Corporate Policy Papers
Taking Risks
Annex Clarifying the rationale:
Poverty, decentralization and local governance
UNCDF’s 1995 policy paper set out the broad conceptual basis for the fund’s focus on local governance. What follows provides a more comprehensive restatement of the rationale underlying UNCDF policy on poverty reduction, decentralization and local governance.
Poverty and poverty reduction strategies
Important recent work has led to a broader concept of poverty, embracing notions of disempowerment, limited capabilities, and relative well being and of the importance of subjective perceptions of these same factors. The concepts complement the more conventional "economistic" notions of income and consumption levels and variability.
In what follows poverty is broadly equated with the notion of a person falling short of a level of economic welfare considered a reasonable minimum in some absolute sense or by the standards of a specific society. This shortfall is assumed to derive from an inadequate or unreliable consumption of private, collective, or public goods and services—with food, water and shelter being the essential ones, without which no others can be consumed.
There is broad consensus among researchers and donors that effective poverty reduction requires:
• Improving individual and household opportunities for employment and livelihood and increasing returns. Similarly, there is a need for food security, through more productive or labour-based economic growth, in the fragile areas where increasing numbers of the rural poor are concentrated.
• Increasing the poor’s access to basic public and collective services—health, education, water, sanitation, transport—to enhance human capital, increase labour productivity (the principal asset of the poor) and foster access to economic opportunities.
• Providing targeted safety nets for vulnerable groups. (return)
Improving the supply of basic services and infrastructure
The relative weight to be given to these strategies will vary by country and area, given the varied mix of factors associated with poverty in different contexts. Still, any attempts to reduce poverty involving the first and second strategies above almost inevitably require an increased supply of basic services and infrastructure of at least two types: economic and social services and infrastructure.
Economic services and infrastructure. An essential ingredient to reducing poverty under the strategy of improving opportunities for employment and ensuring food security involves improving the supply of basic transport services (through rural road infrastructure), market infrastructure, water control services and, in some cases, power supply infrastructure. These services and infrastructure allow for the economic activities of the poor to be more productive and boost the terms of trade under which they operate.
Social services and infrastructure. Better access to basic health, education, water supply and sanitation services generally requires an increased supply of these services—which in most cases implies increased investment in service-related facilities (clinics, water points).
By itself, however, such investment is insufficient for increasing the supply of basic services. For these facilities to generate useful services, they must be properly managed, operated and maintained. This is the case for health and education services, where personnel performance is equally as or more important than the facilities in which they operate.
Management of common pool natural resources. In addition, in cases where poverty is associated with a degrading natural resource base, addressing this may require devising ways of restoring or enhancing the institutional arrangements for collective action so that common resources—pasture, fuelwood, water—are managed, regulated and maintained. There is growing evidence that the rural poor, who depend on common resources to survive, are increasingly being excluded from using them, or that the productivity of these resources is declining through their unregulated use. Both outcomes often reflect a breakdown in traditional customary management arrangements, so that common property management regimes evolve into open-access regimes or become privatized. Both outcomes generally come at the cost of the poor. (return)
Market failure, the role of the state and collective action
Generally, because of different kinds of market failure, the public sector or some form of collective action must take the lead role in significantly increasing the supply of basic services. Governments generally assume the lead responsibility for supplying basic health, education, water and similar services because:
• There is insufficient effective demand—that is, demand backed by purchasing power—by the poor for the private sector to respond.
• The social development benefits far outweigh the costs of provision.
• The importance of service quality and the high potential social costs of any divergence from minimum quality standards, allied with the potential for monopoly control of such services, demand a high degree of regulatory or quality control by government.
True, in many areas such infrastructure and services are provided by NGOs rather than by the state. But recent research suggests that there is little evidence that NGOs are more cost-effective than government agencies and that there are inherent problems of both "scaling up" and of sustainability. While NGOs have an essential role to play in rural development and poverty reduction—in social mobilization, training, organizational development, experimental work, disaster relief, advocacy and the like—it is doubtful whether this role should include the large-scale provision of basic services and infrastructure funded from the public purse.
By contrast, it is now recognized that the most appropriate and efficient form of collective action for ensuring management of common pool natural resources is in devolving responsibility to local institutions that include the users themselves. The market solution (privatization) has generally proven highly inequitable, while the state has proven highly inefficient. (return)
Institutional roles in the supply services and infrastructure
Yes, the state should assume a key role in the financing and supply of basic economic and social services. But this does not mean that state agencies should perform all the activities involved in delivering services and infrastructure. Specifically, it is increasingly recognized that an important distinction should be made between providing and producing services:
• Provision functions include planning, arranging financing, assuming responsibility that management and maintenance are undertaken and, ultimately, assuming accountability for service quality.
• Production functions cover design, construction, management, operations and maintenance, and service delivery activities.
Provision is the main prerogative of government, especially since these goods and services are generally financed by public funds. But even some provision activities (especially planning) may be devolved to or at least shared with community groups and civil society. And many production activities are best undertaken by communities and civil society, NGOs, or private operators or other agencies—though generally on behalf of or under contract to local government (or community) agencies.
As for improving the management of natural resources, the state has a limited role to play—indeed, state interference lies at the root of many current problems—and collective action for managing common resources is best ensured by the resource users themselves.
But this form of local collective action is occasionally subject to failure and may require higher-level public action by state agencies. That is, there are often cases where:
• Local user groups need external backup to support the enforcement of group rules, fines and the like.
• Groups competing for the same resource—such as farmer groups within the same watershed, or agriculturists and pastoralists—may be induced to cooperate only with outside pressure or arbitration.
• The authority traditionally managing the resource has lost legitimacy.
• Central withdrawal—for example, a forest department relinquishing control—has left a vacuum because the original user group has fallen into demise.
In all these cases there is a potentially important role for local governments to support local collective action. This represents a highly innovative area for institutional support. (return)
Decentralization and the comparative advantages of local governments
A variety of arguments support the virtues of decentralization. These range from the classic-liberal (local government as training ground for democracy) to the managerial (local government as more efficient service provider), the market-economic (multiple local governments as a mechanism for public competition) and the social-radical (local government as a vehicle for incorporating a wider spectrum of opinion and participation into public affairs and decision-making).
The need for public action and the role of the state in providing socio-economic services have been underscored above. In this context, for UNCDF the rationale for supporting government decentralization is that local institutions are better placed than central agencies to undertake some of these activities. It is primarily an efficiency argument—but it is also a sustainability argument: local governments have the long-term responsibility and authority for delivering certain development investments and services to rural areas. There are also important secondary benefits, to which we return below, that provide a strong supporting rationale.
Under certain conditions (see below) local government institutions possess a comparative advantage in providing some—though not necessarily all—of the basic services outlined above. But where the conditions below are not met, this comparative advantage is not fully realized.
This comparative advantage derives from reasons of local information, local accountability and thus greater scope and incentives for efficiency. More specifically, it is believed that one or more of the following efficiency arguments are true of local governments:
• Improved resource allocation—local government have stronger incentives to allocate resources (whether funds or staff) to basic services and infrastructure that benefit the poor.
• Better information—local governments, through better information and the incentive to use this information, are better placed to respond to local variations in conditions, tastes, standards, location requirements and the like for such services and infrastructure.
• Increased oversight—similar to the local information argument (above), local governments should ensure more efficient use of given levels of funds or staff through closer oversight and control.
• Better maintenance—local governments have stronger incentives to ensure proper operations and maintenance than do central state institutions.
• Increased coordination—it is easier to ensure horizontal coordination between state agency and line department staff, budgets and activities at the local level, and so to ensure complementary rather than competing activities.
• Greater local resource mobilization—it is easier for local institutions to levy and collect taxes and user fees because of the more evident returns seen by those who pay.
These complex arguments are not always self-evident. Moreover, they represent the potential advantages of decentralization that hold only under certain minimum political and institutional conditions—conditions that bind more tightly for some benefits than for others. Finally, there are many other arguments for supporting local governments that transcend the narrower rationale of increased efficiency in service delivery. (return)
Local government and local governance
The preceding sections outlined the rationale for empowering local elected authorities as channels for more effective and equitable basic service delivery for poverty reduction. But it is also worthwhile to support the emergence of local democratic institutions which allow:
• More involvement in public affairs of greater numbers of people, not only through periodic elections but through routine contacts with elected representatives, participation on consultative committess and so on.
• Greater scope for otherwise marginalized groups to express their priorities and needs through these institutions.
• Greater diffusion of information on decisions taken and funds spent, hence a more informed citizenry.
• Political space for interaction between civil society and the state, and thus, enhanced accountability and legitimacy of the state.
These outcomes are political and social goods in their own right, constituting improved local governance. But they can also enhance the service delivery effectiveness of local authorities. The comparative advantage of the latter lies mainly in the greater availability of information on needs, priorities and options, and the more real, nagging pressures for accountability and performance, which can be seen at this level. Achieving improved local governance thus reinforces achievement of improved service delivery. (return)
The previous section aimed to clarify the underlying rationale for UNCDF policy on reducing poverty through local governance. This section seeks to clarify UNCDF’s approach to ensuring that its programmes reach the poor.
The broad rationale for supporting local governance as a strategy for reducing poverty has been outlined. But it is often asserted that local government bodies are ineffective channels for reaching the poorest and that by making them its primary partners, UNCDF cannot be assured of reaching the poor. The following arguments may help clarify this issue.
Poverty targeting is difficulty for any institution—even for specialized microfinance institutions—because it is associated with high information costs and moral hazard problems. Principles of cost-effectiveness require a broader and rougher strategy that will inevitably benefit some nonpoor and miss some poor. While UNCDF does not use intensive social targeting in its projects, its programmes are, by design, targeted to help the poor first and foremost, in the following ways.
A rural focus. UNCDF works only in rural areas of least developed countries. This approach greatly enhances our likely impact on the poor because—despite urbanization—the absolute number of poor is far higher in rural areas than in towns. In addition, the percentage of the population that is poor is much higher in rural areas than in towns. (In some countries the ratio of rural to urban poverty is as high as 3:1.)
A sectoral focus. UNCDF projects supporting local governance focus their objects of financing on sectors—primary health, primary education, rural water, rural roads—that are of disproportionate benefit to the poor. Similarly, UNCDF projects almost always exclude sectors—secondary and higher education, trunk roads—that would be of disproportionate benefit to the nonpoor.
A geographic focus. All UNCDF projects aim to allocate funds to geographic areas—local government units and subunits—in accordance with whatever measures of relative poverty are available for these units. This approach is more cost-effective when the poverty conditions in these units are more homogeneous (by and large, this is more the case in Africa than in Asia). Local governments possess a clear information advantage (relative to central agencies and perhaps even NGOs) on the relative conditions of their subunits.
Inclusive and transparent planning. To ensure the maximum impact on the poorest within subunits, UNCDF’s project strategy aims to develop local participatory planning procedures that allow for full expression of and weight to the needs and priorities of the poorest and marginalized groups. Where these priorities are neglected, planning authorities are to be held accountable and sanctions applied. (return)
Finally, there is no need to idealize local government. Local governments in all countries are tainted with accusations of elite dominance, untransparent backroom practice, inefficiency, and malfeasance. While there is often much truth in this, the underlying question is: what are the alternatives for promoting local service delivery and local governance?
NGOs can play only a limited role in managing public funds, and can scarcely replace government. There is also evidence questioning whether they are more cost-effective in reaching the poorest.
Central government agencies are generally no better than local government and often far worse on all counts. Indeed, the paradox is that the shortcomings of local government are much better known to local people precisely because secrets are much harder to keep at this level. The challenge is to work to exploit this greater transparency for good, rather than to sideline the institution as central governments and donors have done for too long. (return)
