the local level is critical. In many developing countries, as local governments take a more active role in the provision of education and health services (which help reduce poverty), weak statistical capacity at the subnational level to produce the household data needed to identify potential beneficiaries and monitoring progress in poverty reduction prevents full realization of decentralization.

Bardhan (2002) also highlights the need to strengthen the local capacity of information and accounting systems and mechanisms of monitoring the performance of public bureaucrats in developing countries. For instance, attention should be paid to special incentives and devices to check bureaucratic corruption, thus the differential efficacy of such mechanisms under centralization and decentralization can be evaluated. In many developing countries, one of the major goals is to effectively reach out to the poor—targeting success in poverty alleviation programs is treated as an important criterion, rather than the efficiency of interregional resource allocation. Thus, redistribution to disadvantaged groups or regions at the subnational level can improve the potential for productive investment and human resource development on the part of communities long bypassed by the local elite.

# **<u>Conclusion</u>**

Musgrave (1956) argues that a federal structure for the public sector has the greatest potential for resolving the stabilization, distribution, and allocation problems while Oates emphasizes that all forms of government in one way or another share the characteristics of federalism, regardless of degree of centralization or decentralization. Theories of federalism and empirical studies suggest that there tends to be an inverse relationship between centralization and income level, population size, and diversity (cultural, ethnic, regional, racial). At the same time, many developing countries are searching for an alternative to the ineffective provision of public services by the central state. Thus, it is likely that many countries are likely to face issues of decentralization as countries grow in terms of income and population, and to improve the efficiency of provision of public goods and services.

First, this paper discussed several definitions of decentralization. It showed that devolution is often used interchangeably with decentralization, while delegation is often substituted for de-concentration. In general, decentralization refers to the independent decision-making authority of subnational government in its administrative, fiscal, and political affairs. But in reality, most countries are likely to simultaneously deal with issues related to these two dimensions (e.g., delegation and devolution) of decentralization, not just one or the other.

Second, the paper presented efficiency arguments for decentralization, by examining theories of federalism where each level of government has a comparative advantage in the provision of particular public services. For example, the central government might be more efficient in dealing with macrostabilization and redistribution policies. However, subnational government is able to more efficiently provide public services of a local nature within its jurisdiction, because it has better access to relevant information and is more accountable for satisfying the preferences of its residents. Thus, decentralization of certain public services will improve the welfare of a country’s citizens at the aggregate level.

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