Judging efficiency: Fiscal decentralisation of public good delivery

IMF paper reveals distribution of non-excludable services require conditions .

Tehreem Husain April 26, 2015
According to the IMF working paper, if local governments are comprised of rent-seeking elites then higher expenditure would be spent on non-productive items such as wages instead of capital expenditure. DESIGN: CREATIVE COMMON


In a recent IMF working paper, the impact of fiscal decentralisation has been explored on public service delivery using 64 countries inclusive of advanced, emerging and developing countries over a period of 1990-2012.

The findings of the paper interestingly indicate that fiscal decentralisation can improve the efficiency of public good delivery but only under certain conditions.

First, decentralisation should be supported by adequate political and institutional arrangements. Second, both expenditure and revenue decentralisation are necessary for attaining favorable outcomes.

With widespread debates on media’s involvement in the upcoming local government elections this article aims to state bare the fact that despite provinces having significant powers through the National Finance Commission (NFC) Award 2010, lack of a supportive political and institutional environment would harm public service provision.

This is particularly true in Sindh where the two main political parties are often at odds with each other.

Fiscal decentralisation has been deemed important on many fronts as local governments have the informational advantage of the public’s preference for provision of goods and services compared to the central government.

Moreover, its geographical proximity makes it more accountable and can improve public service outcomes in the areas of education and health. On the contrary, fiscal decentralisation can harm public service delivery if accountability is loose and strong institutional arrangements are not in place.

According to the IMF working paper, if local governments are comprised of rent-seeking elites then higher expenditure would be spent on non-productive items such as wages instead of capital expenditure.

The history of intergovernmental transfers in pre-Pakistan region dates back to 1919 and has continued many times since its independence in 1947.

The current NFC Award employs not only population but other variables such as backwardness, inverse population density and revenue collection as some of the factors in deciding resource transfer to provinces.

Under the NFC Award, provinces have been given the powers of expenditure and revenue decentralisation.

But the question arises, has the decentralisation of fiscal powers brought improvements in public service delivery? I focus on Sindh whose institutional and political environment is fraught with power struggle between different political elites.

For the purpose of analysis, three indicators; road network, primary school enrollment and nutrition (to represent health) are taken to measure public service delivery since the implementation of the NFC.

Analysing the indicators, it is seen that Sindh has failed miserably on all three accounts. In terms of road development, the length of road network has declined by 0.3 percent in 2013 relative to the beginning of the fiscal decentralisation through NFC in 2010.

In terms of primary school enrollment again deterioration has been seen. Enrollment has shown a decline of 4% from the start of the NFC Award to 2011/12 which now stands at 50%, according to the Pakistan Millenium Development Goals.

This is in contrast to other provinces especially Punjab which has made considerable improvement in this regard. Lastly, in terms of another primary public sector segment-health, the situation has been quite poor.

Data availability for the health sector remains poor. Taking the indicator of nutrition as a rudimentary indicator for health, the prevalence of underweight children under five years of age has shown no improvement standing at 40.5% in 2012 which was the same in 2010.

The dire situation of health in the province has already been evidenced this year in the scores of deaths of infants in Tharparkar district due to famine and malnutrition aggravated by poor health infrastructure.

A glance at the important indictors exhibiting public service delivery in the province of Sindh corroborates to the thesis presented in the recent working paper published by the IMF.

An uncertain political environment and underdeveloped institutional environment where rent-seeking elites channel expenditure towards unproductive items harms public service delivery in the presence of fiscal decentralisation. The latter can serve as a policy instrument to aid public service delivery but under certain conditions.

The writer is an economist and ex-central banker


Published in The Express Tribune, April 27th,  2015.

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