Institutional Constraints and Multiple Equilibria in Decentralization

Abstract

The economics of decentralization implies that it generates efficiency improvement (higher growth) due to local government's ability to respond to the needs of local communities. However, this is not always the case. While policies do matter, this paper argues that institutional factors hold the key to the problem. The interactions among these factors and the characteristics of leaders in the region determine the outcome of decentralization. By capturing these important properties, multiple equilibria can be generated, avowing the ambiguous effects of local capture. On this basis, a typology of local leaders is developed. To the extent that welfare-enhancing activities are often related to regional growth, the role of an incentive system in determining the local leaders' behavior is also analyzed. In essence, a lack of incentive mechanisms for local leaders to promote growth and the absence of a stick-and-carrot system explain why post-decentralization growth performance has been generally disappointing.

Information, power, and location: World Bank staff decentralization and aid project success

“…Both within the World Bank itself and more broadly in the professional International Development Organization (IDO) community the process of shifting staff from headquarters to the field is often referred to as “decentralization.” This use of “decentralization” is somewhat different than the mainstream academic use. The decentralization literature is often focused on strengthening local and democratic accountability (e.g., Agrawal & Ribot, , Azis, , Ribot, ) as the pathway via which decentralizing agents will lead to better performance. But aid agencies have only limited accountability to the communities or countries in which their projects take place (Easterly, ).…”

Decentralization Reform and Local‐government Proliferation in Indonesia: Towards a Fragmentation of Regional Development

“…It is not a panacea to cure all socioeconomic and political problems, while in contrast it might create macroeconomic instability and endanger national unity if not applied properly. In some countries, regional growth is slower and social indicators are worsening, despite decentralization (Azis, 2008). According to Seymour and Turner (2002) decentralization, as has been implemented in many developing countries at present, does not necessarily encourage 'development' or 'democratic' outcome.…”

“…There have been numerous studies and research on Indonesia's decentralization reform. However, the research and studies have focused on fiscal decentralization (see for instance Lewis, 2003;USAID, 2006;Brodjonegoro, 2006;Azis, 2008;Mardiasmo, 2008), with little, if any, emphasis on how the local-government proliferation under decentralization policy has affected local and regional development. Likewise, there have been studies on local government proliferation in Indonesia (see Fitriani et al, 2005;Bappenas, 2005), but these are not particularly focused on how the proliferation has affected local and regional development.…”

Complex Interplay of Factors in Institutional Model of Decentralization: Theory and Application

“…Greater efficiency is thus at the centre of the relation between decentralization and higher rates of economic growth (Martinez-Vazquez-McNab 2003); however, overall efficiency is not always aligned with private efficiency. With enhanced authority after decentralization, local leaders may put private benefits above social benefits, depending on how they perceive the implication on their probability of staying in 2 Institutional Model of Decentralization (IMD) was first explained in Azis (2008) and elaborated further in Azis (2010). One of the consequential issues that emerged in IMD is the relation between policy and institutions.…”