However, decentralization is neither good nor bad. “It is a means to an end, often imposed by political reality (World Bank 1999, pp. 107).” In addition, it is increasingly clear that the benefits of decentralization can easily be undermined by potential costs such as increasing indebtedness, high deficits, and procyclical finances of subnational governments and regional disparities (Wolman 1994; Prud’homme 1994, 1996; Tanzi 1996; Rodden, Eskeland, and Litvack 2005; Bardhan and Mookherjee 2005; Tommasi 2006). At the same time, the potential allocative efficiency gains of decentralization stemming from satisfying unique preferences of citizens in jurisdictions may not be realized as assumed in theory. Because in most developing countries, the problem is not in satisfying fine differences in preferences between jurisdictions but to meet basic needs.

# **_a. Accountability_**

Regarding public sector accountability, it is argued that the accountability of the public sector will be improved because ineffective local officials would be voted out from their office because the taxpayers will express their preferences in their votes. However experience shows that local elections are often dictated by personal loyalties or political party loyalties. Even if taxpayers vote based on their preferences, it is often the case that voters have limited access to relevant information (“asymmetric information”) and often limited capacity to digest the information (see Sappington and Stiglitz 1987 for asymmetric information; Downs 1957 for voting in democracies<sup>36</sup> ). Devarajan et al (2007) show that the “missing link” between citizens and local government officials in the provision of public services is due to the lack of enforceability of local officials’ accountability. This problem tends to be more severe in developing countries.

At the same time, there is no guarantee that locally elected officials will fulfill their obligation to satisfy the revealed preference. Incentive systems are such that the officials may satisfy a number of influential people in business and political communities (“local elites”) instead of their constituency in order to be re-elected. In particular if reelection depends largely on the influence of local leaders and interest groups rather than on the local performance of public services, as it usually takes longer than the election cycle to produce tangible benefits with policy changes. Thus “local capture” can easily undermine the benefits of decentralization by incurring new costs (e.g. poor subnational tax collection, distortionary subnational taxation, inefficient provision of local public goods).

Experience on decentralization also points to the effects of corruption at the local level although there is no conclusive evidence whether centralized or decentralized government creates higher costs related to corruption (see Bardhan, Pranab and Dilip Mookherjee 2005 for a detailed survey on corruption). Several studies warn that corruption is costly in terms of allocative efficiency and production efficiency. For example, bribes and kickbacks from suppliers would lead to an oversupply of services.

> 36 Downs (1957) argues that the empirical observation of the economic theory of a democracy suggest that democracy is an imperfect political system as the government is chiefly motivated to maximize the most votes instead of maximizing the social welfare of the society.  This imposes continuous challenges to governments and citizens alike as to what degree we can collectively ensure a relatively equal society where the will of people and the public interest are represented relative to the proportion of the population and not relative to the endowment of resources, to help ensure economic and political stability.

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