THE EFFECTIVENESS OF DECENTRALIZATION IN HUNGARY AND SLOVAKIA, by Jean-Jacques Dethier, November 2000

This paper contrasts decentralization in Hungary, one of the most decentralized countries of Central and Eastern Europe, and in Slovakia, one of the least decentralized, during the decade of transition from socialism to market. It also draws lessons based on this experience. Has decentralization been effective? Has decentralization improved the delivery of essential services? Has it promoted efficiency, ensured accountability and encouraged participation? We make the point that the effectiveness of decentralization depends on three crucial factors—which we document in this paper. First, appropriate expenditure and tax assignments. Second, governance mechanisms to strengthen accountability and fiduciary responsibility. Third, incentive mechanisms to ensure that agents deliver services of an acceptable quality at least cost. For constitutionally guaranteed entitlements like education, the latter condition is not easy to achieve because many principal-agent problems arise in the context of shared governance. We discuss this issue, using as an example education, a type of public good for which governance is typically shared between central and local levels of government. The Hungarian and Slovak experiences show that, even when expenditure assignments and accountability rules in intergovernmental affairs are specified by legislation, in practice, major expenditure management and public accountability issues still arise. We examine both fiscal and institutional aspects of decentralization—venturing into issues of accountability mechanisms and incentive schemes that are used to ensure balance between revenue and spending and minimum quality standards in the delivery of public goods. The role of incentives in determining how local organizations like schools operate is crucial. 2 The fiscal literature suggests that it is not possible to ensure incentive compatibility simultaneously with optimal allocation of resources and a balanced budget in the provision of