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Kathmandu Tuesday January 15, 2002 Magh 02, 2058.
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Is LSG Act fundamentally
flawed ?
By DR ALOK K BOHARA
A1995 World Bank Study records a dramatic
decentralization reform taking place worldwide in developing and transforming economies.
Sometimes known as the fiscal decentralization initiative, devolution, or even federalism,
the idea is to transfer fiscal and decision making power from central to
local governments to restore a spirit of self-reliance and regional economic balance.
Nepal adopted two years ago its own version of decentralization mechanism through the
Local Self-Governance Act (2055) (LSGA).
The Act spells out, in detail, power and
responsibilities of the two tiers of governments (village and district). The third highest
de facto tier is the central government. Scholars and policy makers have already begun to
argue about how best to transfer the central government apparatus to the local
authorities. It has sparked conflicts and confusions among various local units.
The newly enacted LSGA has elements that show
movement in the right direction, but it is contradictory and lacks a sound economic
reasoning. Various initiatives are loosely proposed without much economic and political
rationale. The purpose of this article is to critically assess the Act through
institutional economics and public-choice angles and raise some serious concerns.
In particular, among other things, it argues for
a regional level elected government body and suggests reducing the functionality of the
district level authority. Political-economic arguments are given below. Obviously, a
streamlined government structure is just a part of the story. Efforts must also be made to
eliminate redundant control and formalities, institute deregulation, promote
accountability and transparency, and transfer certain government functions to the private
sector.
The economics of decentralization is a very deep
and vast concept, and this one single article cannot do full justice. Nevertheless, a
scant set of ideas, widely popular in the economics of decentralization literature, is
presented as follows.
Economics of decentralization: There are two
types of goods- private and public. National defense, beautiful mountains, parks, local
ponds, shrines, safety, clean air, and rivers, which are not bought and sold in the
market, are public goods, whereas a house and a factory are private goods. Based on the
ability and efficiency, different governmental layers are assigned to provide different
types of public goods for people to enjoy.
Loosely speaking, local units —village or
county— look after the basic needs (eg, drinking water, garbage collection, local
parks), whereas the national government mulls over larger problems, defends the country,
and sets the national agenda. And, there are many tasks in-between for the state or
regional levels to cover. Being in the middle, the regional government provides a
balancing voice and force, and acts as an advocate for the smaller local units. The
current district level entities with Seventy-five units, a middle tier, have many
disadvantages, and they will be discussed later.
Further, all of the three layers have to be
independent, to the extent possible, in their formation and decision making mechanism to
promote efficiency. Consequently, political representation mechanism must be as such to
guarantee that the voters have an opportunity to reveal their varying degrees of
preferences at all the three levels of governments through direct voting.
For example, voters may vote in a party at the
national level for its political philosophy and environmental policy, but at the same
time, they may choose to be totally apolitical in the selection of the local leaders.
These political-economic arguments should be the driving force behind any meaningful
decentralization effort. The newly implemented LSG Act is incoherent and has many flaws.
Efficiency: Governments produce different
activities with varying degrees of optimal scales and effects. Economic efficiency
argument will prevail if the scale of the government units match the scope of the (public)
goods provided. For example, fire, village roads, public libraries, safety, small scale
irrigation, garbage collection, drinking water should be provided at the local levels,
whereas national defense, international relations, race relations and welfare,
immigration, macro stabilization policies, international trade and commerce, consumer
safety standard, fiscal and monetary policies, environmental regulations,
telecommunications, science and technology labs, postal service, preservation of national
wildlife and refuge should fall under the purview of the national government.
There are many tasks that are more suitable for
a mid-level administrative unit. Consequently, many countries have adopted a three-level
decentralization system, and our own Act does follow a similar format too. So far, so
good.
At the village level unit (VDC), the LSG Act
lists numerous tasks and responsibilities that seem appropriate for that level except for
the fact that the village level unit has also been assigned to generate and distribute
electricity. The local authorities at that level are not well equipped to handle such a
responsibility. More appropriately, the private sector should be involved in generating
electricity. Actually, the larger hydro power system, spanning over several districts,
must fall under a larger administrative unit (eg, regional level governments; more about
it later). The LSG Act then outlines a litany of similar tasks to be carried out by the
district unit.
This duplication and ambiguity will be the
source of economic inefficiency and conflict while generating and delivering (public)
goods and services. Similarly, expensive and complex health and education initiatives are
also thrown in at the VDC level without much thought and rationality.
Competition and representative government:
Efficiently run independent local units can compete with each other to attract households
and businesses to improve their tax base. This is called horizontal competition.
Similarly, a vertical competition among different layers of governments (national,
regional, and local) can only be beneficial to the public, as voters can effectively
control the influence of these different governments in their ability to tax and spend.
As such, it is very important not to overlap the
administrative structure of these three layers of government, so that the voters can send
a clear signal as distinctly as possible. That is, the three legislative bodies must be
elected based on the direct voting, and should be separated in their function by defining
distinct tasks based on their ability and the scope of the public goods they can provide.
The proposed Act fails in this regard quite
miserably as well, because there is no clear dichotomy between the VDC and the DDC units.
Furthermore, incorporating the influence of the national parliamentary members in the
district level units, the Act looks more like a controlled decentralization, and a
breeding ground for corruption, especially given the fact that the creation of the
mid-level district level government has a lesser degree of direct involvement of the
voters; it lacks checks and balances.
In any case, separate elections at the national
and the local levels in theory allow voters to express their opinion based on different
sets of agenda. Local leaders are elected for their ability to provide basic public goods
(public utilities), whereas the national leaders are voted for larger issues. Such
separation is essential to increase efficiency in the decision making process.
The current Act blatantly violates this
important principle when it comes to forming the middle level government (district). The
same village level individuals move on and/or give input to also form the group of the
district level policy makers. This is against the spirit of representative democracy, and
the current system is a breeding ground for conflict of interest and corruption.
Matching scale of goods: Economic terms like
negative and positive externalities should play a role in deciding which level of
government should carry out a particular task. For example, since pollution travels across
different geographic boundaries (negative externalities), such decisions making power (eg,
environmental laws, industrial standard) should be given to the national level. Likewise,
decision regarding the training of the manpower should not be left at the local level, VDC
(eg, vocational training and higher education, or even secondary education).
These are costly activities that produce highly
mobile human capital, which can move around quite easily. Similarly, the VDC level local
government should stay out of activities related to dams, energy, transportation, and
health. The higher level units will have more expertise in dealing with these initiatives,
but over time, as expertise and resource increase, some of these responsibilities can be
handed down to the local entities. Thus, it is important to allow voters to directly elect
all the three levels of governments to reflect changes in their voting preferences. In the
US, voters have demonstrated their ability to pressure on the central government to hand
over some responsibilities (eg, welfare system) down to the state level. The Act lacks
such flexibility.
Redistribution and equity arguments: Another
main argument for federalism or decentralization is to achieve equity across different
regions in a country. While small local units (VDC) look after their own self-interest, a
strong central government can provide protection for the depressed areas and regions by
redistributing funds.
In a small country like Nepal with 75 fragmented
districts, the task of monitoring equitable transfer of wealth becomes rather hard for the
central government. Furthermore, a fragmented voice is no match for the powerful central
government. After many years of district level governance, a vast disparity still exists
across districts. Instead, a regional level democratically elected government will be more
efficient in looking after an average of fifteen districts within its jurisdiction.
Historically, political and economic debates
have been raised and fought from the point of view of regional sentiments (eg, western,
far western, and eastern), and so it only makes sense to create regional governments
(directly elected governors and legislative bodies) to address the problem and pride of
regional self-reliance (e.g., South Africa, Mexico, Austria). As for the current district
level tiers, a simple streamline version of DDC can be maintained to perform as a
coordinating unit under the regional level government (like in Austria). More about these
later.
(To be concluded)
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