In many low- and middle-income countries, fiscal decentralization policies mean subnational governments are taking on more service delivery responsibilities just as demands for these services are rising because of population growth. Meeting this challenge and adequately funding these services will require financial resources beyond the reach of most subnational governments today.
Citizens’ social and economic outcomes—particularly in lower- and middle-income countries—depend largely on the actions and capacities of subnational governments. Citizens typically interact with these units of government daily because, while responsibilities differ by country, they are generally responsible for many basic services like water and sanitation, transportation, solid waste management, and police.
In the face of decentralization and the myriad challenges that manifest locally, such as climate change and pandemics, it’s essential that subnational governments have the tools and capacities they need to collect and manage resources to provide essential services.
Subnational governments face a range of barriers to managing public finance and financial resources
As documented in an Urban Institute study last year, governments around the world have implemented numerous strategies, policies, and technical solutions to build stronger subnational public financial management (PFM) and domestic resource mobilization (DRM). However, persistent political economy obstacles loom large and present risks to any purely technical reform. Politics is at the core of PFM and DRM. Indeed, there are few things more political than taxes.
The types of political barriers differ by government type, revenue source, and more. Central government bodies and officials, for instance, may resist sharing resources or authority with subnational counterparts. Though this may stem from greater efficiencies and economies of scale at the national level, sometimes it’s the result of political considerations and maneuvers. For some local politicians, success in raising additional local revenues might mean certain defeat at the polls. At the same time, high net worth individuals may wield the political influence to resist compliance with local property taxes. Compared with technical challenges, there are fewer documented solutions to these political barriers, and even less so ones that are sustainable, replicable, and scalable.
But given the urgent needs for reliable, equitable, and high-quality services, this status quo is untenable. Localities urgently need resources to meet their challenges.
To break down barriers, we need a more robust research agenda on subnational DRM
But before national and subnational governments and their development partners, such as donor agencies and civil society organizations, can act, we need a better understanding of what works and what doesn’t under what conditions, better tools for assessing opportunities, and more documented efforts to pilot and capture lessons from potentially scalable solutions.
The following research questions could build insights to inform government and donor efforts:
What strategies secure political commitment for DRM reform and implementation?
- Which levers and reform windows are necessary or best suited to securing political support?
- What combination of champions (local stakeholders working to improve subnational DRM) is most effective at securing commitments, and how do these champions ensure accountability and sustain momentum?
- How should existing political economy analysis tools and frameworks be modified and adapted to subnational DRM?
- How should champions balance attention between implementing or enforcing existing taxes, mechanisms, and policies with seizing opportunities for reform?
What role does civic engagement in DRM conversations (e.g., participatory budgeting, public budget hearings) have on the effectiveness public financial management?
- How do local leaders ensure truly representative engagement in DRM conversations? What strategies have succeeded in fostering more encompassing collective action?
- What steps can build citizen (and business) confidence in the effectiveness and even-handed implementation of equity-advancing tax reform?
What intergovernmental fiscal relationships are most conducive to accountable, effective DRM and PFM?
- How do politics affect fiscal relationships between national governments and subnational units?
- How should governments structure performance-based transfers to incentivize revenue performance while accounting for equity?
- How can transfer systems avoid inequitable distribution (i.e., punishing poorer areas while rewarding wealthier areas)?
- What performance-based transfer systems have proven the most effective, and what is their recipe for success?
- What performance metrics are best incentivized through performance-based transfers?
What should be the private sector's role in supporting DMR?
- What principles should guide the engagement of private sector agents in DRM (e.g., fee collection) and service delivery? And how can donor programs apply those principles?
- How does the underlying legal and regulatory framework enable local governments to engage the private sector and dictate the manner of doing so?
What unconventional, innovative solutions can governments and their partners adopt to address political economy barriers to DRM (e.g., behavioral economic tools to improve compliance)?
- How can development partners help pilot, analyze, and, if successful, adapt and scale solutions to different places and political contexts?
These questions are hardly exhaustive, but they represent a potential starting point for building a more robust agenda on subnational resource mobilization, particularly cracking the challenge of political barriers. Ultimately, if stakeholders want to improve access to quality resources for all citizens in developing countries, this research agenda should inform innovations and reforms that improve how subnational governments raise and spend resources.
Thanks to Juliana Pigey, James Ladi Williams, and Chas Cadwell for contributing to this post.