The Importance Of Fiscal Decentralization

Literature will be reviewed on concept of fiscal decentralization, local level development, the importance of fiscal decentralization, concept of how accountability influences fiscal decentralization and influence of corruption on the implementation of fiscal decentralization. This chapter will also present the theoretical framework of the study defining certain basic terms and concepts. Various studies have been conducted on local government authorities in Ghana in the implementation of fiscal decentralization strategies to undertake local level developmental projects.

1.5.1 Fiscal Decentralization

Fiscal decentralization is seen as a system of government which involves the assignment of responsibilities comprising of the functions and

A comprehensive fiscal decentralization reform improves accountability and responsiveness of government by increasing citizen voice and the incentives those public officials (Faguet, 2012). Fiscal decentralization also makes local governments more responsive to citizens’ needs (Faguet, 2014). Electoral accountability of government officials may be undermined when individuals do not know whom to assign blame or praise for policy outcomes. When different parties rule at the national and sub-national level, political accountability decreases because voters face difficulties assigning responsibility among different levels of government (Lago Peñas and Lago Peñas, 2010). Elected officials face substantial incentives to exploit the fiscal common by over-borrowing in order to increase local public goods provision (Goodspeed, 2002). More taxing power and more autonomous taxes may induce responsible local spending behaviour and governments’ accountability (Weingast, 2009). Fiscal decentralization therefore has greater impact on accountability. Proponents of fiscal decentralization argue that if sub-national governments are responsible for administering their own tax revenues, they will be held accountable by local populations. The decentralized form of government, therefore, brings about welfare-enhancing results and makes local officials more accountable and responsible

Fiscal decentralization may reduce centralized regimes’ incentives to corruption; national officials in centralized regimes would seek re-election by selectively pooling on a minimum majority of regions while extracting maximum rents from the rest (Lockwood, 2005). This means fiscal decentralization has both negative and positive impact on corruption. A study conducted by Ivanyna and Shah (2011) revealed that decentralization has a significant and robust negative effect on corruption regardless of the estimation technique or the measures of corruption used. Moreover, when financial decentralization is applied to both side of the budget, it reduces corruption over time. Bardhan and Mookherjee (2002) contend that a complicated and non-transparent local government revenue system is costly to administer and it facilitates corruption and mismanagement. Furthermore, many local government revenue have a distorting effect on resource allocation decisions, thus have an inhibiting effect on the start-up of new enterprises and the achievement of economic