Decentralization's Effects on Public Investment: Evidence and Four Lessons from Bolivia and Colombia

LSE Crisis States Programme Working Paper No. 62

23 Pages Posted: 15 Jul 2005

See all articles by Jean-Paul Faguet

Jean-Paul Faguet

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Date Written: June 2005

Abstract

The effects of decentralization on a number of important policy goals is much debated but little agreed upon. This paper examines the cases of Bolivia and Colombia to explore decentralization's effects on government responsiveness and poverty-orientation. In Bolivia, decentralization made government more responsive by re-directing public investment to areas of greatest need. In Colombia, municipalities increased investment significantly as decentralization deepened, while running costs fell. In both countries, investment shifted from economic production and infrastructure to social services and human capital formation. Resources were rebalanced in favor of poorer districts. Four important lessons emerge from the comparison. For decentralization to work well, (i) local democracy must be free, fair, transparent and competitive; (ii) local governments must face hard budget constraints; (iii) central government must be scaled back; and (iv) significant tax-raising powers must be devolved to the periphery.

Keywords: Decentralization, public investment, Latin America, Bolivia, Colombia, local government

JEL Classification: D73, H41, H42, H72, O18

Suggested Citation

Faguet, Jean-Paul, Decentralization's Effects on Public Investment: Evidence and Four Lessons from Bolivia and Colombia (June 2005). LSE Crisis States Programme Working Paper No. 62, Available at SSRN: https://ssrn.com/abstract=758545 or http://dx.doi.org/10.2139/ssrn.758545

Jean-Paul Faguet (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

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HOME PAGE: http://www.lse.ac.uk/Depts/destin/faguetjp.html

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