Decentralisation's Effects on Public Investment: Evidence and Policy Lessons from Bolivia and Colombia
ABSTRACT This paper examines decentralisation in Bolivia and Colombia to explore its effects on the uses and spatial distribution of public investment, as well as government responsiveness to local needs. In both countries, investment shifted from infrastructure to social services and human capital formation. Resources were rebalanced in favour of poorer districts. In Bolivia, decentralisation made government more responsive by re-directing public investment to areas of greatest need. In Colombia, municipalities increased investment significantly while running costs fell. Six important lessons emerge from the comparison. For decentralisation to work well: (i) local democracy must be transparent, fair and competitive; (ii) local governments must face hard budget constraints; (iii) central government must be scaled back; (iv) significant tax-raising powers must be devolved; and (v) decentralisation is composed of distinct, separable components, the sequencing of which is important. Finally, (vi) what decentralisation achieves, and whether it is advisable, hinges on how central government behaved pre-reform.
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ABSTRACT: For the past fifteen years, Colombia has been engaged in a grand experiment in decentralization. Since 1986, subnational government spending has increased dramatically, as the regions have assumed greater control of health and education programs and other local services, and an increasing fraction of national revenues have been earmarked for transfer to lowerlevel governments.01/2003;
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ABSTRACT: Governance indicators are now widely used as tools for conducting development dialogue, allocating external assistance and influencing foreign direct investment. This paper argues that available governance indicators are not suitable for these purposes as they do not conceptualize governance and fail to capture how citizens perceive the governance environment and outcomes in their countries. This paper attempts to fill this void by conceptualizing governance and implementing a uniform and consistent framework for measuring governance quality across countries and over time based upon citizens’ evaluations.World Development. 01/2000; 28(2):365-380.
Decentralisation's effects on public
investment: evidence and policy lessons
from Bolivia and Colombia
Article (Accepted version)
Faguet, Jean-Paul (2008) Decentralisation's effects on public investment: evidence and policy
lessons from Bolivia and Colombia. Journal of development studies, 44 (8). pp. 1100-1121.
© 2008 Taylor & Francis
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DECENTRALISATION’S EFFECTS ON PUBLIC INVESTMENT
Evidence and Policy Lessons from Bolivia and Colombia1
16 May 2007
This paper examines decentralisation in Bolivia and Colombia to explore its effects on the
uses and spatial distribution of public investment, as well as government responsiveness to
local needs. In both countries, investment shifted from infrastructure to social services and
human capital formation. Resources were rebalanced in favour of poorer districts. In Bolivia,
decentralisation made government more responsive by re-directing public investment to areas
of greatest need. In Colombia, municipalities increased investment significantly while
running costs fell. Six important lessons emerge from the comparison. For decentralisation to
work well, (i) local democracy must be transparent, fair and competitive; (ii) local
governments must face hard budget constraints; (iii) central government must be scaled back;
(iv) significant tax-raising powers must be devolved; and (v) decentralization is composed of
distinct, separable components, the sequencing of which is important. Lastly, (vi) what
decentralisation achieves, and whether it is advisable, hinge on how central government
Key words: decentralisation, public investment, Latin America, Bolivia, Colombia, local
All over the world, developing countries are decentralizing their public
administrations in an attempt to make them more efficient, flexible and responsive.
Decentralisation is central to the policy agendas of countries as disparate as Mexico,
Egypt, Ghana and India. And under the guises of subsidiarity, devolution and federalism,
reform is firmly in the foreground of policy discourse in rich countries too. But
surprisingly, the empirical literature is unable to agree on what decentralisation’s effects
on public administration and public finances have been in practice (Kim et al. 2005).
Advocates (for example Olowu and Wunsch 1990; Putnam 1993; World Bank 1994;
UNDP 1993) argue that decentralisation can make government more responsive to the
governed by ‘tailoring levels of consumption to the preferences of smaller, more
homogeneous groups’ (Wallis and Oates 1988, 5). Opponents (for example Crook and
Sverrisson 1999; Prud’homme 1995; Samoff 1990; Smith 1985; Tanzi 1995) dispute this,
arguing that local governments are too susceptible to elite capture, and too lacking in
technical, human and financial resources, to produce a range of public services that are
varied, efficient and responsive to local demand. But neither side is able to substantiate
its arguments convincingly with empirical evidence.
Recent studies in the Journal of Development Studies have on balance tended
toward the negative camp. In a study of rural water supply in central India, Asthana
(2003) finds that decentralisation of water provision decreased efficiency. Operating
costs per unit of output were higher in decentralised utilities, and asset utilization was
lower. Both differences are statistically significant. Along similar lines, Akin, Hutchinson
and Strumpf (2005) analyse a detailed database of Ugandan local government health
budgets. Using subjective characterisations of the degree of ‘publicness’ of different
health activities, they find evidence that local governments are allocating declining
proportions of their budgets to public goods, and increasing shares to publicly financed
private goods. They attribute this behaviour to free riding by local officials on the health
expenditures of their neighbours. Woller and Phillips (1998) test the much broader claim
that decentralisation will increase the long-term growth rate by making the public sector
more responsive and efficient. Using panel data on 23 developing countries between
1974-1991, they find no strong evidence of any systematic effect of decentralisation on
economic growth. Johnson, Deshingkar and Start (2005) buck this negative trend by
finding that India’s recent decentralisation was associated with positive outcomes for the
rural poor in Andhra Pradesh and Madhya Pradesh. But their enthusiasm for
decentralisation is nonetheless limited. The pro-poor outcomes achieved, they argue,
were due to central and state governments’ ability to counterbalance the elite capture that
decentralisation tends to spawn, which naturally favours the rich.
The broader literature takes a more positive view of decentralisation, but is
ultimately inconclusive. Consider the broadest surveys: Rondinelli, Cheema and Nellis
(1983) note that decentralisation has usually disappointed its partisans. Most developing
countries implementing decentralisation experienced serious administrative problems.
Although few comprehensive evaluations of the benefits and costs of decentralisation
efforts have been conducted, those that were attempted indicate limited success in some
countries but not others. A decade and a half later, surveys by Piriou-Sall (1998), Manor
(1999) and Smoke (2001) are slightly more positive, but with caveats about the strength
of the evidence in decentralisation’s favour. Manor notes that the evidence, though
extensive, is still incomplete, but ends his study with the opinion that ‘while
decentralisation …is no panacea, it has many virtues and is worth pursuing’. Smoke, by
contrast, finds the evidence mixed and anecdotal, and asks whether there is empirical
justification for pursuing decentralisation at all. Given the sheer size of the literature, the
lack of progress is surprising.
This paper examines the effects of decentralisation on: (i) the uses of public
resources, (ii) their distribution across space, and (iii) government responsiveness and
poverty-orientation, by comparing two recent cases of extensive reform: Bolivia and
Colombia. Although these issues are just two of the many dealt with above, they are
amongst the most important, and form the core of the theoretical case in favour of
decentralisation (Blair 2000; Dillinger 1994; Musgrave 1959; Oates 1972).
Focusing on a pair of broadly similar countries in the same region limits problems
of data comparability, and geographic, cultural and historical context. But it is the
decentralisation-specific similarities that are most striking, and that make this comparison
particularly good. Until reforms began, Bolivia had few elected mayors and Colombia
had none. Municipal administrations in both countries had little power and few resources.
Both countries were characterised by highly vertical administrations in which authority
cascaded down from the President, through ministries and state governments, to local
officials in the farthest towns and villages. In such a system, accountability was upwards
and not downwards.
Both countries turned to decentralisation in the early 1990s (although Colombia
took a few, cautious steps somewhat earlier). In both countries – as we discuss below –
reforms were far-reaching. Significantly, both decentralizations gave a prominent role to
municipalities, which in both countries are mostly small and rural. Average municipal
population in Bolivia is 20,847, and 36,099 in Colombia, although both figures are biased
upwards by the presence of a few very large cities. Fully 82 per cent of municipalities
have populations below the average in Bolivia, and 86 per cent in Colombia. The
proportion of municipalities with fewer than 10,000 inhabitants is 55 per cent in Bolivia
and 40 per cent in Colombia.
Decentralisation is henceforth defined as the devolution by central (that is,
national) government of specific functions, with all of the administrative, political and
economic attributes that these entail, to democratic local (that is, municipal) governments
which are independent of the centre within a legally delimited geographic and functional
domain. The rest of the paper is organised as follows. Section 2 reviews the Bolivian and
Colombian decentralisation programs, focusing on their legal and budgetary aspects.
Section 3 provides summarised analysis of the economic outcomes of decentralisation in
each country. Section 4 summarises the effects of reform in Bolivia and Colombia, and
teases out policy lessons for other countries contemplating reform.
2. The Bolivian and Colombian Decentralisation Programs
2.1 Popular Participation in Bolivia
The Bolivian revolution of 1952-1953 destroyed an autocratic plutocracy that not
only oppressed the indigenous majority but – especially in rural areas – literally enslaved
them (Klein 1993). This was replaced with a nationalist project to recast social relations
through the active intervention of the state in the nation’s social and economic affairs.
Revolutionary protagonists sought to transform a poor, backward, extremely unequal
country by expropriating the ‘commanding heights’ of the economy – land and mines –
so smashing the power of an entrenched elite. The new government then embarked upon
a state-led modernization strategy in which public corporations and regional governments
initiated a concerted drive to break down provincial fiefdoms, transform existing social
relations, and create a modern, industrial, egalitarian society (Dunkerley 1984).
Revolutionaries deemed direct political control necessary, and so the country quickly
acquired one of the most centralised state structures in the region.
Intellectual trends of the subsequent four decades – Dependencia theory,
Developmentalism, and Import Substitution Industrialization – all contributed to the
centralizing tendency, as did the military governments which overthrew elected
administrations with increasing frequency from the 1960s onwards (Klein 1993). With
political power so little dispersed, there was little point in establishing the legal and
political instruments of local governance. As a result, local government existed in Bolivia
only in the 30-40 largest and most important cities. Beyond these, municipalities existed
at most in name, as a ceremonial institution devoid of both administrative capability and
resources. And in most of the country they did not exist at all.
Although the 1994 reform was sprung on an unsuspecting nation, the concept of
decentralisation was by no means new. For more than 30 years a decentralisation debate
focused on Bolivia’s nine departments ebbed and flowed politically – at times taking on
burning importance, other times all but forgotten. The issue became caught up in the
country’s centrifugal tensions, as regional elites in Santa Cruz and Tarija consciously
manipulated the threat of secession to Brazil and Argentina respectively – with which
each is economically more integrated than La Paz – to extract resources from the centre.
The Bolivian paradox of a highly centralised but weak state, and a socially diverse
population with weak national identity, meant that such threats were taken seriously by
the political class, which blocked all moves to devolve more power and authority to
What spurred the change of tack? Why then? Two factors stand out. The less
important one arises from Bolivia’s failure to achieve sustained, healthy growth despite
wrenching economic reform overseen by the IMF and World Bank. Fifteen years of near-
zero per capita economic growth sapped the credibility of the state and fomented social
unrest. The new Movimiento Nacionalista Revolucionario (MNR) administration of Pres.
Gonzalo Sánchez de Lozada (1993-1997) saw the structure of government itself as an
impediment to growth. Decentralisation was an attempt to deepen structural reform in
order to make the state more efficient and responsive to the population, and so regain its
legitimacy in the voters’ eyes.
The more important factor arises from the rise of ethnically-based, populist
politics in the 1980s, which undercut the MNR’s traditional dominance of the rural vote,
and posed a serious challenge to its (self-declared) role as the ‘natural party of
government’. This rural dominance was itself born out of the MNR’s agrarian reforms of
the revolution. Hence a party with a tradition of radical reform, which found itself in
secular decline, sought a second, re-defining moment. In a typically bold move, it sought
to reorganise government, re-cast the relationship between citizens and the state, and so
win back the loyalty of Bolivians living outside major cities. To a very important extent,
decentralisation was a gambit to capture rural voters for at least another generation.3
Against this background, the Bolivian decentralisation reform was announced in
1994. The Law of Popular Participation, developed almost in secret by a small number of
technocrats (Tuchschneider 1997), was announced to the nation to general surprise,
followed by ridicule, followed by determined opposition of large parts of society.4 It is
notable that opposition to the law, which was fierce for a few months, came principally
from the teachers’ union, NGOs and other social actors, and not from political parties.
Judged by their public declarations, this opposition was an incoherent mix of accusations
and fears that denoted a deep suspicion of the government’s motives, and not a careful
reading of the law. The lack of opposition from parties can largely be attributed to the
sweeping reforms that were being enacted by the MNR government at the same time as
decentralisation. With privatization of the main state enterprises, education reform, and a
comprehensive restructuring of the executive branch all being pushed at once,
decentralisation was relegated to the second tier of political parties’ concerns. The
opposition focused its attention elsewhere, and it never became a fighting point.
First made public in January of that year, the law was promulgated by Congress in
April and implemented from July. The scale of the change in resource flows and political
power that it brought about were enormous. The core of the law consists of four points
(Secretaría Nacional de Participación Popular, 1994):
1. Resource Allocation. Funds devolved to municipalities doubled to 20 per cent of all
national tax revenue. More importantly, allocation amongst municipalities switched
from unsystematic, highly political criteria to a strict per capita basis.
2. Responsibility for Public Services. Ownership of local infrastructure in education,
health, water & sanitation, irrigation, roads, sports and culture was given to
municipalities, with the concomitant responsibility to maintain, equip and administer
these facilities, and invest in new ones. But the staffing of this infrastructure,
including responsibility for salaries, remained central attributes.
3. Oversight Committees (Comités de Vigilancia) were established to provide an
alternative channel for representing popular demand in the policy-making process.
Composed of representatives from local, grass-roots groups, these bodies propose
projects and oversee municipal expenditure. Their ability to have disbursements of
Popular Participation funds suspended if they find funds are being misused or stolen
can paralyze local government, and gives them real power.
4. Municipalisation. Existing municipalities were expanded to include suburbs and
surrounding rural areas, and 198 new municipalities (out of some 315 in all) were
The central agencies previously charged with regional and local investment projects – the
regional development corporations – were scaled back as a result. There were relatively
few direct transfers of staff to municipalities, although many ‘quasi-transfers’ appear to
have operated informally, through the labour market. And a small, complementary
program of municipal training and capacity building was established with support from
international donors. The Laws of Decentralised Administration (1995), and of
Municipalities (1999), followed subsequently, further defining the municipal mandate
and locating it in a broader governmental architecture.
The change in local affairs that these measures catalyzed is immense. Before
reform local government was absent throughout the vast majority of Bolivian territory,
and the broader state present at most in the form of a military garrison, schoolhouse or
health post, each reporting to its respective ministry. After reform, elected local
governments sprouted throughout the land.
The role of oversight committees (OCs) is worth underlining. These are, in effect,
a non-electoral form of representation that operate in parallel to Bolivia’s municipal
councils and mayors. They are composed of the representatives of grass-root
organizations within each municipality. A municipality will typically be divided into four
or more regions, each of which nominates one member to the OC from amongst its local
grass-roots leaders. OC members elect from amongst themselves a president, whose legal
status is comparable to the mayor’s. The OC’s power lies in its natural moral authority, as
well as the ability to suspend disbursements from central to local government if it judges
that funds are being misused. Oversight committees thus comprise an additional layer of
social representation similar to an upper house of parliament, enforcing accountability on
the mayor and municipal council.5
2.2 The Decentralisation Process in Colombia
Like Bolivia, Colombia was traditionally a highly centralised country, with
mayors and governors directly named by central government. Governors, in particular,
were the President’s hombres de confianza, and carried out his will in the regions. Like
Bolivia, a deep and extensive decentralisation program crystallised around the
constitutional and legal reforms of 1991-1993. The earlier introduction of a number of
piecemeal fiscal and political reforms mean that Colombia’s process was not a Bolivian-
style ‘big bang’ reform. But when placed in the international context, the coherent and
extensive package of measures that jelled in 1991-1993 should be regarded as a ‘fast-
track’ program.6 Taking the long view, Ceballos and Hoyos (2004) identify three broad
phases of reform in Colombia:
Phase 1 began in the late 1970s and early 1980s, and included a number of
specific fiscal measures aimed at strengthening municipal finances. Most important of
these were Law 14 of 1983 and Law 12 of 1986, which assigned to municipalities
increased powers of tax collection, including especially sales tax, and established
parameters for the investment of these funds.
Phase 2, which began in the mid-1980s, was more concerned with political and
administrative matters. Amongst the most important of these measures was Law 11 of
1986, which established the popular election of mayors, and sought to promote popular
participation in local public decision-making through Juntas Administradoras Locales,
amongst others. Reforms enshrined in the 1991 constitution, such as citizens’ initiatives,
municipal planning councils, open cabildos, the ability to revoke mayoral mandates,
referenda, and popular consultations, further deepened political decentralisation. The
1991 constitution also established the popular election of governors.
Beginning in 1991, and continuing for most of the decade, Phase 3 consisted of a
number of laws that regulated the new constitution, and other fiscal and administrative
reforms of the period. These laws assigned increasing responsibility to municipalities for
the planning, financing and provision of public services and social investment, and
provided additional resources for the same by increasing central government transfers to
local governments gradually but significantly. Over time, municipalities ‘certified’ as
having high administrative capacity were granted greater political autonomy and greater
discretion over devolved funds. Automatic transfers to regional governments rose from
about 20 per cent to over 40 per cent of total government spending, placing Colombia
first in the region amongst unitary countries, and third overall after the two big federal
countries, Brazil and Argentina.7
As for Bolivia, the aggregate effect of these reforms was a large increase in the
authority and operational independence of Colombia’s municipal governments,
accompanied by a huge rise in the resources they controlled. Municipalities were allowed
to raise and spend significant sums of taxes, central-to-local government transfers
increase more than three-fold,8 and municipal governments were permitted to issue
public debt. Overall municipal expenditures and investments rose five-fold, while
running costs remained stable over the period (see figure 7 below). An important
difference with Bolivia is that whereas Bolivia implemented fiscal (taxation and
expenditure) and political (elections, popular consultations) decentralisation measures at
once, Colombia sequenced its reforms, moving forward first with measures to bolster
local revenues, and only then turning to local politics. This is an important difference,
which we return to below.
What drove decentralisation in Colombia? Ceballos and Hoyos group the
motivations into two categories. The first of these is the challenge of political instability.
Colombia is a violent country, with a long history of civil conflict, armed rebellion,
persistently high levels of ‘common’ crime, and the use of violence as an explicit tool of
political mobilization. The late 1970s saw levels of violence rise again as the internal
conflict intensified. At the same time, social protests and pressures from regional groups
multiplied, linked to the central state’s inability to meet demands for social services and
public investment. Secondly, the political hegemony over the instruments of the state of
the traditional Liberal and Conservative parties began to be seen more and more as a
liability – less the solution to a previous round of civil violence (La Violencia) and more
a cause of the next one. Colombians from across the political spectrum became convinced
that the inability of the state to respond to society’s demands – and its outright absence in
many areas (the ‘internal frontier’), combined with the waning legitimacy of an
arbitrarily restricted democracy,9 were leading to public sector inefficiencies, civic
discontent, and ultimately armed violence.
Thus from the start decentralisation in Colombia was a multi-faceted tool
designed to serve a combination of purposes particular to Colombia’s troubled
democracy. Through it, policy elites sought to increase the levels of electoral and citizen
participation within the existing institutional framework. They sought to open the
political system through popular elections at the regional and local levels, where they
hoped new political movements would emerge and eventually assume power, so breaking
the liberal-conservative hegemony over the resources of the state.
3. The Impacts of Decentralisation
This section compares the allocation of resources across different uses, and across
space, by central vs. local government in the two countries. In accordance with the ‘big
bang’ nature of its reform, evidence for Bolivia is presented in stark before-vs.-after
terms. By contrast, Colombia’s more gradual reform is better suited to a time series
approach, and hence that evidence covers the entire period 1993-2002. Ideally this paper
would present the same graphs and tables for both countries. Unfortunately, different
countries collect data in different ways, and current data availability for Colombia and
Bolivia oblige us to present evidence that is similar, but not identical.
3.1 The Impact of Decentralisation in Bolivia
Measuring the effects of decentralisation in a country where 2/3 of municipalities
did not exist before reform presents special methodological problems. The vast majority
of public investment in villages and towns before 1994 was undertaken by central
government. But financial records of these projects do not include information on which
municipality they would eventually belong to. Hence it became necessary to work with
local experts in geographic information systems to allocate the thousands of public
investment projects in the 1987-1993 Public Sector Investment Budget10 to Bolivia’s
municipalities as created or expanded in the 1994 reform. This was carried out under the
auspices of a World Bank-funded research project, ‘Decentralization and Participatory
Planning in Bolivia’, which analyzed the effects of the 1994 reform on government
responsiveness to objective and subjectively expressed local needs, through a blend of
qualitative and quantitative methods. By comparing detailed financial reports from pre-
reform investment projects with high-resolution maps of Bolivian towns, villages and
geographic features, a small team of Bolivian geographers was able to identify the
physical location of the majority of central government investments, and then allocate
them to the municipalities defined by the decentralization reform. In this way, we were
able to re-construct municipal investment data for a period in which most municipalities
did not exist.
The extent of the change is perhaps best appreciated by examining the changes in
resource flows decentralisation catalyzed. Before decentralisation, 308 Bolivian
municipalities divided amongst them a mere 14 per cent of all centrally devolved funds,
while the three main cities took 86 per cent. After decentralisation the shares reversed to