Handbook of Fiscal Federalism
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Handbook of Fiscal Federalism

Edited by Ehtisham Ahmad and Giorgio Brosio

This major Handbook addresses fiscal relations between different levels of government under the general rubric of ‘fiscal federalism’, providing a review of the latest literature as well as an invaluable guide for practitioners and policy makers seeking informed policy options. The contributors include leading lights in the field, many of whom have themselves made seminal contributions to the literature.
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Chapter 8: Decentralization and Development

Pranab Bardhan


Pranab Bardhan Introduction The centralized state, on account of its many well-recognized failures, has lost a great deal of legitimacy everywhere, and decentralization of governance is widely believed to promise a range of benefits. It is often suggested as a way of reducing the role of the state in general, by fragmenting central authority and introducing more intergovernmental competition and checks and balances. It is viewed as a way to make government more responsive and efficient. Technological changes have also made it somewhat easier than before to provide public services (like electricity and water supply) relatively efficiently in smaller market areas, and the lower levels of government have now a greater ability to handle certain tasks. In a world of rampant ethnic conflicts and separatist movements, decentralization is also regarded as a way of diffusing social and political tensions and ensuring local cultural and political autonomy. These potential benefits of decentralization have attracted a very diverse range of supporters. For example, free-market economists tend to emphasize the benefits of reducing the power of the overextended or predatory state. In some international organizations pushing structural adjustment and transitional reform, decentralization had sometimes been used almost as a synonym for privatization; similarly, in the literature on mechanism design an informationally decentralized system of individual decisions coordinated by a price mechanism is pitted against a system of central commands and plans. Even those who are still convinced of the pervasiveness of market failures are increasingly turning for their resolution to the government at...

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