Decentralization's Effects on Public Investment : Evidence and Policy Lessons from Bolivia and Colombia

This paper examines decentralisation in Bolivia and Colombia to explore its effects on the uses and spatial distribution of public investment, as well as government responsiveness to local needs. In both countries, investment shifted from infrastructure to social services and human capital formation. Resources were rebalanced in favour of poorer districts. In Bolivia, decentralisation made government more responsive by re-directing public investment to areas of greatest need. In Colombia, municipalities increased investment significantly while running costs fell. Six important lessons emerge from the comparison. For decentralisation to work well, (i) local democracy must be transparent, fair and competitive; (ii) local governments must face hard budget constraints; (iii) central government must be scaled back; (iv) significant tax-raising powers must be devolved; and (v) decentralization is composed of distinct, separable components, the sequencing of which is important. Lastly, (vi) what decentralisation achieves, and whether it is advisable, hinge on how central government behaved pre-reform