Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 4: Political Economy Approaches to Fiscal Decentralization
Ben Lockwood INTRODUCTION 1 This chapter surveys recent contributions to the study of fiscal decentralization that adopt a political economy approach. By a political economy approach, I mean a systematic attempt to think about the behavior of government – whether at the national or local level – taking into account institutions and processes, such as elections and legislatures, which determine the choice of fiscal policies in practice. This is in contrast to the “standard” or traditional approach to the study of fiscal decentralization, which builds on the pioneering work of Oates (1972) and has been since developed by a number of authors.1 This approach treats each level of government as a benevolent social planner, maximizing the welfare (for example, sum of utilities) of the residents of its jurisdiction. What is the distinctive contribution of the political economy approach? In discussion of the costs and benefits of decentralization, it is usually argued that the costs of decentralization are due to various kinds of coordination failure: specifically, the failure to internalize tax and expenditure externalities of various kinds, or to exploit economies of scale (Oates, 1999). The political economy approach has little to say about these coordination failures that is distinctive from the standard approach. There is less of a consensus on the benefits of decentralization, but generally, the idea is that it is beneficial because it is “closer to the people”. There are two ways in which this can manifest itself. First, it is claimed to improve allocative efficiency, in the sense that...
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