Fiscal Decentralization and the Efficiency of Public Service Delivery

Abstract

This chapter explores the impact of fiscal decentralisation on the efficiency of public service delivery. It uses a stochastic frontier method to estimate time-varying efficiency coefficients and analyses the impact of fiscal decentralisation on those efficiency coefficients. The findings indicate that fiscal decentralisation can improve the efficiency of public service delivery but only under specific conditions. First, the decentralisation process requires adequate political and institutional environments. Second, a sufficient degree of expenditure decentralisation seems necessary to obtain favourable outcomes. Third, decentralisation of expenditure needs to be accompanied by sufficient decentralisation of revenue. Absent these conditions, fiscal decentralisation can worsen the efficiency of public service delivery.