Does Decentralization Increase Responsiveness to Local Needs? Evidence from Bolivia

Bolivia's 1994 decentralization led to changes in the geographic allocation of funds and to the development of innovative institutions of local governance. The changes in the sectoral (and geographic) allocations of public funds show a strong relationship with objective indicators of social need, evidence that local priorities are being reflected.Significant changes in public investment patterns - in both the sectoral uses of funds and their geographic distribution - emerged after Bolivia devolved substantial resources from central agencies to municipalities in 1994. By far the most important determinant of these changes are objective indicators of social need (for example, education investment rises where illiteracy is higher). Indicators of institutional capacity and social organization are less important.Empirical tests using a unique database show that investment changed significantly in education, agriculture, urban development, water management, water and sanitation, and possibly health. These results are robust and insensitive to specification.As the smallest, poorest municipalities invested newly devolved public funds in their highest priority projects, investment showed a strong, positive relationship with need in agriculture and the social sectors. In sectors where decentralization did not bring about changes, the central government had invested little before 1994 and the local government continued to invest little afterward.These findings are consistent with a model of public investment in which local government's superior knowledge of local needs dominates the central government's technical and organizational advantage in the provision of public services.This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to analyze fiscal decentralization in developing countries. The author may be contacted at j.p.faguet@lse.ac.uk