Soundings

Alberto Alesina
Regional Reckonings
Decentralization done wrong
Winter 2013

Italians, long resigned to the corruption of their national government, are starting to discover how wasteful their regional governments are, too. According to recent reports, local bureaucrats have spent lavishly on many unnecessary items, such as enormous, luxurious buildings for their oversize staffs and extravagant foreign trips, as though they were engaged in diplomacy. The country is feeling the effects of a good idea gone wrong: decentralization, the devolution of governing power to local authorities, which was recently accomplished through a constitutional amendment. Italy is hardly alone. Much of the national deficit in debt-burdened countries like Argentina, Brazil, and Spain, among many others, originated in their regional governments. In America, many state governments are in dire straits because they’ve promised their workers overly generous pensions.

In theory, decentralization brings government closer to the people, increasing popular control and making politicians more accountable. It should also create an efficient division of roles among levels of government. Tasks of obvious national significance or with large economies of scale, such as defense, foreign policy, the management of interregional infrastructure, and regulation of foreign commerce clearly belong to national governments; tasks that have small economies of scale and that involve local differences, such as education and policing, should seemingly be the responsibility of regional governments, which can tailor policies more appropriately to residents’ wishes.

To succeed, however, decentralization must be based on sound principles. First, localities should be required to run balanced budgets. Otherwise, their eligibility for bailouts from the national government will discourage them from spending within their means. Even with a balanced-budget rule, a regional government can be profligate if the national government decides to transfer money directly to it from another region (in addition to the indirect interregional transfers that necessarily result from progressive income taxes and national welfare programs). Any direct transfers of this kind should be made as transparently as possible. But the approach nevertheless tends to encourage waste and corruption—an exchange of favors between national politicians and local lobbies. A better approach is to finance regional spending with local taxes.

The second critical element of successful decentralization is a clear division of responsibility. In practice, this has often proved difficult to achieve. Tasks are allocated not according to efficiency but according to the result of battles among different levels of government. Duplication, confusion, and conflict among these levels of government lead to inefficiency, bureaucracy, and a rising tax burden.

Decentralization, then, offers genuine benefits but also real risks. The results of poorly conceived decentralization schemes suggest that bad decentralization may be worse than no decentralization at all.

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