Decentralization can both enhance and constrain reforms. For example, when there is a high degree of decentralization, top-down policy implementation is more difficult since incentives embedded in the reform policies have to be compatible. In more authoritarian regimes, bureaucrats can be more readily controlled by strong and clear policy directives. Otherwise, local leaders may have to be bought off to ensure their compliance. Hence, decentralization can make reform more difficult.
In contrast, decentralized systems can also facilitate reform. Because the different parts of their economies are isolated from one another, they are more amenable to experimentation, a valuable tool to be able to exploit during the process of reforms that were almost always untried (Qian and Weingast 1997). Decentralization also allows local leaders to be able to benefit more directly (and indirectly) from the growth that accrues to their regions if reforms trigger local growth.
While we consider factors associated with decentralization that both enhance and constrain reform, we necessarily must simplify. The impact of decentralization on transition policies can be multi-dimensional and complicated. However, while the topic of government decentralization and policy efficacy is important and currently widely debated, we restrict our attention to a subset of issues.
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