William McCarten World Bank with inputs from Kai Kaiser,Bert Hofman, & Vikram Chand

1. DECENTRALIZATION AND POVERTY REDUCTIONIndia and Indonesia Democratic DecentralizationRelative Gradualism versus Big BangOECD : Paris 29/09/2004 William McCarten World Bank with inputs from Kai Kaiser,Bert Hofman, & Vikram Chand

2. OECD Questions • Present empirical findings from case studies focusing on the impact of decentralization on (i) participation,(ii) empowerment,(iii) access to services and (iv) local governance -control of corruption.Theme levels versus ∆’s • Identify common patterns and determinants (political, institutional, fiscal formulas) under which decentralization policies are most likely to be pro-poor. Political rules for decision making • Explore in which regulatory areas of public service delivery are the potential benefits of decentralization for the poor most likely to occur. • Propose policy measures to improve existing donor policies promoting decentralization and local governance.

3. A conceptual framework • A simple, but highly focused, framework for examining decentralization through three challenges: • (1) moving government closer to the people with increased accountability to local preferences • (2) establishing a sustainable, higher level fiscal framework for local government; and • (3) improving local service delivery and better access for poor (ergo avoid elite capture)

4. A little decentralization political theory • Timothy Besley (1997) argues that decentralization enhances the prospects for poverty reduction only when it leads to fundamentally (i) new institutions, (ii) changes political structures, (iii) improved governance, or (iv) changed attitudes towards the poor. • James Manor (2004) advises that poor become more powerful politically: • (i) when the ruling party in the political system is pro-poor or follows redistributive policies (e.g.: West Bengal since 1970s ) , • (ii) when rival parties and elites in the political system and at lower levels, compete to appeal to poor voters (e.g.: Last Indian general election- produced a government committed in its Common Program to being more “inclusive” and to make decentralization work for rural poor.) • (iii) when pro-poor coalitions have strength within civil society. Hence organizational training for marginalized groups is used as a tactic. • v) when poor people are given exclusive or predominant influence within decentralized bodies. (West Bengal and parts of Kerala ) , • (v) when poor and excluded groups gain sufficient seats on decentralized bodies to make it necessary for leaders to build alliances with their representatives. (Power-sharing arrangements to ensure stability in heterogeneous societies)

5. Social Capital: Glue for Effective Decentralization • Paul Seabright (1997) suggested that when local community activities involving wide coordination and co-operation, are successfully implemented there is an increased likelihood of future co-operation and a cumulative process of augmenting social capital. • Note: Kerala started the process of decentralization with high social capital • Indonesia may still be starved of non government institutions that cut across religious and ethnic boundaries (See Andrew Rosser IDS Working paper, Indonesia: the Politics of Inclusion (2004)) • What are potential “bridging” social capital /glue creating strategies?

6. Indonesia • Decentralization is response to heavy handed centralist ways of New Order Suharto Government. • Some hierarchical relationships disappears • Hence Big Bang in 1999-2001 (administrative, political and fiscal ) • Transfer responsibilities, 2 million of 3.4 million central civil servants transferred • 400 local Government; 30 provinces • 16,000+ facilities handed over to the regions. • Brand new intergovernmental fiscal system • New political system, new accountability arrangements • “No harm” clause resulted in less equalization in transition • DAU , General Transfer Political Bargaining “historical legacy” • Law 22/1999 of Regional Governance shifted the balance from a largely top-down form of accountability to local political accountability. • Election of the head of region, and the annual accountability speech. • The head is elected by and accountable to the local parliaments (DPRD). Law 22/1999 Article 16(2) stipulates that the regional head of the executive (bupati/walikota) and legislative act in partnership (kemitraan).

7. Development spending increased Central and regional development spending, percent of GDP

8. Unequal transfers

9. Indonesia Challenges • Wage bill to formula element major service disruption, but wage setting is done nationally • Minimum standards are vital, but might be a Trojan horse for recentralization without transparent definitions and feasible timetables • Provinces intentionally forgotten, but “came back from dead” in final design • DAU to regions and districts • Development framework for budgetary “on leading” and coordinate donors in decentralization • Local government highly fiscal dependence and this works against accountability and own tax effort • Indonesia pre-Big Bang had an overstaffed, unresponsive civil service. • Yogyakarta, a province with too many civil servants, began to experiment in 2002 with civil service reform by reviewing functions, organization an staffing. It has offered flexible severance packages

10. People’s Perception of Services after One Year

11. Corruptionretail or speed money

12. Indonesia Unfinished Agenda • Incentive for regions to improve finances • Lump sum components of transfers • Capacity building • Natural resource components of revenue sharing with revenue assignments leads to inequality in own revenue • Enhancing accountability • Incomplete definitions of assignments and political responsibilities

13. Directions for Indonesia reforms • The center should devolve more resources • Preferably in the form of tax base • The DAU should become more equalizing • And governance should improve • Through more clarity in local functions… • .better rules on financial management and procurement. • ..better rules for local politics….. • And DAKs (program grants ) with incentives to perform such as minimum service standards

14. India 3rd Tier Decentralization • The impacts of varying a few institutional components in one state can be compared to conditions in other states • Indian rural decentralization process has led to both successes and failures. • The success stories, including qualified successes, of which I argue Madhya Pradesh is one, are often misunderstood

15. Implementation of Indian decentralization by states • Great variations among states • Regular, competitive, elections with high participation but (differing approaches to permitting political party affiliation.) • Lagging fiscal decentralization • Lagging administrative decentralization • Limited accountability downwards (MP continuing experimentation,Kerala 33% capital budget devolution) • Problems of inclusion (SC/ST, OBC ) • In most states insufficient information,little transparency, little monitoring, risk of corruption

16. Design of decentralization • Constitutional Amendments (73d, 74th and ESA-tribal) • Political Decentralization and Accountability: Self-government; 3 tier system; • Gram Sabha ≃ town call meeting” with quorum • State Acts • Administrative Decentralization: functions (potential 29 functions ) and roles • State Finance Commissions • Fiscal decentralization: transfers and own revenues • Neglected

17. Plot of Road Access & Children in School (NFHS Sample ) Circa 1992 :

18. Awareness & Political Incentives • In 1994 Madhya Pradesh Government mobilised newly – PRIs energies by organising a massive survey on education access . • Canvassed PRI member in their constituencies. Who was not attending school? From the results, local elected representatives were encouraged to prepare a Village Education Register. This became the basis for further planning in the field of education . • A Human Development Report published in1995 showed how far the state had to travel in social indicators indicators. The Chief Minister regarded it as a record of the state's failures that had to be set right. • Subsequent HDRs then serve as a useful monitoring tools. Opposition parties too have used it to put pressure on the government. The HDR has been an important element in development debates in MP • European Union donor funding for DPEP and ADB program loan sequenced after political decentralization and back-stopped flexible wage policy .

19. Rajiv Gandhi missions: Parallel agencies and competitor to main departmentsInnovative substitute for civil service reform • While the PRIs were created to articulate local demands,government resources and “second track” was brought under special Rajiv Gandhi missions led by especially selected and committed officers. • These missions were given a degree of autonomy in decision making and they reported almost directly to the CM. • Once local PRI were articulated and the needs verified the mission released funds to the panchayat. The teacher is paid by the sarpanch . This is an attempt to create local accountability. 

20. A little more decentralization theory • Without strong accountability mechanism and accessible networks to draw upon expert “know how” from state gov. decentralization may lead to efficiency and effective losses. • Richard Bird notes that decentralization must find ways of coping with the challenge and opportunities of double information asymmetry when managing knowledge-based services. • Higher-level governments may not know what is needed, while the local government may not know how to do it. • Madhya Pradesh established the Rajiv Gandhi missions partly to cope with this double information asymmetry problem.

21. MP Education expansion strategy • Reducing physical distance to schools has been the objective of EGS • Creation of about 28,000 schools consisting of (usually) one or (at most) two teachers and at least 25 pupils in tribal areas, 40 elsewhere. The creation of an EGS school is conditional on the reception by the government of a request made by parents of prospective pupils through the gram panchayat, thus making the reach of the school supply responsive to parents’– or local sarpanches’ – demands • Participation in DPEP and the experimentation of new teaching methods in alternative schools (now merged with EGS ones) have also contributed to the extension of the public sector schooling . • Dalit hamlets did not have easy access to existing schools social obstacles compounding physical ones.

22. Absenteeism: Teachers2003 Survey Reported in 2004 WDR

23. Absenteeism: Medical Staff

24. Literacy rate outcomes by state

25. Madhya Pradesh Implication • A success given the initial conditions and great risk of caste, tribal and gender exclusion by local elites • Madhya Pradersh tried to use direct democracy forum ( gram sabha ) to hold corruption in check and ensure accountability of the heads (sarpanch) of gram panchayat. Results not very successful. • A continuous process of innovation which has yet to achieve an equilibrium • Madhya Pradesh “model” is likely more appropriate for north Indian state than more heavily praised Kerala or West Bengal models • (Many experts believe that West Bengal story can’t be replicated)Crook, R. C. & Sverrisson, A.S. (2001) Decentralization and Poverty Alleviation in Developing Countries: A Comparative Analysis or, is West Bengal Unique?, IDS Working Paper 130 (June): 1-60 .

26. Shared patterns in India and Indonesia • Civil service was corrupt or unresponsive • Civil service was not accountable but decentralization may have an impacts. • Lack of clarity on assignments of function in both countries • Allocations for efficiency gains yet to be achieved • Monitor performance of service delivery and publicize this to permit yardstick competition and decentralized inter-jurisdictional demonstration effect (Pierre Salmon concept ) • Donors have important role to play in design of monitoring systems. UNDP Report/ PRSP strategies / MDG international experience

27. When is Decentralization Pro Poor? • Benefits of decentralization for the poor most likely to occur- • Answer: Primary education and primary health access and quality can be improved for disadvantages groups. Kerala, India has emphasized community development and self help projects for poor but sustainability requires good governance • Few benefits or difficult benefits in participatory natural resource management (Example Central Government should design forestry management regulations but local government might take day to day management responsibility. ) • Corruption, including speed money, might be “squeezed” if accountability to people is developed However too much was expected from the direct democracy experiment in MP and “people campaign for decentralization” in Kerala • Delegate democracy mechanism accountability need to be build up as well as participatory democracy and donors can play vital role in capacity building. Seat reservation, supermajority or decision making rules requiring accommodation • Monopoly of traditional centralized civil service is contested

28. Accountability and Resource Efficiency Issues • Community participation can be enhanced by contribution of buildings, teacher-parent committees, and accountability to local councils. • Clarify “well defined” minimum standards monitoring in Indonesia • Concentrate on observable, easy-to-monitor targets • More local revenue needed to build accountability • Soedjito and Kerstan paper advocate “create an incentive system for local governments”, but incentive that can be manipulated should be avoided as should formulas that lend themselves to creating moral hazard opportunities • Decentralized civil service reform can play a vital role in accountability and poverty reduction, if Central Governments devolves discretionary freedom over civil service reform. Yogyakarta has taken initiative, but Indonesian Government has not approved. With lower wage bill there are more resources for non wage services. Use parallel small agencies with esprit , such asGandhi Missions of MP , to solve knowledge problem and expand service delivery to the poor . • Potential scope for better coordinating between multilaterals and bilateral donors, based on comparative advantage. Some "pass through" of “on lending” terms might reflect social goals, such as reaching MDG targets.

29. Policy measures to improve existing donor policies • Training for disadvantaged groups who win elections to local governments • Encourage monitoring and public dissemination of results Requiring the government to state its policy and spending intentions clearly is a vital precondition to holding it accountable • In identifying remedies, delivering credible policies that are sustained, effective, and adequately financed goes to the heart of the political process: • Does the cabinet have clearly articulated policy priorities? • Are the domestic stakeholders—civil society, business community, public interest groups, labor unions, farmers’ associations, and other interest groups—consulted on policy? • Benchmark access to services stratified by groups income levels.