index.1.jpg (3032 bytes) Note #6 – June 2005 

"Regional Development In the Context of Fiscal Decentralization:
Models, Problems and Opportunities
Soros Foundation-Moldova, Round Table, 1 July 2005


Decentralization: Supporters and Opponents
by Anatol Gudîm

Persevering aspiration of President and Government to reorganize executive power has as its object making work of state bodies more effective, less bureaucratic and corrupted, more comfortable for business and population. This showed through changing of the Government’s structure and the announced reduction (by 2/3!) of the state machinery. On July 10, there will be held new mayor elections in the Chisinau municipality and many villages. 

One of the intrigues of these elections consists in that the current Minister of Finance, nominated as a candidate by the ruling Party of the Communists of Moldova, will much likely become the general mayor of Chisinau, the largest city-donor of the Moldova’s state budget. And if this happens, according to the common sense, a marvelous transformation has to take place: Minister of Finance, a disciple of strict centralization of state budget revenues and further transfers to regions and towns will immediately turn into a disciple of decentralization and, first of all, tax decentralization, who would strengthen economic basis of local self-administration.  

That is quite a twist of fate! However, such a turn of circumstances will, fortunately, actualize again search for a balance in relations of the “vertical of power” and local self-administration based on European Charter of Local Self-Government, which the Moldovan Parliament ratified in 1997, but many officials have already forgotten about this... 

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The transition period in most CIS countries, including Moldova, was characterized by shifts towards democracy and partial decentralization of state administration systems. New constitutions and corresponding laws of these countries reflect the principle of local self-administration. And, at least formally, division of powers was implemented. 

Authorities admit that democracy in a country as a whole and at the local level – the closest to population and its needs – is not possible without decentralization. In practice, though, all CIS countries, including Moldova, move towards decentralization with considerable difficulties and counteraction of “opponents”. Inertia of previous decades of centralized administration is too strong. 15 years turned out to be insufficient to let new legislation and new state bodies become a natural part of real life of those countries. In the meantime, the example of the Central and Eastern European post-socialist countries showed that decentralization of state administration is quite achievable in the course of 10 years, but only given the political will and public consensus on the common sense and expected results of reforms.  

Text Box: Decentralization: opportunities and risks 
The Global Forum on Innovative Policies and Practices in Local Governance, organized by the United Nations (Gothenburg, Sweden, 1996) pointed out that in establishing a policy framework to strengthen local governance through decentralization, there are both benefits and potential risks that can result from the implementation of such arrangements. 
Facilitating greater popular participation;
Increased efficiency in determining service demand;
Increased flexibility of government in the presence of changing circumstances;
The capacity to tailor solutions for local problems to local conditions;
Providing opportunities for innovations needed for significant policy and programmatic changes;
Promoting social pluralism and dynamism;
Broadening the potential of societal capacity-building;
Providing increased accountability to the people.
Potential risks:
Interregional inequalities may increase, widening intra-national poverty gaps and potentially fostering  politically destabilizing forces;
Higher risks of resource capture and rent seeking by local elites;
Possible misuse of authority in an environment of inadequate supervision;
Inadequate implementation arrangements that can lead to disparities between available revenues and the responsibilities needed to be carried out, which in turn can render local governance systems ineffective.

Yet, as opinion polls demonstrate, population is not quite content with democracy and capability of local self-administration bodies in CIS countries. The main cause of disillusionment in the results of administration reforms consists in that rights and responsibilities of local authorities, stipulated legally, are far from being supported with proper resources (property, taxes) in full measure. Those resources are small, and the largest part of local budgets is formed from the central government subsidies, which sharply narrows opportunities of independent decision-making at the lower level. 

Besides, in most post-soviet countries, including Moldova, decentralization has been generally limited to de-concentration and/or delegation, when a certain dispersal of power takes place, but central government retains the right to override decisions of local bodies and take, at any moment, those powers back. There has been no full transfer of rights and resources to local authorities (devolution as the strongest form of decentralization) yet. But such an approach is shortsighted, as weak, amateurish and corrupted local bodies cause problems both to the state and population. Moreover, there are signs that the lack of local state administration capacities blocks reforms of the central level in Moldova. 

Text Box: The Supporters and Opponents of Decentralisation 
Potentially strong supporters
Electorates and their elected representatives
Demand for more participation in governance at regional and local levels
Decentralisation is popular with the electorate. However, the president may be concerned that regional autonomy and social imbalances may endanger his political standing.
Decentralisation is often popular with the electorate. But because parliamentarians like to identify with specific regional and local projects they can “bring home”, they may favour less transparent and structured systems.
Regional and municipal governments
“Give us the property and the autonomy to tax and spend”. Regional and local governments are often most concerned with limitations on their autonomy and access to their revenue base.
External donors
These provide encouragement and some technical assistance, but are no substitute for in-country champions of decentralisation.
Ministry of Finance
Often prefers strict limits to decentralisation in order to maintain tight control over fiscal policy.
Ministry of Economy
Often wishes to control the types of investment made, as well as the regional distribution of investment. Typically prefers programmes with large external benefits versus local benefits.
Weak supporters 
State Chancellery, Ministry of Local Government
Often favour larger roles and resources for local governments, but would like to control the distribution of those resources.
Weaker local governments
Would like guaranteed transfers of resources from wealthier local governments (Chisinau municipality e.g.) to weaker municipalities. More interested in inter-governmental transfers than in fiscal decentralisation.

Decentralization is a method which provides premises to increase transperency in the management of public property and taxpayers money, as well as to enhance the rationality of public spending. In a decentralized political system citizens have more opportunities to participate in political decision-making, because the political process is broken down to smaller units.  

Decentralization instead of forcing a unified way of life, recognises the peculiarity of the grass roots. It forms a basis for improving customer service. In the political area, it means stregnthening of the bases of democracy and development of the multy party system, preservation of local and cultural identity.  

The success of decentralization depends less on the formal rhetoric used by politicians but rather on the real quality of decentralization, e.g. the degree to which decentralized units take part in decision-making. Decentralization itself is no guarantee of good governance or access of citizens, especially the poor, to basic services. It requires decentralization that goes beyond administrative and financial measures to a dimension of political power sharing to enhance civil society. 

One of the biggest problems that public administration in CIS countries faces is the rethoric of decentralization or de-concentration or delegation, at best. Moldova‘s recent experience is a classic example of de-concentration, when new institutions are established at the regional and local level (which shows through a tendency of ministries to establish their own branch offices at the lower level), local governments fulfill tasks under the supervision of central bodies; the central level increases fiscal control of resources and delegates new responsibilities to local government without allocation of appropriate financial resources to fulfil them, central decisions are indicated by legislative provisions as being of higher order. 

The real proccess of devolution is taking place when the power to make decisions is transfered to local level and the local units are autonomous and independent, have freedom of action and resources within their competence. There are four components defining discretion: 

·        General legal framework in which local government exist;

·        Degree of discretion in the number of local services. This category includes how many constrains localities encounter in the forms of central standards with regard to the services they need to deliver;

·        Financial discretion at the local level is critical. In a system where central government money transfers account for most of the local government income, independence is difficult to achieve. Real decentralization can be measured along local government’s powers in generating independent revenues such as local taxes, service fees, and charges;

·        Non-legal forms of influence: non-authoritative government advice or circulars may have binding power on localities. Non-compliance to central circulars may end up in legal or financial penalties. 

In order to make local self-administration a real force in public life of CIS countries and an efficient component of the state machinery, reform measures should focus on the following: 

  • Constitution of the country should define more constructively the rights, responsibilities and resources that are guaranteed to local authorities by the European Charter of Local Self-Government; National legislation should precisely delimit the functions and responsibilities of the local state administration (appointed by the central government) and the local self-government bodies (elected by the population). The following principles are particularly important: territorial self-government should be separated from state administration; the state administration should monitoring the legality of local self-government activities; self-government territorial units (regions, municipalities) should be endowed with the appropriate bodies, competences, property and financial resources in order to be able to exercise genuine independence;
  • Decentralisation should be realised within the framework of the subsidiarity model, under which the “execution of state powers, as a rule, should be mainly entrusted to state bodies closest to the people”;
  • The independence of local authorities should be strengthened through a strict separation of local and regional budgets from the central state budget (including subsidies). It is important to increase local revenue sources, stabilise expenditure responsibilities, and assure local authorities’ greater financial autonomy;
  • Relations between territorial self-administrations and the private sector must be more transparent, creating an appropriate business infrastructure and an effective system of civil service training. In order to make decentralised authority efficient, qualified personnel need to be attracted by offering rewards and career benefits. Local governments require skilled, professional decision-makers who are adequately remunerated;
  • The right to inter-local cooperation and formation of associations of local authorities should be used more actively. Such associations should assume a more dynamic role not only in the implementation of regional and local development programmes, but also in the national strategic process, including the achievement of the UN Millennium Development Goals, jointly realized by the country’s government and its international partners.

These reforms will require time and effort, but
shifts towards European integration, as well as economic recovery apparent in the country, inspire optimism, since openness, growth, and increasing welfare of the population bring greater political stability and suggest that the country has a greater potential to democratise.