Does Decentralization Increase Responsiveness to Local Needs? Evidence from Bolivia

Abstract

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 a994, 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.