Although the understanding of decentralization has evolved over time, the basics of decentralization have not changed all that much in the past twenty years. However, the global context within which decentralization reforms are pursued has changed significantly in a number of different ways:

Considerable development progress has been made around the world. Many developing, and transition economies have experienced tremendous economic transformation and growth over the past 25 years, evolving from economies relying heavily on the primary sector of the economy, to more productive, diverse, and complex economies. More diverse economic structures and rising productivity require greater and more responsive public sector infrastructure investments, while higher household incomes and a sharp reduction in global poverty have often triggered increased public participation and demand for better public services.

Cities and urbanization. Until 2007, more people lived in rural areas than in cities. By 2050, it is projected that two-thirds of the global population will live in cities, with most of that increase is expected to occur in African and Asian countries (UNDESA 2018). Urban areas offer a unique context for decentralization and localization, as they often function as the engines of national economic growth, while at the same time acting as a space for social mobility and transformation where local self-governance is facilitated, and possibly even encouraged, by the density of population and economic activity. It is often assumed that mayors and city leaders have the power to shape their own affairs. In reality, however, the ingredients for city competitiveness are distributed between various tiers of government and between various entities. This means that mayors and other leaders of competitive cities will need to complement their own “wedge” of decision-making powers in economic development by leveraging other tiers of government and private sector partners to generate outcomes that are more than the sum of their parts (World Bank 2015).

The role of conflict, fragility and increase in authoritarianism. The increase in terrorist activities in the last two decades have had a destabilizing effect in countries around the world and have caused or contributed to fragility and conflicts in numerous other countries. By 2020, the economic and physical insecurity brought about by conflict and violence had shifted the international balance in favor of authoritarianism. This was worsened by the COVID-19 pandemic which ravaged the world from 2020 (Freedom House 2021).

Focus on inclusive (equitable) and sustainable development. The Millennium Development Goals (MDGs) were quite successful at increasing the quantum of development finance and targeting these resources on a number of specific objectives. At the same time, many observers felt that the development impact of the additional resources was limited by the fact that a disproportionate share of the resources was getting stuck at the national level rather than funding improvements in frontline services. In contrast to the MDGs, the 2030 global Agenda for Sustainable Development (the SDGs) actively considers the need to “localize” inclusive and sustainable development by ensuring the transformation of public sector resources into development results.

Recognition of the preeminent role of macro-fiscal stability. A major concern related to (fiscal) decentralization is the fact that a more decentralized public sector could potentially reduce the ability of central finance authorities to ensure macro-fiscal stability. This concern was driven to a large extent by fiscal crises associated with fiscal decentralization in Latin America in the 1980s and 1990s (Ter-Minassian and Jimenez 2011). Macro-fiscal stability is increasingly understood as a foundational requirement for sustainable development success, especially as inflation and unemployment tend to have a disproportionate impact on the poor. As a result, considerable emphasis has been placed in the run-up to decentralization reforms on the preeminent need to pursue decentralization in a way that preserves macro-fiscal stability – for example, as happened in Indonesia and Kenya. Important parts of this effort have been to focus decentralization reforms on expenditure devolution over revenue devolution; the emphasis on subnational fiscal rules to limit subnational borrowing and the associated risks to macro-fiscal stability (IMF 2020); and efforts to ensure that there is a balance between the function responsibilities and finances devolved, so that the decentralization process is (in aggregate) fiscally neutral and does not result in increasing deficits at the national government level.

Climate adaptation and mitigation. Cities consume over two-thirds of the world’s energy and account for more than 70 percent of global CO2 emissions. At the same time, the effects of the changing climate are already experienced by 70 percent of cities worldwide, with 77 percent expected to undergo a dramatic change in climate conditions (CCFLA 2021). Common hazards to cities and local governments include becoming an urban heat island, flooding, landslides, sea level rises, storm surges, tsunamis, wildfires, droughts, earthquakes, and volcanos. Building cities that are green, inclusive, and sustainable should be the foundation of any local and national climate change agenda.

In many countries, the role of international financial institutions and development assistance is changing. As countries move up the economic ladder, the role of international financial institutions and development agencies evolves from primarily serving as a funder of capital infrastructure to acting as champions of public sector efficiency and catalysts for systems transformation.

COVID-19. The global coronavirus pandemic has created a global humanitarian and economic crisis of proportions without precedent in recent times. Local governments and local administrations around the world have been at the front line in responding to the pandemic by: providing emergency and curative health services and other public health services; enforcing compliance with social distancing and public hygiene measures; mitigating the impact of the pandemic on other local public services; or by supporting social and economic relief activities within their local communities. As such, the pandemic has reminded policymakers all around the world that out of all government levels, the local level is closest to home and, in many cases, best positioned to respond to specific challenges. By highlighting the potential value of local governments and other local actors to the people, in many different countries the pandemic is also highlighting the obstacles that stand in the way of local governments performing their functions in an inclusive, effective and responsive manner (Yilmaz and Boex 2021). Research suggests that effective intergovernmental systems and coordination mechanisms and local government capacity are two preconditions for deploying local governments effectively in the fight against pandemics (Yilmaz and Boex 2021).