IMFG Paper | 2013

Decentralization and Infrastructure in Developing Countries

The paper first sets out the theory of expenditure assignment with respect to decentralizing infrastructure expenditure, and then considers how practice around the developing world appears to differ from what that theory appears to suggest. We suggest several ways in which theory and practice might be brought closer together. The most important is simply to begin by taking a more comprehensive approach to infrastructure reform in countries in which much such investment is, properly, at the subnational level. Two critical preconditions for effectively decentralizing investment are, first, clear assignment of infrastructure responsibilities and, second, effective local government accountability. Neither condition is now satisfied in many developing countries. One key reason is that few countries have developed appropriate and adequate local government revenue systems. Although much attention has been paid to financing infrastructure through borrowing and public-private partnerships (PPP), and such approaches may have important roles to play in developing adequate infrastructure in some countries, they can neither substitute for a sound local revenue system nor realize their full potential in the absence of such a system. In addition, since local governments are seldom equal in fiscal or economic terms as a rule, effectively decentralizing infrastructure requires the careful development of different (asymmetric) approaches for different sizes and types of subnational government structures.

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