Making Decentralization Work in Africa

Decentralization in Africa can work if we couple fiscal transfers with internal competition.

When the music changes, so does the dance." — African Proverb

Decentralization has been the center of national reforms in many developing countries. Local governments are expected to drive development in their own jurisdictions. In Africa the report Decentralization and Urban Governance in Africa states that “Subnational governance bodies exist in all African countries, and 81% of African countries have established legal frameworks defining the powers of municipalities, districts, or counties. The logic is simple: bring government closer to the people, and development will follow.

Yet most cannot generate enough internal revenue and are far from being effective. They still depend on fiscal transfers from the central government to provide even the most basic public goods and services.

This makes targeted grants from central governments a critical revenue source. Through grants, central governments help local governments meet spending needs, ensure minimum standards in education and health, and reducing gaps across regions. In principle, these transfers correct disparities and create a foundation for balanced development.

But a deeper question remains. Do grants to one local government also influence neighboring ones to increase their own development spending?

In a research led by Rose Camille Vincent, PhD. & Victor Osei Kwadwo, PhD, we focused on Benin’s Fonds d’Appui au Développement des Communes (FADeC) and examined exactly this question. We looked at 77 municipalities between 2008 and 2015, tracing how grants affected local development spending both directly and indirectly. Beyond standard spatial models, we reflected on the socio-cultural context of sub-Saharan Africa, using ethno-linguistic affinity as a way of measuring interconnectedness.

The results showed that grants raised development expenditure not only in the local government that received them, but also in adjoining ones. In other words, the benefits spilled across borders. Moreover, ethnic and linguistic ties strengthened this effect. A grant in one municipality nudged its “ethnic neighbour” to also increase spending.

The ability of local governments in low-income countries to internally generate revenue is still limited. Worse, this ability is lower in peripheral local governments. If these peripheral local governments are left alone without grant support, they will remain incapacitated in fulfilling their mandates, especially in critical poverty-sensitive areas such as primary education, health or housing.

Grants change that dynamic. On the one hand, grants can have a flypaper effect where the provision of grants increases local government investment towards development that even spills over to compel adjourning local government also to invest. On the other hand, grants can have a disincentivizing effect where rent-seeking and moral hazard is exacerbated.

Our evidence suggests that, at least in Benin, the positive effects dominate. The simultaneous spending creates a chain of investment that makes holistic regional development more likely and reduces inequality.

A key question, lies in the utilization and impact of central government grant transfers on local economic performance.

 

Next steps

The empirical evidence from our study reinforces the appeal of targeted inter-governmental grants for the decentralized financing of public services as this creates positive spillovers. This is especially relevant in low-income countries where local revenue generation is limited amidst a vast disparity between core and peripheral local government areas.

The evidence on the multiplier and spillover effect of the grant points to the appealing nature of intergovernmental transfers as a mechanism for financing local public services, especially in least-developed countries such as Benin.

Compared to advanced economies, decentralization in many African countries still lacks the competition and accountability that drive strong results. Yet our findings show that progress is possible. By leveraging the way local governments interact geographically and socially, targeted financing can spur competition and turn decentralization into a genuine driver of regional development.

DISCLAIMER: The views expressed in this blog are those of the author and do not necessarily reflect the official position of Governance and Development Advisory, Utrecht University, or any institution with which the author is affiliated. This piece is written in a personal capacity to contribute to critical dialogue on decentalization and development in Africa.