Is decentralization a panacea for development?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Vivin R Nair, Global Shaper, Trivandrum Hub,

• Decentralization has been presented as a system to improve economic outcomes.
• The outcome of decentralization varies according to different contexts.
• Policymakers should focus on capacity-building as a cornerstone of decentralization.

There has been a revolution in governance since the second half of the 20th century – sweeping the world in diverse forms – which goes by the label of “decentralization” or “devolution”. The impact of COVID-19 has exacerbated an inclination towards a decentralized world, invariably without a conversation around building the preconditions necessary for a successful decentralized system.

The essence of decentralization has been succinctly put forth by Mahatma Gandhi: “A true democracy cannot be worked by twenty men sitting at the centre; it has to be worked from below by the people of every village.”

Traditionally, decentralization is defined as the transfer of powers and resources from central to sub-national government. Decentralization has been presented as a bearer of increased efficiency and a better economic outcome. However, empirical research reveals a burgeoning divergence between the theoretical and practical outcome of decentralization. Reverberating assertions of decentralization as merely operating, yet dysfunctional, has been buried under the enormous challenges posed by the pandemic-induced crisis.

What do the proponents and detractors of decentralization postulate?

One of the major arguments put forth by the proponents of decentralization has been its ability to match local needs through tailor-made policies and services. For example, following devolution, Wales created the Ministry for Education and Lifelong Learning to develop human capital, which was otherwise not provided special attention. Furthermore, decentralization can also increase competition among regions, leading to enhanced production and simulating innovations in policymaking.

Several academics have argued that decentralization brings with it greater accountability, proximity and higher participation among individuals. Proximity allows for a reduction in the cost of collecting and using that information; while participation and accountability paves the way for better surveillance and scrutiny of elected representatives’ actions.

The detractors of decentralization have argued that competition between regions could lead to a deadweight loss (the cost to the society due to an inefficient allocation of resources) on the nation’s overall growth. Numerous bureaucratic layers in decentralized governance could add to red-tape, corruption and an increased cost due to duplication of work. The lack of hard-budget constraints in the context of separate financing and decision-making units could lead to overspending by regional governments, resulting in fiscal deficits without proper responsibility. Professors Pranab Bardhan and Dilip Mookherjee show us that the chance of corruption as a result of increased proximity may result in lobbying over policymaking. The differences within policy agendas of various tiers of government can also lead to uncertainty.

The real-world implications of a text-perfect theory

Over the past three decades, there has been a significant proclivity towards decentralization as a solution for developmental barriers, and a gateway for an efficient society. However, the outcome of decentralization varies according to different contexts, including the regional and institutional settings of a country and the process of implementation. An empirical study by Andrés Rodríguez-Pose and Adala Bwire shows that there is no direct relation between positive economic growth and devolution.

While the arguments favouring decentralization provide an excellent theoretical basis, the practical aspects of the same require greater attention. Conversations around de-globalization are indicative of not only vulnerabilities associated with increased inter-dependency but also weak local systems. The uniform application of decentralization across a country with diverse regional history, institutional quality and path dependency (a tendency for institutions to grow in a particular manner as a result of their historical, and deeply-ingrained structural characteristics) can, in fact, increase inequality emanating from systemic and structural blindness.

The ramification of a spatially blind application of decentralization measures can have a cascading effect on the well-being of a country. For instance, in a country with multiple provinces or states – with their own distinct histories, path-dependencies, and differentiated institutional qualities – the application of uniform decentralization policy can turn a blind eye towards the differences that exist within them. Once unaccounted for, those provinces that lag behind could potentially be trapped into a vicious cycle of increased corruption and red-tape.

COVID-19 has denuded the positive image associated with decentralization. The impact of nationwide lockdown directives has exposed weak links and the inability of governments to coordinate even within those countries that are theoretically decentralized. In a decentralized country like India, one could witness two kinds of approaches in dealing with the pandemic.

On one hand, the State of Kerala has been efficiently using the decentralized system to test, trace, and isolate cases; on the other, several states under the same system have, invariably, failed to tackle the pandemic. Thus, decentralization should be redefined and reformulated to accommodate the regional imbalances and path-dependency trends. Policymakers ought to focus on capacity-building as a cornerstone of decentralization.

In summary, selling decentralization as an all-encompassing solution to the problems of economic development and governance should be viewed with caution, as it may have both positive effects as well as negative repercussions. In societies with deep inequalities, decentralization is the ideal way forward; but policymakers should be cautious about the formulation and implementation of the same.

The success of decentralization is contingent upon various other factors, such as institutional quality, national and local context, the way and form in which decentralization is implemented. An adequate conversation about the preconditions and bridging inter-regional inequalities and decentralization must go hand-in-hand. In the context of “The Great Reset”, it becomes imperative that the new social contract ought to focus on fundamentally revamping decentralization.