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Chapter 2. Decentralization and environmental issues

2.1 Summary

The purpose of this chapter is to analyse the role of decentralization in addressing environmental problems. It first proceeds with the definition of decentralization and examines the various forms it can take. It then reviews the advantages and possible constraints of decentralization in coping with environmental problems.

It concludes that decentralized decision-making is an important condition for addressing environmental problems properly, but it also points out that this is not a sufficient reason to assume that all related decisions should be taken at the decentralized level.

Examples are provided that demonstrate when and how environmental problems can be addressed directly by the affected people (individuals) without intervention of any kind of institution (this is the case of some environmental problems at the farm level) and when and how they can be solved either through negotiation between private or civil organizations (which do not involve public institutions) or through government intervention.

At the end of the chapter, a number of criteria are suggested for helping to choose the institutions more suited to solving the environmental problems.

2.2 Definition and concept of decentralization

Decentralization as transfer of functions

Decentralization is a process through which authority and responsibility for some functions are transferred from the central government to local governments, communities and the private sector.

This process involves that decentralized institutions, either local offices of central government or local private and civil organizations (entrepreneurs, farmers, communities, associations, etc.) be provided with higher power in policy making and decision taking. The underlying tenet of decentralization is the subsidiarity principle.

Subsidiarity principle

Subsidiarity principle entails that decisions should be made by the populations affected or, on their behalf, by the authorities closest to them unless the origin of problems and/or their solution is out of control by the local communities.

2.3 Forms of decentralization

Decentralization may take various forms. The four main forms are reported below and shown graphically in Figure 2.1.


Political decentralization is associated with increased power of citizens and their representatives in public decision-making. It generally involves a representative political system based on local electoral jurisdictions and pluralistic parties.


Administrative decentralization is the transfer of responsibility for planning, financing, and managing certain public functions from the central government and its agencies to field units of government agencies, subordinate units or levels of government, semi-autonomous public authorities or corporations, or area-wide, regional, or functional authorities. In turn, administrative decentralization may take the following forms:

(i) deconcentration, which consists of redistribution of decision-making authority and financial and management responsibilities among different levels of the central government. This form is often considered the weakest form of decentralization;

(ii) delegation: through delegation central governments transfer responsibility for decision-making and administration of public functions to semi-autonomous organizations not wholly controlled by the central government, but ultimately accountable to it (e.g. sub-national housing authorities, transportation authorities, regional development corporations); and

(iii) devolution: in a devolved system, local governments have clear and legally recognized geographical boundaries over which they exercise authority and within which they perform public functions (e.g. raising revenues, investment decisions). It is this type of administrative decentralization that underlies most political decentralization.


Fiscal decentralization is associated with the authority of the decentralized units to make expenditure decisions with funds either raised locally (e.g. user charges, co-financing with users, property taxes, borrowing, etc.) or transferred from the central government. In many developing countries local governments or administrative units possess the legal authority to impose taxes, but often the tax base is not sufficient to undertake local investments, so that they rely heavily on government transfers.


Market decentralization is the most decentralized form in as much as decision-making power is transferred from public to private organizations. It can take two different forms:

(i) privatization which means allowing private enterprises to perform functions that had previously been monopolized by government, or contracting out the provision or management of public services or facilities to commercial enterprises, or still financing public sector programmes through the capital market and allowing private organizations to participate; and

(ii) deregulation which consists of transferring services provision or production activities previously owned or regulated by the public sector to competing private organizations (e.g. electricity or broadcasting provided by various and competing companies).

Figure 2.1 Forms of decentralization

Moreover, two major implications are incorporated in the above decentralization forms:

Geographical and institutional dimensions

Geographical decentralization, a shift from central/national decision-making to regional/local decision-making. This holds for the political, administrative, and fiscal forms;

Institutional decentralization, a shift from central government decision-making to local government and/or public and private organizations involvement. This holds for all the types of decentralization.

2.4 Some good reasons for decentralization

When environment is addressed at decentralized level

The following reasons are usually put forward to justify decentralization of decision-making for addressing environmental problems:

Environmental problems are location-specific

Geographical decentralization is particularly suited to the nature of environmental problems because they are often location-specific and can be dealt with comprehensively at various geographical levels. The design of institutional arrangements and policy instruments to take account of differences in environmental and ecological factors among geographical areas has been recognized in several studies[29].

A good example is coastal water pollution due to nitrogen fertilizers. The impact on coastal water pollution of source-specific nitrogen fertilizers depends on many factors such as soil quality and hydrology, which differ in various watersheds or drainage basins. In this case it might be more cost-effective to introduce area-specific regulations able to reflect better the differences in the contribution of various areas to coastal water pollution.

Factors impinging on institutional arrangements

As far as institutional decentralization is concerned the forms of institutional arrangements best suited will depend on a number of factors[30], such as:

Provision of environmental goods and services entails:

- financing

- production

- regulation

- consumption

Let us take for example the case of nonpoint pollution. This form of pollution is hardly manageable at the local level because it is originated by a high number of sources scattered all over a given geographic area (e.g. farms in the watershed), may involve a high number of parties and large distances between the place where the problem is produced (e.g. mountain area upstream) and the place it is consumed (e.g. the coastal area downstream). As a consequence, information may not be perfect, and transaction costs be very high. In this case, it may not be cost-effective for the local institutions to address and solve the problem. It is more likely that higher level institutions incorporating all the geographical area were pollution is originated and consumed (e.g. local government level) are better placed to cope with this sort of problem, either alone or in combination with local institutions. For these interventions to be effective, however, it should be made sure that all the factors mentioned above are taken in due account.

2.5 Possible constraints to decentralization

Factors hindering decentralization

As pointed out in the previous section, decentralization is not a panacea to all environmental problems. On the contrary, in some circumstances decentralization may lead to higher inefficiencies. Some of these circumstances are reviewed below.

The above factors highlight the limits of the view that local governance is better than higher level governance. The lesson that can be drawn from the previous sections is that the identification of the most appropriate institutional setting to tackle the environmental problems requires a careful analysis of all the factors described as well as of the features of the environmental issues.

Some environmental and natural resources’ management problems can be addressed and solved at the farm level by individuals or private organizations. Others can only be solved at national/sub-national and international level by governments. Most frequently, the way to overcome the complexities of ecological and environmental processes is to develop institutional arrangements at multiple levels able to cope with the specificity of the environmental issues and to provide the correct incentives to the users at each level of the hierarchy. The following sections provide an illustration of various cases of environmental goods and services requiring different institutional involvement.

2.6 Resolution of environmental problems at the farm/household level

Environmental problems

Environmental problems faced by farmers can be generated:

... outside the farm

A classical example of problems generated outside the farm or negative environmental externalities at the farm level is given by soil degradation due to wind or water erosion. If the degree of land degradation is not too high, common agricultural practices can be used by farmers to restore the productivity of the soil. These practices can range from increase of inputs and fertilizers (which, however, can have adverse effects on soil acidification) to crop rotation, minimum tillage, proper management of fallow periods[32].

... within the farm

Environmental problems originating inside the farm and leading to land degradation are soil compaction, salinization, acidification, waterlogging. Also in this case, decisions to address and solve the problems can be taken within the farm with no need of intervention from government at either local or national level, provided that the farmers can afford to pay the costs required and perceive it is in their interest to do so. In other words, they will decide to improve their conservation practices if they can find financial resources and they expect their returns to increase.

... beyond the farm household

If, however, land degradation or air pollution problems are severe, restoring land or avoiding health effects of air pollution may require more resources than usually available at the farm/household level. For example, land restoration may require extensive engineering works, watershed management, irrigation and drainage system, etc., all of which cannot be undertaken by individual farmers. Air pollution abatement can only be achieved through policies aimed at reducing carbon dioxide emissions from industries or vehicles. In such cases government intervention may be required either at the local or at the national level.

... at national/subnational level-

In addition, if the cause of land degradation is due to policy failures such as subsidies on irrigation water that are responsible for inefficient use of water at the farm level, and in turn for salinization problems, government intervention at the national or subnational level can be required to overcome the problem. In this case, farming practices are strictly dependent on policies. It is therefore a policy problem to introduce an incentive system sufficiently profitable to induce farmers to adopt more sustainable practices.

2.7 Resolution of externalities through negotiations among parties

Externalities imply that at least two parties are involved: the “producer” of the externality and the “consumer”. It is very frequent that negative environmental externalities are solved directly by the affected parties before the problem reaches the public forum.

Resolution of externalities

Let us assume, for example, the case of water. Water resources provide a number of goods and services that are valuable to economic activities. Among the goods are irrigation water, industrial water, domestic water, recreation and tourism water. Among the services are habitat protection, biodiversity, waste absorption, and so forth. In many developing countries water goods and services are often free of charge, which means that their scarcity value is equal to zero. As a result, individuals using water for irrigation, industry, waste discharge, tourism and recreation, tend to use larger amounts of water than economically feasible.

Let us consider the case of wastes’ absorption services of water resources. Farmers use water courses (rivers, streams, lakes, etc.) to discharge the waste waters of their activities (livestock, agriculture). Most of the time they are not charged for this service. Therefore, it is likely that there will be excessive run-off of fertilizers and pesticides in water courses, resulting in increased pollution of water and in negative externalities to other users. Since water quality is not priced and cannot be marketed (market failure) the market place is not the appropriate institution to solve the problem of pollution. It is more likely that the appropriate solution will be found either through negotiations among the stakeholders or through the public intervention at various levels (regulations, courts, and/or economic incentives).

... through negotiation-

With negotiation, for example, the perpetrators of the environmental impact will be willing to accept an amount of money to compensate for the foregone benefits they would incur if they reduced water pollution, whereas, the people suffering from the bad externality will be willing to pay an amount of money to continue to use the recreational services of water resources. The parties will agree on the amount of money that will maximize the benefits of both the perpetrators and the suffering population. In other words, the social optimal use of environmental resources will be achieved. This is known in the literature as the Coase Theorem[33] and is demonstrated with an example in Box 2.1.

... through local government-

In the situation described in Box 2.1, government intervention is not necessary unless negotiations do not lead to a solution of the conflicting interests (for example, because of high transaction costs). Moreover, if government is necessary and the scale of the problem and the parties affected are confined at the sub-national level (say local government), it is also likely that the most suitable institutions to decide upon the measures to be undertaken are the government institutions at the local government level.

Box 2.1 A demonstration of the Coase Theorem

Suppose a large farm is polluting a lake, and the water of the lake is used for consumption and for recreation by the community living around the lake. Suppose that the benefit for the large farm to discharge its pollution in the lake is US$1 000 (for example, this may mean that it would cost US$1 000 for the plant to stop discharging in the lake by reducing its pollution or by discharging in some other location). Suppose that the benefit for the community of using the lake is US$1 200 (for example, this may mean that if the community had to stop using the water of the lake, it would have to pay US$1 200 to obtain water from some other sources). Given these values, the social optimum in this case requires that the lake be used by the community for consumption and recreation purposes since it is in this use that the lake creates the largest value.

Indeed, since it would cost US$1 000 for the plant to stop using the lake to discharge its pollution, the large farm would accept any compensation above US$1 000 to stop discharging in the lake. On the other hand, it costs US$1 200 for the community not to use the water of the lake. The community would be willing to pay up to US$1 200 to be able to use the water from the lake and still be better off. Since the community is willing to pay more than what the large farm would require to stop its discharges, there is room for negotiation. Negotiation will result in the community compensating the polluters to induce them to stop polluting the lake. The lake will therefore be used for consumption and recreation by the community.

As a result, the common good (i.e. water) has lost its property of non-excludability and becomes a marketable good with well defined property or user rights.

2.8 Resolution of environmental externalities with spillover effects outside the area

Government intervention when direct negotiation among parties is difficult

The situation will change significantly if property rights cannot be defined and the environmental problem is generated in one area but has spillover effects into neighbouring areas or into the whole country and maybe the whole world. In this case, as pointed out by Smith (FAO, 2001) Pareto-efficiency criterion “... implies that the services should be controlled and financed at that scale where there are no spillover effects”. Spillover effects also entail that a higher number of parties with conflicting interests are involved and, consequently, that a direct negotiation between the parties is more difficult.

An example of this situation is tropical deforestation. The environmental concerns raised by deforestation are manyfold, the most important of which are: a) global climate change; b) loss of biodiversity; and c) extinction of indigenous populations. The fundamental function of tropical forests in climate regulation, biodiversity conservation, and life assurance to indigenous peoples are considered today as major international goals. It follows that even though some agreements could be achieved between the parties directly involved in deforestation at the country level, that solution could be deemed immoral from the societal standpoint if it does not account for all the above mentioned functions, and for the opinion of the international community.

Government intervention either at national level or international level is justified in this situation on the ground of moral and equity arguments, which usually involve the whole society (in this case the whole world community) and cannot be addressed only at the sub-national level by governmental or private institutions.

2.9 Some rules for choosing the most suitable institution/organization to cope with environmental problems

In the previous sections it has been made clear that the appropriate level for addressing environmental problems is more an empirical question than a well defined procedure. Broadly speaking, the following rules can be devised for considering the most appropriate institutions or organization for addressing the environmental problems. A summary of these rules is provided in Table 2.1.

Central government

Government institutions at the central level can be considered if:

(i) number of parties involved and conflicting interests are high;

(ii) geographical distance between the parties is large;

(iii) transaction costs are high;

(iv) negotiations between the parties cannot achieve important social, political, and moral goals;

(v) property rights are not defined clearly;

(vi) the scale and timeline of environmental problems cannot be addressed by individuals or private organizations;

(vii) the measures deemed to be the most appropriate for addressing the problem can only be undertaken by the central government. This may be the case of macroeconomic policies (exchange rate, import and export taxes/quotas, etc.); and

(viii) lack of skilled personnel at the decentralized level.

Sub-national government

Sub-national level government institutions are better suited than central level if (i) to (iv) of the previous point occur and when the scope and scale of environmental problems can be managed properly and cost-effectively at the sub-national level. It is also important that the measures necessary to solve the problem can be decided and implemented at the sub-national level. For example, sub-national government institutions could be involved effectively in watershed management, installation of catchment basins, and other soil-conservation measures that are typically adopted at the sub-regional level. For this to be feasible and effective, however, a political, administrative, and fiscal decentralization should already exist in the country.

Table 2.1 Criteria and suitable institutions to address environmental issues



National government or higher level*

Government at lower level

Parties and other public or private organizations**

Scale of the problem

· Global


· National


· Local government



· Community



Type of measures

· Measures that can only be decided at national or higher level (e.g. exchange rates, population planning policies, etc.)


· Measures that can be implemented at the lower levels (e.g. water charges, some norms and standards, etc.)


· Measures that can be implemented by the private sector and individuals (e.g. agricultural practices, etc.)


Conflicting interests

· High



· Low


Geographical distance

· High



· Low


Transaction costs***

· High



· Low


Property rights

· Public good



· Non Public good




Information and awareness

· Uncertain



· Perfect




Enforcement costs

· High



· Low




Institutional system

· Decentralized



· Not decentralized


* Institutions that can be involved individually or in combination with lower level institutions.

** Community organizations, farmers’ associations, NGOs. Parties may also include government institutions.

*** It is worth noting that transaction costs are to a certain extent dependent on other criteria such as geographical distance, information and awareness, number of parties, conflicting interests.

Civil society organizations

Private or civil society organizations (entrepreneurs, farmers’ associations, NGOs) are better suited when:

(i) only few parties are involved;

(ii) negotiation costs are low;

(iii) the “producer” of the externality is aware of and informed about the effects;

(iv) the cause and the effects of the externality take place in the same geographical area (local government, community, etc.) or very near the source; and

(v) property rights are defined or can be easily defined.

2.10 Basic conditions for successful decentralization

In order for decentralization to be effective and sustainable, a number of conditions must be respected. Among the most important are the following:

Following the forms of decentralization of Figure 2.1, the above conditions can be summarized into three main points including the political, administrative, and fiscal dimensions. So, for example,

[27] FAO (1993).
[28] Oates (1972).
[29] See for example, Tietenberg (1979) and Siebert (1992), Ostrom (1993).
[30] All the factors described subsequently in the text contribute to the transaction costs. This concept is related to the degree of complexity to find a solution in presence of conflicting interests in the use of environmental resources. The higher the complexity, the larger the transaction costs. A more formal definition of transaction costs is given by North (1996) who states: “Transaction costs are the most observable dimension of the institutional framework that underlies the constraints in exchange. They consist of those costs that go through the market, ..., and therefore are measurable, and of hard-to-measure costs that include time acquiring information, queuing, bribery, and so forth, as well as the losses due to imperfect monitoring and enforcement. These hard-to-measure costs make it difficult to assess precisely the total transaction costs resulting from a particular institution”. Suggested further readings on these topics are: Williamson (1975, 1979, 1985); Stiglitz (1985), Nabli and Nugent (1989).
[31] The timeline issue is based on the argument that individuals attach less weight to a benefit or cost received in the future than they do to a benefit or cost received now. Yet, given that many environmental investments (for example, forestry and soil conservation) produce benefits in the long term, alternative investments yielding benefits in the short term will generally be more attractive to individuals. However, short term benefits of individuals may be in contrast with long term benefits to the whole society. Government intervention in this case is justified to ensure that social goals are met. For more details on the time preference issue in economic analysis of the environment the readers are referred to Pearce and Warford (1993).
[32] Other possible farming practices include, intercropping, crop rotations, retained crop residues, enhanced shelterbelts, water management, integrated pest control, sylvo-pasture, green manuring with legumes, etc. (Conway, 1987).
[33] Ronald Coase (1960).

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