Allocative efficiency changes as resources are reallocated between expenditure categories to better match the needs of local constituencies. There are three dimensions that we recommend for evaluation. First, there must be some means for local officials to detect what local demand is. Normally this involves some form of democratic government, though other arrangements may work too. Third, local government decision-maker should be accountable to their constituents.
Fiscal efficiency deals with the ways in which LGUs are financed.
Three dimensions are of importance. First, local taxes should connect taxpayers with services they receive as much as possible. Second, systems of grants and transfers from the central government should provide adequate finance without overly distorting local preferences. Third, the system of finance for LGUs should not threaten national macroeconomic stability. A case study of fiscal decentralization in the Philippines was conducted in late 1998 to illustrate the application of the case study methods suggested here.