Comment on “The Dangers of Decentralization” by Prud'homme

Abstract

A s an advocate of decentralization, I find it difficult to respond to Remy Prud'homme's arguments against decentralization. It is undoubtedly true j L that decentralization, done badly, can cause problems. But the article is not devoted primarily to demonstrating that proposition; for the most part it argues that decentralization, per se, is wrongheaded. Prud'homme (p. 201) sets up a straw man that he calls the "pure decentralization of fiscal federalism." He then argues that relying on this theory would lead to a variety of problems, including a tolerance of interjurisdictional disparities, an inability to conduct macroeconomic stabilization policy, and a loss of productive efficiency in the public sector. In a section entitled "Beyond the Centralization-Decentralization Dichotomy," he presents his antidote to this approach. The "centralization-decentralization dichotomy" is a false one. Prud'homme cites no literature advocating the "pure" theory of decentralization, and the antidote that he prescribes is little more than the conventional wisdom in this area. (The reference list contains only one item that pre-dates 1985; thus it omits many classics in the literature, which present a more balanced theory.) First, Prud'homme states that according to the "pure" theory of decentralization, interjurisdictional disparities are "abnormal phenomena. .. that will be reduced and eliminated automatically by the movement of goods, capital, and labor" (p. 202). The implication that there are no transfers in the decentralized theory can be true only if one ignores literature that does not conform to the author's Procrustean bed of "pure" theory. Academic literature on fiscal disparities and intergovernmental grants goes back at least to Buchanan (1950), which evoked the response by Musgrave (1961). Oates (1972) devotes one of six chapters to "The Theory and Use of Intergovernmental Grants," and Break (1980) contains a fifty-page chapter on "The Economics of Intergovernmental Grants." The study of such grants has not been confined to academic research. Although the use of grants is relatively limited in the United States, that is not the case in other federations. In Australia the very title of the official history of the

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“…What we should see at the subnational level, therefore, are public officials moved to action by sanctions from ''voice" and ''exit" using their greater familiarity with local conditions and preferences to craft more appropriate public policies. By carefully deploying their own resources on allocative policies and then relying on limited transfers from the national government to overcome their fiscal limitations, those officials should use the freedom to maneuver provided by decentralization and federalism to ''help improve the enactment and execution of government policy" (McLure, 1995). Decentralized authority and interjurisdictional competition, in sum, create incentives which, combined with unique access to knowledge of local circumstances, prompt efficient responses by officials on the frontlines of service provision: a compelling vision, indeed.…”

Election goals and income redistribution: Recent evidence from Albania

“…In some circles, decentralization is currently being touted as a mechanism capable of increasing the use of local information, of enhancing government accountability, and of limiting leakage from social programs (see Prud'homme (1995) and McLure (1995) for discussion on these issues). Such gains must be weighed against losses caused by politicians using their discretion to in#uence the allocation of block grants.…”

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