Corruption and Decentralization of Infrastructure Delivery in Developing Countries

Corruption in the delivery of public services in developing countries has frequently been argued to result from overcentralization and lack of suitable information systems required for effective oversight of the behavior of bureaucrats. Devolution of powers to procure and deliver these services to elected local governments better informed about local conditions may accordingly improve service delivery. However, if political accountability of local governments is limited, decentralization is also prone to leakages and targeting failures. This paper presents a simple analytical framework to evaluate the effects of decentralization of infrastructure delivery in different institutional contexts. It argues that the mode of financing local governments is a key parameter. Given limited accountability of local governments, expenditure decentralization accompanied by full devolution of revenue raising authority to local governments may lead to efficiency and equity losses relative to centralization. These pitfalls can be avoided if local services are funded by user fees. User-fee-financed decentralization generally dominates both centralization and local-tax-financed decentralization, regardless of patterns of political accountability. However, it may allow local elites to be overprovided the service and evade paying fees. Fiscal grants from the center restrict the scope of such overprovision, at the cost of imposing financial constraints on local governments that limit flexibility in service allocations to local need. From a design perspective, therefore, the real choice of financing mode is between user fees and fiscal grants: either can dominate the other