I Decentralization and Local Economic Development


The first section provides an introductory overview of decentralization, both at the global level and specific to Latin America, seeking to determine to what extent decentralization is creating, or can create, greater opportunities to stimulate economic growth at the subnational level. Although it would be premature to conclude that an unequivocal relationship exists between decentralization and local economic development (LED), this section identifies the most relevant aspects to consider in understanding such a relationship.

In chapter 1, Tim Campbell describes the global trends toward decentralization and the basic elements of that process common to various countries. These elements are analyzed to formulate an understanding of the effect they have on LED. The author argues that the capacity of local governments is the key to driving LED and that there are a variety of tools at their disposal to create an appropriate business climate, formulate strategies, and implement programs. Nonetheless, he points out that their success depends on a complex variety of factors, among them the ability to strike an acceptable balance between decision-making autonomy for local governments and effective financial regulation of their spending and debt. This requires a clear definition of powers between levels of government, association with the private sector, and the incorporation of effective accountability mechanisms.

In chapter 2, Rafael de la Cruz attempts to clarify the question of whether Latin American economies are fully benefiting from decentralization in the region. The author specifically investigates whether a higher degree of decentralization allows subnational governments to lower transaction costs of the overall economy, and urban economies in particular, thereby improving opportunities for LED. To this effect, he compares the degree of decentralization with the gross domestic product (GDP) per capita (as a proxy to per capita productivity) in the major cities of Latin America, which could indicate a positive association between the two factors. However, de la Cruz highlights the limitations of this analysis, and argues that there is still room to improve the effectiveness of subnational governments and their impact on local development, particularly by adopting the necessary corrective policies to realign intergovernmental fiscal relations and subnational management models.

In chapter 3, Mario Marcel highlights the necessary requirements for decentralization to increase economic efficiency in the provision of public goods. He maintains that decentralization processes can be understood economically from two different approaches. In the first (local public choice) approach, decentralization contributes to the efficiency of public- resource allocation and requires that subnational governments be given responsibilities and functions to provide public services to the communities that are in line with their preferences. In the second (principal- agent) approach, decentralization’s contribution to efficiency depends on the capacity of the central government to generate rules, incentives, and supervisory systems that drive subnational government performance. Additionally, the author analyzes the decentralization processes in Chile to show how these two approaches have been combined, and presents the pending challenges of subnational institutions in that country.

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