Urban Change Blog
11 March 2015
In a Country Well Governed…


The Chinese philosopher Confucius once said: “In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of!” Clearly, there is an unmistakable relationship between governance and poverty. For, the act of governing ultimately relates to the distribution of wealth and opportunities. Moreover, assuming responsibility for undue imbalances that occur in this process is an important characteristic of any legitimate state. At the same time governing bodies themselves face palpable and challenging restraints when it comes to creating a more inclusive society, as they are imminently limited by the funds they have at their disposal. Pro-poor governance thus is not only about fostering the institutional willingness to do something about poverty, but also about developing the (financial) capacity to enable this positive change.

Strengthening Local Governments

How to strengthen local governments in such a way that they become meaningful actors in the field of poverty reduction? It is a question that lies at the core of UPPR’s advocacy work for more inclusive urban planning. Ideally, local urban governments should actively strive to extend the state’s care to poorer communities. In reality, however, the urban poor often find themselves at the periphery of state influence. They live in slum settlements where the state seems painstakingly absent most of the time, as becomes evident from the non-provision of much needed services. The question therefore arises what can be done to bring the state closer to its poor citizens?

Efforts to foster greater closeness between the state and its citizens generally abide by the logic of decentralization. Decentralization refers to the process of redistributing and dispersing power away from the seat of central authority. It can be an important vehicle for poverty reduction and consolidating democracy. Over the past two decades many developing countries have implemented decentralization reforms in an attempt to create a more transparent and accountable state. More often than not, however, these noble impulses are curbed by distinct fiscal limitations(1). 

Fiscal Transfers

With any sincere attempt to endow local governments with greater power comes the administrative challenge of fiscal reform. At the core of this challenge lies the discrepancy between the decentralization of expenditures and of revenue (2). For many local authorities the expenditure tasks that have been delegated to them well exceed their capacity to raise revenue from sources under their own control. This challenge is particularly pertinent in the case of Bangladesh, where urban local government revenues are exceptionally low (even when compared to countries with lower per capita GDP and lower urbanization levels)(3). Needless to say, that this shortage of financial resources proves a major hindrance to consistent pro-poor planning. 

One way in which local municipalities can and do increase their revenue is through taxation. For example by installing property taxes(4). However, this form of fiscal decentralization tends to exacerbate existing inequalities between different governmental units. For, not all municipalities have similar needs and costs when it comes to providing public services or similar opportunities for raising the revenue to finance them. Effective fiscal reform is therefore very much dependent on a system of intergovernmental fiscal transfers being in place(5) to level out discrepancies between different local authorities.

Shaping State-Society Relations in Bangladesh

For most city corporations in Bangladesh the opportunities for raising revenue are woefully inadequate. When it comes to guaranteeing more robust and resilient urban economies, a reliable system of intergovernmental transfers is therefore all the more important. The system of fiscal transfers that is currently in place in Bangladesh, however, largely revolves around the ad hoc allocation of block grants(6). These block grants are allotted without much consideration of the physical, social and economic needs of individual city corporations and pourashavas and without taking levels of urban poverty into account. 

This poses the question on how this indiscriminate system can be transformed in such a way that it adequately addresses the specific needs of local government in terms of pro-poor planning? UPPR has suggested that a possible solution would be to experiment with conditional, or performance based, grants(7). Conditional transfers are intended to provide incentives for governments to undertake specific programs or activities(8) and therefore form a potentially powerful tool for encouraging local authorities to prioritize pro-poor planning. In addition, to provide them with the much needed resources for doing so. 

In the long run a purposefully planned system of fiscal decentralization can play an important role in shaping state-society relations in a more positive way. It has the capacity for bringing many people (including the poor) into direct contact with public authorities and might well prove instrumental in reversing the relationship of absence and mutual distrust that typically prevails between the state and its poor citizens.

Notes:

1) For a critical analysis of the relationship between decentralization and poverty reduction see the UNDP report: ‘Decentralization and Poverty Reduction: Does it Work?’ (2003): http://unpan1.un.org/intradoc/groups/public/documents/un/unpan012251.pdf 

2) See the book ‘Intergovernmental Fiscal Transfers. Principles and Practice’ (2007), edited by Robin Boadway and Anwar Shah: https://openknowledge.worldbank.org/handle/10986/7171

3) See the UPPR report ‘Targeting Urban Poverty Reduction: Policy and Institutions for Inclusive Urban Governance’: http://www.upprbd.org/projectrpts.aspx

4)  See the CMI brief ‘Fiscal Decentralisation in Development Countries. Lessons for Bangladesh’ (2014) by Odd-Helge Fjeldstad: http://www.cmi.no/publications/publication/?5125=fiscal-decentralisation-in-developing-countries

5) This point is made in the aforementioned book on intergovernmental fiscal transfers by Robin Boadway and Anwar Shah.

6) See the aforementioned UPPR report on Targeting Urban Poverty

7) See the aforementioned UPPR report on Targeting Urban Poverty

8) For a more elaborate explanation of conditional transfers see the aforementioned book on intergovernmental fiscal transfers by Robin Boadway and Anwar Shah


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