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INTRODUCTION: SCOPE AND PURPOSE
For much of the post-Bretton Woods era, the typical development approach emphasized central government plans and programs. The thinking was that if a poor country could come up with a national plan for generating and investing a sufficient amount of funds in a manner consistent with macro-stability, then that country would have met the pre-conditions for development. It would be a state-led (central government) strategy whereby the "flexibility to implement polices devised by technocrats was accorded a pride of place, and accountability through checks and balances was regarded as an encumbrance."1 Until perhaps the mid-1990s, this was the main message of not only the two Bretton Woods institutions—the International Monetary Fund and World Bank—but also other multilaterals and many bilaterals.
It was not an unreasonable strategy. Bretton Woods reflected a world emerging from the ravages of war, when much of the developing world was gaining its political independence. Development seemed a surmountable and largely technical challenge: good advisors would devise good policies, and technically assisted and institutionally capable governments would implement those policies.2 There could even be stages, from the first "mission" to an "exit strategy"—words that reveal so well the thinking of the time.
There was some progress, especially in infant mortality rates, life expectancy, and adult literacy. There were also many failures.3 The failures were not just about an inability to demonstrate sustained growth rates. They were also about environmental deterioration, loss of civil liberties, corruption, and a very poor record of delivering "local" public services—clean water, sanitation, education, health, housing, safety nets, and, as some argue, poverty alleviation.4 These were failures in an era when the scope of central government expanding enormously.5
Now, the thinking about what is important to achieve development objectives is changing, dramatically so in some countries. Writing in 1994, Dillinger reported (in what has become one of the most quoted World Bank reports) that of the 75 developing countries with populations greater than 5 million, all but 12 claimed to be embarked on some form of transfer of fiscal authority from central to local governments. This transfer of power has been occurring even in "inherently centralized" countries, such as the Kingdoms of Jordan and Morocco (Ebel, Fox, and Melhem 1995; Vaillancourt 1997; World Bank 1999), Central and Eastern Europe states that were under the Soviet-type fiscal system (Dunn and Wetzel 2000; Bird, Ebel, and Wallich 1995), the People's Republic of China (Wong 1997), military regimes like Pakistan (Shah 1996; Pakistan NRB 2001), countries like Thailand that view decentralization as an efficiency strategy for improving local service delivery in reaction to financial crises (World Bank 2000), nation-states that are trying to avoid the centrifugal forces of separatism, like Russia (Wallich 1994; Martinez-Vazquez and Boex 2001) and Indonesia (Ahmad and Hofman 2001; Bird et al. 2001), and Latin America, where participatory budgeting is taking hold (Stein 1997; Burki, Perry, and Dillinger 1999).
The World Bank is very explicit on the importance of all this: the World Development Report on Entering the 21st Century notes that along with globalization (continuing integration of countries worldwide), localization—the desire for self-determination and the devolution of power—is the main force "shaping the world in which development will be defined and implemented" in the first decade of this century. The report argues that these "defining forces of globalization and localization," which at first glance may seem countervailing, often stem from the same factors and reinforce one another (WDR 1999/2000).
The theme that emerges is that "good governance" matters, where "governance" is about how people determine collectively which government should deliver services, and do so by establishing a set of transparent and competent public institutions they can understand and control. It is a theme that is tied to "getting right" what Bird refers to as the fundamental questions of intergovernmental finance: Who does what? Who levies which taxes (and is there a place for borrowing)? How can the resulting imbalances be resolved? What is the institutional framework to deal with the technical and political problems of decentralization?6
Within this context, a number of studies attempted to quantify the impacts of decentralization by relating some measure of decentralization to the economic outcomes of fiscal stability, economic growth, and public sector size (Davoodi and Zou 1998; deMello 2000; Ehdaie 1994; Fukasaku and deMello 1998, Oates 1985).7 Nearly all of these studies draw on Government Finance Statistics (GFS) issued by the International Monetary Fund as the basis for measuring "decentralization."
As emphasized by Bird (2000), however, measurement is surprisingly difficult. And, if one cannot be confident of measuring the independent variable, then one cannot state with much confidence that decentralization is associated with one or more outcomes.
The purpose of this paper is to take a critical look at the nature and implications of measuring the fiscal dimension of decentralization. Recognizing that "a curious combination of strong preconceived beliefs and limited empirical evidence" characterizes all too much of the discussion (Litvack et al. 1998; Bird 2000), we look at two policy issues: (1) the extent to which fiscal decentralization is occurring and (2) the fragility of estimation results depending on how one measures fiscal decentralization (and, therefore, the danger in drawing sweeping conclusions that often have important policy implications).
We start with GFS, but supplement this measure with other considerations that recognize more fully subnational autonomy and discretion in expenditure and taxation arrangements. We find substantial differences between GFS indicators and those that capture more accurately fiscal responsibilities among different types of government. We estimate the impact of these various measures of decentralization on economic stability, economic growth, and public sector size. Not surprisingly, we find that the different indicators have markedly different effects on economic performance.
Notes from this section:
1. World Bank, The State in a Changing World, World Development Report (Washington, DC, 1997), Chapter 1.
2. Ibid.
3. Vinod Thomas et al., The Quality of Growth (New York: Oxford University Press for The World Bank, September 2000).
4. Pauly (1973).
5. Central government expenditure, 15 percent of GDP in 1960, double that by 1985 (World Bank 1997).
6. Bird (2000).
7. The question of social outcomes (e.g., literacy rates, immunization, school enrollment) is not considered here.
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