The Dangers of Decentralization

Demand for decentralization is strong throughout the world. But the benefits of decentralization are not as obvious as the standard theory of fiscal federalism suggests, and there are serious drawbacks that should be considered in designing any decentralization program. An analysis of these dangers makes it easier to understand some of the real choices. These choices are not so much whether to decentralize in general, but rather what functions to decentralize, in which sectors, and in which regions. In many cases the problem is not so much whether a certain service should be provided by a central, regional, or local government, but rather how to organize the joint production of the service by the various levels. In many—if not most—cases, such measures have an enormous potential and could, if properly designed and implemented, significantly improve the efficiency of the public sector. Decentralization measures are like some potent drugs, however: when prescribed for the relevant illness, at the appropriate moment and in the correct dose, they can have the desired salutary effect; but in the wrong circumstances, they can harm rather than heal. This article looks at some of the negative effects of decentralization in the hope that a better understanding of its dangers will contribute to a wiser application of potentially desirable decentralization programs.