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Ideas & Debate

Economic benefits of decentralisation won’t be immediate

What will be the impact of the introduction of political, administrative and fiscal decentralisation in Kenya? More importantly, what are the pros and cons of decentralisation with regard to economic development?

In terms of pros, fiscal decentralisation can promote cost-effectiveness, and greater co-ordination and efficiency in public resource utilisation.

There is a higher likelihood that budgets can be and will be better scrutinised as sub-national governments are more closely accountable to citizens for taxing and spending decisions. Further, since decision-making is localised, projects can be managed more efficiently thereby avoiding costly delays.

In terms of grassroots economic development, decentralisation facilitates the development of small-scale projects close to the community that directly speaks to their context and constraints.

This participation and localised attention can contribute to the economic development of individuals and SMEs thus allowing more participation in the local and national economies.

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In addition, decentralisation creates a local platform that allows investors to become more knowledgeable and sensitive to local potential, competitive advantage, problems and needs.

Decentralisation allows for the generation of more exhaustive and accurate economic information on which investment decisions can be made and implemented.

Investors are always most comfortable with investing when they have a rich pool of data and information on which they can draw.

In terms of cons, decentralisation can encourage economic separatism that reinforces narrow sectional interests that do not leverage economies of scale and joint project development.

Secondly, elite capture is a real risk in the context of decentralisation where local elites respond to decentralisation by making efforts to capture all benefits.

This can be done by elites dominating local politics and gaining control of local political institutions, or by central government actors transferring powers and resources into counties along lines of economic and political alliances. The result is that the economy of the county is dominated by elite interests and economic power is consolidated not distributed.

Further, most evidence points to the fact that decentralisation in Africa has not had a significant effect on poverty reduction. Also bear in mind that levels of economic development differ within counties with an economic dominance of more urbanised areas.

This translates to more tax extracted from urban sources. If urban residents feel that their tax revenues are used by county officials for the benefit of rural residents, their incentive to pay local taxes may reduce.

Further, some counties have been historically neglected and start at a relative disadvantage making them less attractive for relocation and investment, and less able to retain skilled labour thereby deepening the rift of economic development between counties.

On the other hand, a county that is deemed particularly attractive may see migration that leads to saturation of labour supply. In Kenya, this dynamic is particularly dicey due to the fact that county boundaries generally fall across tribal lines.

Therefore local communities may resent individuals from other tribes setting up shop in “their area”, potentially causing socio-political tension and conflict.

Finally, it should be noted that according to some studies, it will take 10 to 15 years to show the results of decentralisation. Therefore, Kenya is currently investing in a process with unknown outcomes.

An important overall point of which one should be cognisant is that the relationship between decentralisation and economic activity could be non-linear with the positive effect receding with increasing levels of decentralisation.

Some evidence even suggests there is a level of ‘optimal decentralisation’ beyond which additional devolution would restrain rather than foster economic activity.

Ms Were is a development economist.

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