The Palestinian Economy. Theoretical and Practical Challenges

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Proceedings “The Palestinian Economy: Theoretical and Practical Challenges” 249 2. Theoretical Aspects of Decentralisation 2.1. Theoretical Aspects The question of what form of government promises the greatest success in resolving the allocation, distribution, stabilisation, and more recently coordination problems has been the centre of fiscal decentralisation issues. By itself, fiscal decentralisation, i.e. the devolution of taxing and spending powers to lower levels of government, has become an important theme of governance in many developing countries in recent years (Fjeldstad 2001, p. 1). Accordingly, restructuring of governmental functions and finances between the national and lower levels of government has entered the core of the development debate. In Latin America, after a long tradition of centralised government, most countries implemented decentralisation policies in the recent past (Burki et al. 1999). 2 But such trend is also to be found in Asia and Africa as well. The main argument in support of decentralisation policies is that they bring decisions closer to the people. Information asymmetries, agency costs and problems of collective decision can be alleviated through decentralisation. However, decentralisation can also worsen the provision of public goods in the presence of positive spillovers, lack of technical capabilities by local governments, or capture of low-level administrations by local elites. The theoretical literature obtains trade-offs without universal superiority of either centralisation or decentralisation in the provision of public services. The problem needs to be analysed empirically (Galiani and Schargrodsky 2001, p. 1). In Oates (1972), central governments produce a common level of public goods for all localities, while local governments can tailor public goods output to local tastes. He finds that local governments are preferable when the better match between local government outputs and local preferences is not outweighed by spillovers or economies of scale in central government provision. Lockwood (1998) and Besley and Coate (2000) allow for heterogeneous local provision but central policy making in which elected representatives bargain over public goods provision. With heterogeneous provision, the case for decentralisation has to be driven by political economy considerations, i.e. 2 Recent studies analysing decentralisation processes in Latin America include Lopez Murphy (1995), Tendler (1997), Bird and Vaillancourt (1998), Fukasaku and Hausmann (1998), Savedoff (1998), and Willis et al. (1999). On Argentina, see Porto and Gasparini (1998), Grindle (2000), Tommasi, Saiegh, and Sanguinetti (2000), inter alia.
250 Zagha drawbacks in the political and legislative processes of centralised systems that may induce inequity, uncertainty, or excessive public spending. In Tommasi and Weinschelbaum (1999), the advantages of centralised decision making (internalisation of externalities) are compared to those of decentralised decision making (increased control of agents by the citizens through lower information asymmetries, less free-riding and easier coordination). In addition, decentralisation may have the advantage of encouraging competition if citizens “vote with their feet” (Tiebout 1956). Oates in his Fiscal Federalism (1972, p.13) summarises the economic desirable characteristics a decentralised public sector possesses. First, it provides a means by which the levels of consumption of some public goods can be tailored to the preferences of subsets of the society. In this way, economic efficiency is enhanced by providing an allocation of resources that is more responsive to the tastes of consumers. Second, by promoting increased innovations over time and by providing competitive pressures to induce local governments to adopt the most efficient techniques of production, decentralization may increase both static and dynamic efficiency in the production of public goods. Third, a system of local government may provide an institutional setting that promotes better public decision-making by compelling a more explicit recognition of the costs of public programs. Oates concludes (1972, p.19) that mix of centralised and decentralised forms of the government is the central theoretical problem of the subject of fiscal federalism, or in his own words “This [...] is the central theoretical problem of the subject of fiscal federalism: the determination of the optimal structure of the public sector in terms of the assignment of decision-making responsibility for specified functions to representatives of the interests of the proper geographical subsets of the society.” In the final analysis of this issue the selection of the proper level of government to provide a particular good or service is not an easy problem; there are typically a number of variables that figure in this decision, and in most instances, some form of trade off between welfare gains and losses is involved. The principle of subsidiarity suggests that economic performances of the governments will be more responsive to consumer demands and to cost cutting pressures (i.e. more efficient) if services are provided by the lowest level of government possible. While foreign policy, defence, immigration, and international trade can be
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Page 9 and 10: 246 Zagha 1. Introduction The local
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The Effect of the Israeli-Palestini
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Assessing the Causes of Inequality
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424 Olivera provisions - in particu
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426 Olivera Figure 1: Economic Grow
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428 Olivera 3. Traditional economic
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430 Olivera costs and lower market
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The Palestinian Economy. Theoretical and Practical Challenges

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