and lack of controls over borrowing and unanticipated increases in recurrent costs of investments are some of the issues present in almost all studies showing why decentralization failed.
For further information of these issues please read:
Jean-Paul Faguet (2005), The Effects of Decentralization on Public Investment: Evidence and Four Lessons from Bolivia and Colombia, Crisis States Programme Development Research Centre, Working Paper no. 62.
http://www.crisisstates.com/Publications/phase1papers.htm#special
Bahl, Roy and Martinez-Vazquez, Jorge (2006), Sequencing Fiscal Decentralization, Andrew Young School of Policy Studies, Georgia State University.
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