Fiscal Decentralization and the Efficiency of Public Service Delivery

IMF Working Paper

This paper analyzes the impacts of fiscal decentralization on the efficiency of public service delivery. It contributes to existing studies by focusing explicitly on the efficiency of public service delivery instead of the policy outcome. The policy outcome can be improved by augmenting policy inputs (for instance, spending allocation); in contrast, efficiency is measured as the difference in policy outcomes—across countries and over time—under a similar set of policy inputs.

This paper covers a large sample of countries, including developed, emerging, and developing economies. It uses a stochastic frontier method to estimate time-varying efficiency coefficients and analyzes the impact of fiscal decentralization on those efficiency coefficients.
The paper’s findings suggest that fiscal decentralization can serve as a policy tool to improve performance, but only under specific conditions. Our findings focus on the efficiency of spending on education and health and indicate that an adequate institutional environment is needed for decentralization to improve public service delivery. Such conditions include effective autonomy of local governments, strong accountability at various levels of institutions, good governance, and strong capacity at the local level. Moreover, a sufficient degree of expenditure decentralization seems necessary to obtain a positive outcome. And finally, decentralization of expenditure needs to be accompanied by sufficient decentralization of revenue to obtain favorable outcomes. Absent those conditions, fiscal decentralization can worsen the efficiency of public service delivery.

The paper is structured as follows. Section II reviews the existing literature and summarizes the merits and risks of fiscal decentralization. Section III presents the empirical analysis. Section IV concludes with the main policy recommendations.

 Moussé Sow and Ivohasina F. Razafimahefa. 2015. Fiscal Decentralization and the Efficiency of Public Service Delivery. IMF Working Paper 1559. Washington: IMF Fiscal Affairs Department.