[PDF] The Political Economy of Decentralization in Sub-Saharan Africa

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Cover image:

Cover design:

Translation:

Advisory Committee Members

Agence Française de Développement

World Bank

Réunion

(Fr.)

Mayotte

(Fr.) IBRD 39497

October 2012

Introduction

1

A Focus on Sub-Saharan Africa

1

Analytical Approach

3

Methodology

4

Contributions of is Volume

5 Notes 6

References

6 1

Institutional and Fiscal Decentralization:

Blueprint for an Analytical Guide

9 e Institutional Approach to Decentralization 11

Decentralized Budgets

18 Assignment of Responsibilities between Tiers of Government 24

Revenue Structures and Systems

30

Financial Transfers

36

Statistical Data

39

Conclusion

42
Notes 43

References

43
History of Decentralization in Burkina Faso, 1991-2011 47

Organization of Decentralized Local Government

and Deconcentration in 2011 49
e Decentralized Budget 61

Assignment of Responsibilities

65

Local Taxation

77

Intergovernmental Transfers

88

Revenue and Expenditure Statistics

98
Notes 102

References

105

History of Decentralization in Ghana:

From Independence to 2010

107

Organization of Decentralized Local Government

and Deconcentration in 2010 113
e Decentralized Budget 125

Assignment of Responsibilities

132

Local Taxation

137

Intergovernmental Transfers

142

Revenue and Expenditure Statistics

153
Notes 156

References

159
History of “Centralization" in Kenya, 1963-2010 161

Organization of Decentralized Local Government

and Deconcentration in 2009-10 166
e Decentralized Budget 173

Assignment of Responsibilities

177

Local Taxation

181

Intergovernmental Grants

185

Guy Gilbert and Emmanuelle Taugourdeau

ierry Madiès

Gérard Chambas and Frédéric Audras

Institut Française de Recherches en Afrique

Ecole Normale Supérieure de Cachan

Conseil des Impôts

Ecole des Hautes Etudes

en Sciences Sociales

Abraham Ky

ierry Madiès

Yvon Rocaboy

Emmanuelle Taugourdeau

Institut d"Etudes Politiques de Bordeaux

For two decades now—in fact, ever since the splintering of the former Communist Bloc—experiments in decentralization and federalization have

been developing in a large number of countries, not only in the formerly communist states of Eastern Europe but also in Asia and Africa, each time

raising the same questions: What real responsibilities should be assigned to the decentralized tiers of government? What concomitant own resources, what transfers, and what equalization mechanisms should be maintained or introduced? e decentralization policies implemented in developing countries over the past 20 years or so are parts of this process. ey have changed—and are still changing—the institutional landscapes in these countries. Many of the powers previously in the hands of the central government or its deconcentrated struc- tures have been transferred to decentralized levels of government. Additionally, in a recent but increasingly widespread trend, local governments are gradually

emerging as development actors and are now being assigned responsibilities for territorial development.

Whatever the reasons governing a decentralization process, the transfer of new functions to the local government layer can be substantive, at least in

intent. is raises a second set of questions: What are the origins and causes of these moves toward greater decentralization? Does actual decentralization

on the ground coincide with the decentralization intended—as written in

constitution or law? How can gaps between intended and actual decentral-ization be explained? Does the existing institutional design hinder decen-

tralization, or can it be rethought and reformed to encourage even deeper decentralization?

A Focus on Sub-Saharan Africa

In Africa, the current phase of decentralization began in the 1990s with the draing of legislation indicating the political will to decentralize. e eort

Stage 1: Analytical Guide

Stage 2: Institutional Economy Study

Stage 3: Political Economy Field Study

Methodology

your

Pouvoirs

Fiscal Fragmentation in Decentralized Countries:

Subsidiarity, Solidarity and Asymmetry

Bernard Dafon

e approach proposed in this chapter is to apply an analytical method derived from institutional political economy and grounded in many years of decentral- ization practice (Daon 2009, 2010a). e method breaks down into two steps: an institutional study and a eld study. First, we examine the objectives of decentralization and the means used to

implement it, as set out in national legislation. is allows us to analyze the degree of consistency between the decentralization mechanisms proposed and

the stated goals. At this stage, we can already gauge whether the decentralization

policy goes no further than lip service or whether there is a will, particularly from politicians and central administrations, to push through genuine devolu-

tion of responsibilities and nancial resources. Second, we compare the institutional design with what is actually happen- ing on the ground. Analyzing this from an institutional political economy per- spective enables us to measure—or at least to assess—the road traveled. It also highlights the achievements of decentralization (which may need to be consoli-

dated); the shortcomings to be corrected; and the decits still to be overcome. is method oers at least two advantages:

It does not refer to a theoretical norm but calls on a positive approach. e benchmark is not an optimal state of what decentralization should be

according to the theories of scal federalism—or even second-generation scal federalism (Daon and Madiès 2008)—but instead according to the

institutional “design" of the country studied. In other words, the benchmark does not constitute a model but rather what a specic country has set as

its own objectives—with the proviso that an initial coherence exists and is checked between objectives and mechanisms in the design stage.

Figure 1.1

Possible Interrelationships in a Decentralized System of Government

Source: Dafflon 2010a.

R = regional governments. C = community governments. connections between governmental units in hierarchical, vertical relatio nships connections between governmental units in horizontal, cooperative relationships with others of the same level and the same regional jurisd iction connection between regions in horizontal relationship connection between local governments of different regional jurisdictions

Federal or central government

C 1.1 R 1

Median voter

Resident

s

Citizens

Taxpayers

Beneficiaries

Local level

(community government communes, municipalities)

Regional levelR 2R 3R n

C 1.2C 1.3C 1.4

C n.1C n.2etc.

Temporal variation

Spatial variation

Conicts between economic goals

Conicts with noneconomic goals

Deconcentration

Delegation

Devolution

nancial autonomy budget autonomy e Responsibility-Resource Gap : Dafflon 2010a; adapted from Dafflon and Madiès 2008, 65. : LPG = local public goods.

Figure 1.2

The Decentralized Budget: Responsibilities and Gaps

Decentralized Budget

Distribution of responsibilities and powers

[1] Own choice of local public goods (LPGs) = devolved functions [2] Specific functions (devolved or delegated) [3] Delegated functions (agency)

In general

IncentivesDistribution of resources

[A] Own taxes

Shared tax(es)

Exclusive tax(es)

Choice between taxes and user

fees and charges [B] User fees and charges [C] Intergovernmental grants

Block grants or tax sharing

Specific incentive grantsExpenditure

Revenue

[4]

Supply gapsBridging the gap

Gaps between functions and

resources = vertical gap

Tax system uniformity

Budget deficit

Production gaps

Spillover and congestion effects

Disparities in costsAdditional grants

Formula-based gran

t

Piggyback tax coefficien

t

Corrective grants

Expenditure/needs

equalizatio n

Gap in financial resourcesRevenue equalization

0 Administration

1 Law and public order

2 Education and training

3 Worship, culture, and recreation

4 Health

(continued next page)

Table 1.1

(continued)

Functions

(1)

Central

(2)

Regional

(3) Local (4)

Assignment of Responsibilities between

Tiers of Government

Table 1.1

(continued)

Functions

(1)

Central

(2)

Regional

(3) Local (4)

9 Finances and taxes

Sources: Dafflon 1998, 46-47; Conference of the Cantons' Finance Ministers, Bern (harmonized public account-

ing system, 2008). a. Decentralizing town and country planning raises the question of land- use management on two levels: (a) It involves ownership or access to ownership of land used for infrastructur es, required both for construction (ownership of land on which a school building or town hall will be buil t) and civil engineering works (for

example, roads and right of way for routing pipes for water supply or sewage). (b) It involves the real estate

registry: although property rights are defined at the national level, the cadastral boundaries must be registered

and known at the local level without ambiguity; this is necessary for de velopment programs (Rochegude and

Plançon 2009) and local tax collection.

Analytical method

Sample Matrix of Shared Governmental Responsibilities and Implicit Transfers in

Primary Education

Assignment of

responsibilities (government level) (1)

Teacher

training (2)

Salaries and

employment status of teachers (3)

School

curriculum content (4)

Teaching

materials (5)

Technical

equipment (6)

School

buildings (7)

School

management and organization (8)

Source: Dafflon 2006, 296-98.

a. "Intermunicipal syndicate" designates an arrangement of two or more small municipalities that join responsi- bility (cooperate) to successfully assume certain functions or to achi eve economies of scale.

b. "Implicit transfers" are centrally funded resources (both human and material) that the central government

supplies to local governments. Such transfers, like in-kind services, leave no financial trace in the local govern- ments' budgets. Budget decentralization ratio = total municipal expenditur e es total public expenditures in part balance In public finance, two maxims of fiscal federalism and decentralization serve as basic principles: (a) “finance follows functions," and (b) “the one who decides must also pay." The sense of the first should be limpid, at least in concept if not in application: levying taxes is not an end in itself but serves to finance local public goods and services. It should thus first be decided which functions will be assigned to local governments, and then financial resources should be adjusted accordingly. This holds particularly true for developing countries: given their weak tax bases—and hence the crucial role of financial transfers—decentralization would be no more than wishful thinking if the maxim were turned on its head and decentralization tailored to fit the local governments" available own resources. Decentraliza- tion laws listing the functions to be assigned to local governments often mention a concomitant transfer of financial resources. What thus needs to be verified is the extent to which this principle is respected in the institutional design and in practice. e second maxim is a two-way street. On one side, local governments that choose to provide their own public goods and services must bear the nancial consequences of their decisions—more precisely, they must also decide which taxes will nance them. On the other side, if a higher tier of government imposes rules and standards for the provision of some local services (man- dated functions), this same tier must bear the costs by ensuring equivalent nancial transfers. In the decentralized budget (again following the taxonomy in gure1.2), this means setting out expenditures and revenues in parallel as follows: [1] [A] for own choice spending, at the level of taxes; [2] [B] for those specic functions funded by user fees; and, above all, [3] [C] for nancial transfers. A widespread problem in developing countries, and directly related to this principle, stems from the fact that mandatory spending needs [3] are oen too high compared with the transfers received [C]. e result is that the local gov- ernments either cannot deliver local public services in line with quantity and quality requirements or are forced to draw on their own resources [A], which leaves them with insucient resources to fund their own choices. e diculty lies in balancing these two aspects: the standards imposed by a supervisory central authority must not be too high and, at the same time, the corresponding transfers must be commensurate with the costs originating from this oversight. e principle of concomitance expresses this equilibrium and, during case stud- ies, it is therefore paramount to check whether it is respected. The denitions presented below do not preclude other denitions and must therefore be seen more as conventions that enable us to know we are talking about.

Exclusive Tax

A tax for which only one tier of government can exploit the tax base and collect all of the revenue.

Shared Tax

Several tiers of government have access to the same tax base. If each government has full scal sovereignty, each can dene the tax base, and there will be as many denitions as government units, with obvious coordination and harmonization problems. A government has partial scal sovereignty when it can set part of the taxation criteria (for example, the tax base, exemptions, deductions, tax spendi ng, and tax rate schedule). Taxes that have the same base but are shared by several tiers of government, each of which freely sets the tax rate, enter into this shared-tax-base category. Fiscal exibility means that a government sets only the tax coefcient (the base, deductions, and schedules remaining identical). Also in this category are systems that apply additional levies (piggyback taxes). Finally, mandatory taxation means that a government is not free to choose and must levy a tax in compliance with the rules set by a higher tier of gov ernment.

Revenue Sharing

Generally, the tax base and the tax rate are set by the higher-tier government that col- lects the tax, but a xed share of the tax revenue is apportioned to the government units belonging to the lower tier. Two methods of revenue sharing exist, depending on whether sharing is based on The amount of tax revenue collected in the local government unit concerned, according to the origin criterion (also called the “principle of derivati on"); or A distribution formula that includes various criteria (such as populati on size) or is designed to reduce disparities in scal capacity (“revenue equalization").

Source: Dafon and Madiès 2008, 44.

Inventory of Resources

?e approach to resource inventory is based on three matrices, each organized along the lines of table 1.3, in this proposed sequence: Matrix 1: an inventory of institutional and legal provisions

Matrix 2: an account of on-the-ground practices

Matrix 3: available gures and statistical data.

Sample Matrix of Financial Resources, by Government Tier

Resources

(1)

Central

(2)

Regional

(3) Local (4)

Fiscal resources

a

1 to G tax in the equation [1.4]

G+1 to K in equation [1.5]

Municipal assets and property

K+1 to P in equation [1.6]

Intergovernmental transfers

P+1 to Z in equation [1.7]

External transfers

P+1 to Z in equation [1.7]

Source: Dafflon 2010a.

a. See note (b) under table 1.1. RT

UCMATRANS,

TT i iG 1 UCUC i iGK 1 MAMA i iKP 1

TRANSTRANS

i iPZ 1 TtBDK iiiiji jn 1 (.)141516

13TUCMA

R

Matrix 1

Matrix 2

Matrix 3

Current State of Play

decides implements controls sanctions

Table 1.4

Sample Analytical Matrix of Financial Transfers

Type of

transfer (1) Legal basis (design) (2)

Benchmark

(3) Gap between columns

2 and 3

(4)

Other type of

intervention (5)

Opportunity

cost (6)quotesdbs_dbs29.pdfusesText_35

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