Handbook of Multilevel Finance
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Handbook of Multilevel Finance

Edited by Ehtisham Ahmad and Giorgio Brosio

This Handbook explores and explains new developments in the “second generation” theory of public finance, in which benevolent rulers and governments have been replaced by personally motivated politicians and the associated institutions. Following a comprehensive introduction by the editors, the renowned contributors present fresh and original perspectives on the key multi-level issues, along with recent developments in theory and practice, as they relate to taxes, budget systems, the management of liabilities and macroeconomic stability. The book also explores special issues concerning the poor and marginalized, structural change and the environment, natural disasters, and the task of overcoming conflicts whilst keeping countries together.
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Chapter 18: Decentralization and development: dilemmas, trade-offs and safeguards

Pranab Bardhan and Dilip Mookherjee


After its many failures, the centralized state has lost a great deal of legitimacy everywhere. This has given rise to the hope that decentralization will deliver a wide range of benefits by making governance more accountable and responsive to local needs and preferences. In a world of ethnic conflicts and separatist movements, decentralization is also regarded as a way of diffusing social and political tensions and enhancing social cohesion. Yet there is also much skepticism and awareness of potential pitfalls concerning the extent to which decentralization will actually succeed in achieving this promise. Since different people mean different things by decentralization, let us be upfront in using the term to denote devolution of political and administrative decision-making power to elected local bodies. The latter refers to village, municipal or county-level governments, below the provincial level. We shall also confine our discussion to local governance, specifically excluding non-government community development projects. A substantial amount of literature on fiscal federalism in developed countries focuses on the economic efficiency of inter-governmental competition, and focuses on the trade-off between inter-jurisdictional externalities and local information advantages. While those issues remain important, some special institutional and political economy considerations arise in the context of developing countries, which have been previously discussed in Bardhan (2002). These give rise to some novel governance dilemmas and predictions concerning the outcomes of decentralization.

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