First, it recommends an approach to assessing the economic efficiency impacts of fiscal decentralization. Second, it does a brief case study of the Philippines to illustrate the method. The methods recommended recognize the difficulty of doing economic analysis in developing countries. Data are scarce and other information incomplete. Nevertheless, assessment of what are basically economic factors requires that observations and analysis follow the logic of economic theory, but purely quantitative methods cannot be used exclusively.
Judgment is required.
Just as economic theory organizes empirical investigation, it also organizes the way we think about problems. If information about those problems is judgmental and anecdotal, theory organizes whatever the available information is. The main effect of FD is to provide improved resource allocation and therefore improved economic efficiency. Efficiency gains rest on the presumption that local governments are much better in identifying and fulfilling the needs of households, since they are closer to them, and in mobilizing and using local resources to pay for goods and services having purely local impacts. Not all gains in consumer welfare can be measured as increases in output.