Capacity and conflicting objectives.

Local capacity is hardly an end in itself: it is rather a means to achieve a combination of objectives. That is, capacity (local or otherwise) can be understood as the tools that allow the pursuit of a goal. In that sense, one knows that there is a capacity deficiency when particular organizations or institutional arrangements are under-performing relative to what could be achieved given the available resources (Fiszbein [1997]). What this highlights is that capacity should be evaluated in terms of specific objectives. In other words, when faced with the question of whether local capacity constitutes a bottleneck to successful decentralization reforms, one should ask “capacity to do what?” before attempting to offer an answer.

An important implication is that what appears to some analysts and policy-makers as lack of capacity, might in fact be the reflection of a conflict in the objective function used, on the one hand, by those analysts/policy-makers and, on the other hand, by the local people. In other words, I say you have poor capacity because you are not doing what I would like you to do.

When Richard Bird and I (World Bank [1996] and Bird and Fiszbein [1997]) reviewed the state of decentralization in Colombia ten years after it had begun, we quickly found that what was being characterized as poor planning capacity among municipios was in fact a genuine disagreement between local and national priorities. At that point in time disbursement ratios under the system of matching funds managed by the central government were extremely low. In the view of the central government, this was due to low capacity on the part of local government required to prepare local development plans and project proposals. The reality was, however, that most local governments felt that the conditionality imposed in the use of those funds contradicted local choices on how to allocate resources and manage local services, and thus preferred borrowing funds at market rates to using their resources to match the national grant. Many of those local governments might have unusual or perverse preferences --at least from the national perspective-- but they sure had no lack of capacity to achieve their objectives.

This review also showed that in many areas, national legislation and policies severely limited local capacity to pursue not just local but also national goals. For example, even after a decade of decentralization, Colombia made extensive use --through national laws and regulations-- of earmarking of local resources for specific uses. In addition, over the years, the national government had established a variety of “unfunded mandates” on local governments such as the requirement that each municipality (70 percent of which had populations of less than 20,000) establish a toll-free telephone number to report cases of corruption. When fully accounted the combination of earmarking and unfunded mandates represented for many municipalities more than 100% of the untied portion of the automatic inter-governmental grant they were receiving (World Bank [1996]). Thus, the observation that few municipalities were complying with those mandates (e.g. no toll-free number) was more a reflection on the absurdity of the policy than on local capacity.^[1]

What this and many other examples in Colombia and elsewhere in the region illustrate is that what in many cases is perceived to be lack of local capacity could in fact be interpreted as (1) a conflict between local and national preferences; or (2) an inadequate design of incentives in a principal-agent relationship.