Costs and Benefits of Decentralization

1. Costs and Benefits of Decentralization SATI Workshop on Tax Policy and Administration, University of Pretoria, June 18-20, 2006

2. Choosing decentralization? • Some countries are born decentralized • Some choose to become decentralized • And some have decentralization thrust upon them – for many diverse reasons • But no matter why a country is (to some degree) decentralized, it has to work out just what decentralization means and how to do it.

3. What is Decentralization? • Deconcentration – decentralizing the central administration • Delegation – ‘contracting-out’ central policy implementation to local governments • Devolution – letting local governments decide what to do and how to do it…within limits?

4. Modes of Decentralization • Administrative decentralization – the centre decides, the regions and localities administer • Political decentralization – sub-national governments decide • Fiscal decentralization • Done right: how to make political decentralization efficient and effective • Done wrong: how to make a mess of things

5. Potential Benefits • Efficiency gains • The right services to the right people in the right amounts • Creating incentives for growth • ‘Laboratory’ for innovation • More heads are better than fewer • Learning from success…and failure • Revenue mobilization – broaden the base? • Political aspects • Improve governance • Restoring (or redressing) regional balance • Helping to build (or rebuild, or hold together) a nation

6. Potential Costs • Macroeconomic concerns • Runaway deficits • Unsustainable borrowing • Equity concerns • More local revenues increase regional imbalance • Is local control helpful or harmful to the poor? • Efficiency and effectiveness – can LG really do the job? • Capacity – can LG really do the job? • Critical infrastructure from a national perspective • Corruption – more …or less? • Political concerns – exit and loyalty

7. Striking the Balance • Much discussion but little solid evidence • Complex, multi-faceted issue • Some general ‘lessons’ • Make rules clear to all • Finance follows function • Need for financial control system • Hard budget constraint - accountability • Some local revenue flexibility • Get intergovenmental transfers right • Borrowing – keep an eye open for problems • Asymmetry – the big, the small and those in-between • Universal problems, local solutions • Strategy, process (‘buy-in’), time…..

8. A Separate Question: Local Tax Administration • Is it necessary? • No. Economic and political accountability does not require local tax administration. • Is it desirable? • Possible informational and accountability advantages. • If center does it, will LG see the money? • Is it feasible? • Constraints on local capacity. • Consider splitting the task?

9. Dividing Tax Administration • Central valuation and central collection • Pakistan, France, Jamaica • Central valuation and local collection • U.K., Colombia • Local valuation and central collection • Tunisia, Slovenia • Local valuation and local collection • India, Mexico, U.S.

10. Property Tax Administration • Who sets the rate? • Who identifies the base? • Who assesses properties? • Who decides appeals? • Who sends the bills? • Who collects payments? • Who enforces the tax? • Who receives the revenue?

11. Some Questions for Discussion • What role should LG have in taxation? • In deciding what taxes to levy? • In deciding what tax rate to impose? • In identifying and assessing taxpayers? • In billing and collecting taxes? • If there is a separate LG tax office, what should its relations be with CG tax administration? • None? • Information sharing? • Support and training? • Division of labour?