Social Funds and Decentralization: Optimal Institutional Design

LSE Development Studies Institute Working Paper No. 05-59

Public Administration and Development, Vol. 26, pp. 303-315, 2006

30 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

Most of the 60 developing countries that have established social funds are decentralizing their governments as well. But the question of how to tailor social funds - originally a highly centralized model - for a decentralizing context is scarcely addressed in the literature. This paper examines the implications of decentralization for the institutional design of social funds step-by-step through the project cycle. The topic is doubly important because a social fund can increase its effectiveness and the sustainability of its investments by reorganizing internal processes to take advantage of the political and civic institutions that decentralization creates. Local government has an informational advantage in local needs and characteristics (time and place), whereas the fund will have access to better technology and knowledge of sectoral best practice. The key is to create institutional incentives which best combine these relative advantages, leading to better investments. I describe a quick and easy system by which funds can conduct routine appraisal of project success, which can in turn inform staff performance evaluations, improve internal procedures, and even permit a performance ranking of local governments. While experience has shown that SFs can help strengthen local governments, strengthening central institutions should be dropped as a central SF goal.

Keywords: Social funds, decentralization, poverty alleviation, institutional design

JEL Classification: D73, H41, H42, H43, H77, R58

Suggested Citation

Faguet, Jean-Paul, Social Funds and Decentralization: Optimal Institutional Design (June 2005). LSE Development Studies Institute Working Paper No. 05-59, Public Administration and Development, Vol. 26, pp. 303-315, 2006, Available at SSRN: https://ssrn.com/abstract=758864

Jean-Paul Faguet (Contact Author)

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

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+44 207 955 6844 (Fax)

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

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