TOWARD A DEVOLUTION INDEX FOR

KENYA

by

John Thinguri Mukui

[email: jtmukui2000@gmail.com; jtmukui2000@yahoo.com]

Nairobi, Kenya

June 2017

Copyright 2017
Extracts may be published if the source is duly acknowleged

A
 TOWARD A DEVOLUTION INDEX FOR KENYA

TABLE OF CONTENTS

1. INTRODUCTION .............................................................................................................. 1
1.1 BACKGROUND ..................................................................................................................... 1
1.2 SCOPE OF THE STUDY........................................................................................................ 2

2. DEFINITION AND MEASUREMENT OF DEVOLUTION ............................................ 5

2.1 DEFINITION OF DEVOLUTION ......................................................................................... 5
2.2 MEASUREMENT OF DEVOLUTION ................................................................................ 12
2.3 LEADERS, FOLLOWERS AND EMPOWERMENT .......................................................... 22

3. ILLUSTRATION FROM INDIA ..................................................................................... 24

3.1 DECENTRALIZED GOVERNANCE IN INDIA ................................................................ 24
3.2 THE COMPILATION OF DEVOLUTION INDEX ............................................................ 26

4. TOWARD A DEVOLUTION INDEX FOR KENYA ..................................................... 27

4.1 THE CONSTITUTION AND THE ENABLING LEGISLATION ....................................... 27
4.2 ELEMENTS OF DEVOLUTION IN RELATION TO KENYA ........................................... 34
4.3 TOWARD A FRAMEWORK FOR MEASURING DEVOLUTION IN KENYA .............. 40

5. INFORMATION AS A CATALYST FOR BUDGETARY REFORM ............................ 48

6. CLIENTELISM AND ELITE CAPTURE......................................................................... 54
6.1 CLIENTELISM ..................................................................................................................... 54
6.2 REGULATORY CAPTURE ................................................................................................. 61
6.3 ELITE CAPTURE ................................................................................................................. 62
6.4 MEASUREMENT OF CLIENTELISM AND ELITE CAPTURE ........................................ 73

7. CONCLUSION ................................................................................................................. 75
ANNEX 1: Fourth Schedule Distribution of Functions between the National
Government and the County Governments.......................................................................... 78
REFERENCES ......................................................................................................................... 80

i
 TOWARD A DEVOLUTION INDEX FOR KENYA

Teach them his decrees and instructions, and show them the way they are to live and
how they are to behave. But select capable men from all the people - men who fear God,
trustworthy men who hate dishonest gain - and appoint them as officials over
thousands, hundreds, fifties and tens. Have them serve as judges for the people at all
times, but have them bring every difficult case to you; the simple cases they can decide
themselves. That will make your load lighter, because they will share it with you. -
Exodus 18:20-22 (New International Version) 1

1. INTRODUCTION

1.1 BACKGROUND

1. Human development is a process of enlarging peoples choices by expanding their

capacities to lead long and healthy lives, to be knowledgeable, to have a decent standard of living
and to participate actively in community life. The process seeks level playing field, to open up
opportunities for all, especially the most vulnerable, so as to maximize the potential of every
person in society. The National Human Development Reports (NHDR) have been used
throughout the world to promote advocacy for human development with the aim of stimulating
dialogue on national development strategies and objectives, and to monitor the status of human
development by providing facts and figures, which measure progress and pinpoint critical
imbalances. In their preparation and follow-up processes, NHDRs focus primarily on national
policy formulation and consensus building among national stakeholders. They seek to inform
decision-making in the management of national resources among the public, private and civil

1
The Knox Bible, Exodus 18:21 reads: Meanwhile, choose out here and there among the people able men,
God-fearing, lovers of truth and haters of gain ill won; put each of these in charge of a tribe, or of a hundred
families, or fifty families, or ten. A footnote to the Knox Bible text states that the word families is not
expressed in the original, but this seems the most probable account of what is meant. Adam Clarkes (1825)
commentary: So the decurion, or ruler over ten, if he found a matter too hard for him, brought it to the
quinquagenary, or ruler of fifty; if, in the course of the exercise of his functions, he found a cause too
complicated for him to decide on, he brought it to the centurion, or ruler over a hundred. In like manner
the centurion brought his difficult case to the millenary, or ruler over a thousand; the case that was too
hard for him to judge, he brought to Moses; and the case that was too hard for Moses, he brought
immediately to God see also Sulzberger (1912). The hierarchy of assistants represents a decentralization
of Moses juridical responsibility rather than assignment of functions between civil and sacral cases (Coats,
1999), though it is unlikely that the function of prophecy could be transferred to other officials (Melamed,
1990). Russell (2015) proposes that the structure of the legal world envisioned by Exodus 18:13-26 is closely
paralleled by that assumed in Ezra 7:12-26, where the Persian king Artaxerxes instructs Ezra to appoint
magistrates and judges who know the laws of God. Ezra had the power of life and death to those who did
not obey the laws of God and of the king (Ezra 7:26), though it does not appear that he exercised it, as he
also had the right to inflict customary punishments of a secondary kind, such as fine, imprisonment,
confiscation of goods, and banishment/outlawry (Rawlinson, 1890). However, Robinson (1988) contends
that the passage [Exodus 18:21], it seems, is not concerned to describe a state of affairs that once obtained,
but only to enunciate the principle of shared government.

1
society sectors. By contributing to the debate on alternative approaches and helping to develop
shared visions, the reports identify new prospects for national development.

2. The theme of Kenyas eighth National Human Development Report on Devolution and
Human Development was conceived as one way of contributing to the advancement of
devolution in Kenya by assessing the opportunities and challenges of devolving both power and
resources. The 8th NHDR is expected to introduce human development indices and the possibility
of computation of devolution index or any other innovative index that can help gauge the extent
of devolution and its impact at the national and county levels. Research on the effects or potential
of devolution on sustainable human development at the local level, especially on health and
education, is limited even in advanced devolved systems of governance. Therefore, it is critical to
understand the dimensions of devolution and how they interface with human development at all
levels. This will require coming up with an innovative devolution index that will help gauge
counties that have been able to embrace devolution for enhancing sustainable human
development.

3. In November 2015, I was hired by UNDP-Kenya to prepare a concept note on the

viability of including devolution indices as part of scope of work for Kenyas eighth National
Human Development Report. The one-week assignment covered definitions and measurement of
devolution with particular emphasis on the three common elements in the literature, namely,
administrative, political and fiscal dimensions, followed by application of the same to India. Since
devolution in Kenya is at its infancy, there might be insufficient information for compilation of
devolution indices especially as part of a major study like the National Human Development
Report. The recommendation was therefore to highlight the conceptual foundations for such
indices, localizing the concepts to the Kenyan situation, and specific information pertaining to
Kenya that may be required, so that such computations can be undertaken as an independent
study at a later date. I later decided to go beyond a concept note and write a detailed esssay, at my
own time and cost. This paper is the product of that endeavor. The purpose of this essay is to
demonstrate to Kenyan researchers and students that devolution is an exciting and romantic area
for study, since such empirical studies are likely to define the course of devolution in Kenya.

1.2 SCOPE OF THE STUDY

4. This report highlights variables that have been used in computing devolution indices in
other countries. The report presents a conceptual analytical review for the devolution index
including a refinement to fit the Kenyan situation by utilizing a variety of sources so as to enrich
the quality and relevance of the index. The application of the literature to Kenya only includes
the period since the enactment of the 2010 Constitution and the enabling legislation to
operationalize the provisions of the Constitution with respect to devolution.

5. In order to suggest a framework for measuring devolution it will be necessary to define

devolution, list its essential elements based on the literature, and highlight theoretical and
empirical examples for measuring the depth and impact of devolution. The idea by Bahl (2008)
that decentralization is the empowerment of people by the empowerment of their local
governments led to inclusion of a brief section on the triad of follower, leader and great men and
how their interactions determine how societies evolve in the course of achieving societal
transformation and empowerment. This is followed by a description of the Indian example of the
devolution index. Although there are many academic articles on the measurement of

2
decentralization, India appears to be the only country where the government regularly compiles
devolution indices, and derive actionable policy prescriptions from the findings.

6. The study includes an analysis of the need for harmonizing standards of budgetary
systems and reporting, and problems of conceptualizing and measuring participatory governance
in polities characterized by elite capture and its more sinister sister (clientelism) operating at
various spatial scales (ranging from household, community, regional, national, to international
scales).

7. There are several mechanisms of socio-spatial restructuring of powers of the nation state.
These include involvement of nongovernmental players in governance, interventions by lower-
tiers of government (e.g. counties), internationalization of policy regimes (e.g. through regional
and global trade and partnership arrangements, international monetary system, and observance of
international governance standards), and functional jurisdictions operating at numerous territorial
scales that fulfill distinct functions through splicing provision of public goods (e.g. water services
boards established under the Water Act 2002, and independent commissions specified in article
248(2) of the Constitution of Kenya 2010) to minimize interjurisdictional spillovers and exploit
economies of scale 2. In an analysis of the optimal allocation of local public goods or services in
large urban agglomerations and the allocation consequences of increasing competition in their
provision, Reifschneider (2006) views the two innovative aspects of the concept of functional
overlapping competing jurisdictions as de-localized membership and uni-functionality of
jurisdictions. De-localized membership means that individuals have the opportunity to choose,
independent of their place of residence, the local government (or local service provider) they
wish to patronize for the provision of local public goods; while uni-functionality means that
different local service providers provide each facility with the various types of local public goods.

2
Olson (1969) observes that: The typical citizen is not only under the jurisdiction of national, state,
county, and city governments, but sometimes also subject to a metropolitan transport commission, a port
authority, a sewage or sanitary district, a Soil Conservation District, a pollution control district, a school
district, an airport commission, or a metropolitan planning commission or council of governments. Many of
these institutions are functional governments or other authorities or organizations that have only a single
purpose see also Olson (1986). The spatial and functional jurisdictions can roughly be considered as
mediating structures, defined by Berger and Neuhaus (1975) as those institutions standing between the
individual in his private life and the large institutions of public life see also Vischer (2001). Vischer
(2001) argues that the Catholic doctrine of subsidiarity is a principled tendency toward solving problems at
the local level and empowering individuals, families and voluntary associations to act more efficaciously in
their own lives, and thus goes beyond devolution of government functions from federal to state level.
Subsidiarity was asserted as a central principle of social theory in the Catholic Church by Pope Pius XI in
the Quadragesimo Anno Encyclical on Reconstruction of the Social Order (1931). Pope Pius XI stated:
Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and
industry and give it to the community, so also it is an injustice and at the same time a grave evil and
disturbance of right order to assign to a greater and higher association what lesser and subordinate
organizations can do. For every social activity ought of its very nature to furnish help to the members of the
body social, and never destroy and absorb them. Pope Pius XI added that the State will more freely,
powerfully, and effectively do all those things that belong to it alone because it alone can do them:
directing, watching, urging, restraining, as occasion requires and necessity demands. The Latin derivation
of the word subsidiarity comes from verb subsidio (to aid or help), and the related noun subsidium (aid or
assistance) see Czeh (1997), Colombo (2012), Rwiza (2014), Brennan (2014), and Calabresi and Bickford
(2014).

3
8. This paper only focuses on the process of transferring service delivery and decision-
making to subnational tiers of government, as defined by the Constitution of Kenya 2010. The
devices of dividing the powers of government include (a) horizontal separation at any given level
of government e.g. the executive, legislative, and judicial branches of the national government,
and the existence of independent bodies and agencies; and (b) vertical separation of powers
between national and subnational governments (Thomson, 1961). However, functional
jurisdictions are normally viewed by subnational governments as part of the center, while the
center views them as managers of common resources or services cutting across several or all
subnational governments, and there is therefore potential for conflict between functional
jurisdictions and subnational governments.

9. Collier, LaPorte and Seawright (2012) argue that typologies are well-established analytic
tools in the social sciences, and can be put to work in forming concepts, refining measurement,
exploring dimensionality, and organizing explanatory claims. Their work focuses on conceptual
typologies, where the dimensions and cell types serve to identify and describe the phenomena
under analysis, as contrasted with explanatory typologies, in which the cell types are the
outcomes to be explained and the rows and columns are the explanatory variables (Elman, 2005;
Elman, 2009; Bennett and Elman, 2006), building on earlier literature on typologies and property
spaces (see Lazarsfeld, 1937; and Lazarsfeld and Barton, 1965). Collier, LaPorte and Seawright
(2012) also distinguish between multidimensional versus unidimensional typologies, where
multidimensional typologies capture multiple dimensions and are constructed by cross-tabulating
two or more variables while unidimensional typologies are organized around a single variable
see also Tiryakian (1968), Marradi (1990), Bailey (2000), Earl R. Babbie (2010), Ahlquist and
Breunig (2012), Gerring (2012), Dunlop and Radaelli (2013), Filho, da Rocha, da Silva Jnior,
Paranhos, da Silva and Duarte (2014), and Kees van Kersbergen and Barbara Vis (2015). Kenneth
D. Bailey (1994; 2000) and Collier, Laporte and Seawright (2008; 2012) add that if typologies are
to meet the norms for standard categorical scales, the cells should be mutually exclusive and
collectively exhaustive; otherwise a given observed case might fit in more than one cell, or might
not fit in any cell. However, some wellknown typologies do not meet the standard of mutually
exclusive categories, for example, Hirschmans (1970) exit, voice, and loyalty; and Hirschman
(1981) himself points out that these are not mutually exclusive categories since voice, in the sense
of protest or expression of dissatisfaction, can accompany either exit or loyalty. Hirschmans
typology can readily be modified by creating two dimensions: (a) exit versus loyalty, and (b)
exercise versus non-exercise of voice. Two of the cells would be loyalty with or without voice,
and the other two would be exit with or without voice; and the revised typology would have
mutually exclusive categories, thereby responding to a standard norm for scales and typologies
and making it possible to classify cases in a more revealing way. Taxonomy is similar to a
typology, but the term is normally reserved for classification of empirical entities, and thus
typology is conceptual while taxonomy is empirical (Bailey, 1994). The term taxonomy is more
generally used in the biological sciences (as in family, genus, species), while typology is used in
the social sciences. This essay includes references that rely on the analytical tool of conceptual
typologies. These are (a) Rondinelli (1981), Rondinelli and Nellis (1986) and Cheema and
Rondinelli (2007) on decentralized governance; (b) combining the administrative continuum and
the political continuum of decentralization into a single matrix that allows for analysis of the
complex interplay that exists between the two realms (Hutchcroft, 2001); (c) Fung and Wright
(2003) on empowered participatory governance and countervailing power, where they describe
the governance structure as either Top-Down or Participatory cross-tabulated with character of
decision-making process as either Adversarial or Collaborative; and (d) Nichter (2008) and Gans-

4
Morse, Mazzuca and Nichter (2014) on the allocation of rewards in electoral mobilization in the
context of machine politics.

2. DEFINITION AND MEASUREMENT OF DEVOLUTION

2.1 DEFINITION OF DEVOLUTION

10. Fesler (1968) states that centralization and decentralization are best regarded as opposite
tendencies on a single continuum whose poles are beyond the range of any real political system,
as total decentralization would require the withering away of the state, whereas total
centralization would imperil the states capacity to perform its functions. Fesler (1968) echoes
the Jeffersonian vertical sharing of responsibilities in a multitier government, as captured in a
letter to Joseph C. Cabell of 2nd February 1816. Thomas Jefferson stated that the way to have
good and safe government, is not to trust it all to one; but to divide it among the many,
distributing to every one exactly the functions he is competent to. Let the National government
be entrusted with the defence of the nation, and its foreign & federal relations; the State
governments with the civil rights, laws, police & administration of what concerns the state
generally; the Counties with the local concerns of the counties; and each Ward direct the
interests within itself. It is by dividing and subdividing these republics from the great National
one down thro all its subordinations, until it ends in the administration of every mans farm and
affairs by himself; by placing under every one what his own eye may superintend, that all will be
done for the best (Thomas Jefferson, 1856; Honeywell, 1931) also cited in Ntoiti, Gakure,
Waititu and Gekara (2013). Thomas Jefferson concluded that what has destroyed liberty and the
rights of man in every government which has ever existed under the sun is the generalizing &
concentrating all cares and powers into one body.

11. The Organisation for Economic Cooperation and Development (1997) notes that any
move along a centralization-decentralization spectrum can take a range of forms, corresponding
to the degree of independent decision-making exercised at the local level (see also, Bird and
Vaillancourt, 1998; and Whiteford, 2001). They may involve deconcentration, delegation,
decentralization and/or devolution. First, deconcentration means the dispersion of responsibilities
within a central government to regional branch offices or local administrative units, thereby
coming closer to citizens while remaining part of central government 3. Second, delegation refers
to a situation in which local governments act as agents for the central government, executing

3
As observed by Silva, Kurlyandskaya, Andreeva and Golovanova (2009), the purpose of deconcentration is
to strengthen the central governments control over local government provision of public goods and
services, while retaining the hierarchical relationship between the central government and the regions.
Khaleghian (2003) points out that deconcentration is centralization in disguise since it extends the
geographic and policy reach of the central government with no guarantee that community participation,
accountability, innovation, or any of the other proposed benefits of decentralization will materialize. The
term centralization in disguise appears to have been first used by Mikhail Bakunin in 1867 in a paper
titled Federalism, Socialism, Anti-Theologism, while arguing for the right of free union and of equally
free secession of a country within a union even if it has joined that union freely and of its own will
(Dolgoff, 1971) also cited in Amster (2012) in the context of local action within a globally connected
network and anarchy viewed as ordered chaos, the resiliency of diversity, the stability of change.

5
certain functions on its behalf 4 . Deconcentration and delegation may also take the form of
regional development authorities, in the US context modeled on the Tennessee Valley Authority,
to assist in unified development of natural resources e.g. water, land, minerals and forests (Fesler,
1946). Third, decentralization is the transfer of responsibility to democratically independent
lower levels of government, thereby giving them more managerial discretion, but not necessarily
more financial independence. In administrative delegation of power in a geographic setting, the
delegator normally specifies the conditions governing the use of the delegated power, establishes
informational procedures that permit his auditing of the performance of his agents, and retains
and apply sanctions for disapproved behavior (Fesler, 1968).

12. The fourth de-term mentioned in the literature is devolution (or devolvement), which is
the umbrella term covering all forms of transfers of responsibility, and is normally understood to
refer to a situation in which not only implementation but also the authority to decide what is
done is in the hands of local governments. Devolution is defined as the act of rolling down or
the act of passing on or transferring (Hunter, 1903) and is one of a sizeable family of English
words that go back to Latin volvere (roll, turn) that include volume, circumvolution, convolution,
evolution and revolution (Southerland, 1949; Shipley, 2001; and Ayto, 2005); while the verb
devolve appears in its current usage in Hyde (1707; also cited in Skeat, 1888). The vocabulary that
describes federalism and regionalism normally uses a negative prefix (de-) and are therefore (a)
imprecise descriptions of what something is not (e.g. de-concentration, de-nationalization, de-
statization and de-centralization) or (b) false antonyms (e.g. legate and delegate).

13. The choice of terminology may also depend on where you sit, with the idea of local self-
government built on democratic principles widely referred to as decentralization in non-English
applications of the terminology, and devolution in the Anglophone literature (Boex, 2012).
According to Fesler (1968), in French usage dcentralisation is a term reserved for the transfer of
powers from a central government to an areally or functionally specialized authority of distinct
legal personality (for example, the increase of the degree of autonomy of a local government or of
a public-enterprise corporation); and dconcentration is the French equivalent for administrative
decentralization within a single governments hierarchy. Fesler (1968) adds that
decentralization is the generic term in both England and the United States and has some
currency in France; while devolution is used by English but rarely by American scholars, and
generally is equal to the French dcentralisation but occasionally embraces dconcentration as
well.

4
An example of delegation is the transfer of some national functions to municipalities in relation to health
(under the Public Health Act, cap 242; the Malaria Prevention Act, cap 246; and the Food, Drugs and
Chemical Substances Act, cap 254) and education (under the Education Act, Act No. 5 of 1968) through
Legal Notice No. 41 of March 1970 made under the Local Government (Transfer of Functions) Act 1969.
Similarly, the Transfer of Functions (Roads) Regulations, 1970 (Legal Notice No. 35 of February 1970),
made under the Local Government (Transfer of Functions) Act, 1969, appointed municipalities as roads
undertakers. The regulations were in respect of Eldoret, Kisumu, Kitale, Thika, Mombasa and Nakuru
municipal councils and the City Council of Nairobi. The enactment of the Transfer of Functions Act in
November 1969 transferred major services (e.g. primary schools, health services and road maintenance) to
the central government save for the seven municipalities, and removed the right of municipalities to levy
their most important source of revenue, the Graduated Personal Tax, through the Transfer of Functions
(Graduated Personal Tax Act) Regulations, 1969 (Legal Notice No. 269 of December 1969). The Graduated
Personal Tax was abolished in 1974. Primary healthcare is a function of county governments under the
Constitution of Kenya 2010 (see Legal Notice No.16 of 2013).

6
14. According to Josselin and Marciano (2005), constitutions can be viewed as agency
contracts by which people delegate to constituted public institutions the right and duty to
undertake some given tasks, where the principal is the people and the ruler is the agent 5. The
two main ways of defining a constitutional contract consists in delegating power to a single agent
(unitary state) or to several agents in a federal state. The surrender of power to a subordinate
government that is complete, permanent, and of constitutional magnitude comes under the
framework of devolution (Kincaid, 1998; Tannenwald, 1998; Josselin and Marciano, 2005).
Kincaid (1998) argues that the transfer of specific powers or functions from a superior
government to a subordinate government surrenders all the powers associated with the devolved
functions (namely, political, legislative, administrative, and fiscal); and it leaves the functional
field vacant for occupancy by subordinate governments. This also implies that further devolution
of functions cannot occur between the national government and subordinate governments
without constitutional change.

15. However, Rondinelli, Nellis and Cheema (1983), Rondinelli and Nellis (1986) and R. A.
W. Rhodes (1992) identify decentralization as the general term with at least four typologies
(devolution, delegation, deconcentration and denationalization/divestment/privatization), where
divestment is the transfer of public services and institutions to private companies and firms 6 Most
of the fiscal federalism literature follows the norm of halting the analysis at national boundaries 7.

16. Cheema and Rondinelli (2007) add that governance decentralization practices can be
categorized into at least four forms: administrative, political, fiscal, and economic. Three of the
four forms are normally taken to represent fiscal, political and administrative instruments (or core
dimensions) that underpin the shift in responsibility between tiers of government, and therefore
define the extent to which intergovernmental relations are deconcentrated, delegated, or
devolved (see also, Litvack, Ahmad and Bird, 1998; Schneider, 2003a; and Falleti, 2005).

5
The principal-agent problem considers the interactions between an uninformed party (principal) and an
informed party (agent) and are divided into adverse selection (hidden information) and moral hazard
(hidden action), where adverse selection arises from asymmetric information (e.g. when individuals buying
a particular insurance policy have a much higher than average chance of making a claim), while moral
hazard arises from imperfectly observed actions by the agent (e.g. the chance that the insured will be more
careless and take greater risks because he or she is protected, thus increasing the potential of claims on the
provider) see Arrow (1985).
6
Other than federalism governance which is concerned with power sharing among a limited number of
governments operating at just a few levels, an alternative form of multi-level governance allows functional
jurisdictions to operate at numerous territorial scales since the jurisdictions are task-specific rather than
general-purpose (Frey and Eichenberger, 1999; Frey, 2001; Frey, 2003; Eichenberger and Frey, 2006; and
Hooghe and Marks, 2003). In this type of governance, multiple, independent jurisdictions fulfill distinct
functions through splicing provision of public goods into a large number of functionally task-driven,
discrete jurisdictions/industries e.g. police security, fire protection, health services, and transportation.
7
Frey (2001) argues that identification of government with territory need not be the case, as there could be
(a) multiple governments associated with the same territory (e.g. where borders are ill-defined or the
ownership disputed especially in relation to ethnic groups), and (b) governments without territory (e.g.
international organizations such as the United Nations, religious organizations of which the Roman
Catholic Church is a good example, international sports organizations, and profit-making global firms) see
also Slaughter (2004) and Thrift (2006).

7
17. The mechanisms of hollowing out 8 the political power of the nation state through
socio-spatial division of labour include (a) increased involvement of nongovernmental players and
private sector in governance especially at the regional and local scales, or the shift from
government to governance (destatization), (b) growth of intervention at the subnational and
supranational arenas (denationalization), and (c) and the move toward entrepreneurialism and
competitive innovation and functional transnational linkages is explained by reference to the
internationalization of policy regimes, or the heightened strategic significance of the global
economic contexts (Macleod and Goodwin, 1999; Burgess, 2006; Martinez-Vazquez and Timofeev,
2009) 9. Decentralization is therefore a subset on governance by different levels of government in
fiscal sphere (financing, administration and service delivery) and regulation of the economy and
private sector behavior within the framework of geographies of statehood (Lefebvre, 2003;
Lefebvre, 2009; Nikiforov and Kuznetsova, 1991; MacLeod and Goodwin, 1999; Jessop, 2002;
Brenner, 2004a; Brenner, 2004b; Brenner, 2009; Martinez-Vazquez and Timofeev, 2009; and
Lobao and Adua, 2011).

18. According to Cheema and Rondinelli (2007), administrative decentralization includes

deconcentration of central government structures and bureaucracies, delegation of central
government authority and responsibility to semiautonomous agents of the state, and decentralized
cooperation of government agencies performing similar functions through twinning
arrangements across national borders.

19. Political decentralization includes organizations and procedures for increasing citizen
participation in selecting political representatives and in making public policy; changes in the
structure of government through devolution of powers and authority to local units of
government; power-sharing institutions within the state through federalism, constitutional
federations, or autonomous regions; and institutions and procedures allowing freedom of
association and participation of civil society organizations in public decision-making, in providing
socially beneficial services, and in mobilizing social and financial resources to influence political
decision-making.

20. Fiscal decentralization includes the means and mechanisms for fiscal cooperation in
sharing public revenues among all levels of government; for fiscal delegation in public revenue

8
The phrase the hollowing out of the state in the analysis of governing systems is due to R. A. W. Rhodes
(1994; 1996) see also Pyper (2011) and Newman and Clarke (2009).
9
Fractals are defined in chaos theory as the separate constitutive elements of universal patterns repeated on
different scales, which when applied to federalism would be a mode of organization of different political
levels, repeated in each one, structuring the whole. This mix of elements is the fractal pattern organizing
European society (ranging from the local, state, nation to the European scale) and India (with several
hierarchically nested spatial tiers of government) see Nicolaidis (2001), Filibi (2003), Hooghe and Marks
(2003) and Mallard and Foucault (2011). In fractal-like logic, the forms of challenges and choices and their
resolution have possible parallels at every level of scale, from the village to the global commons. The
analogy of fractals assists in understanding poverty traps (self-reinforcing mechanisms which causes
poverty to persist), and how these mechanisms may occur at any scale of social and spatial aggregation,
from individuals to families, communities, regions, and countries (Azariadis and Stachurski, 2005; Barrett
and Swallow, 2006; Matsuyama, 2008; and Barrett and Carter, 2013). Apart from differences in functional
assignments, the newly devolved county governments are smaller replications of central government in
terms of structure and operational procedures (Sam Barrett, 2015), which also offers opportunities for
comparative analysis of governance along vertical and horizontal dimensions.

8
raising and expenditure allocation; and for fiscal autonomy for state, regional, or local
governments. Finally, economic decentralization includes market liberalization, deregulation,
privatization of state enterprises, and public-private partnerships.

21. Decentralized systems are therefore those in which central entities play a lesser role in
any or all of these dimensions a smaller share of fiscal resources, grant more administrative
autonomy, and cede a higher degree of responsibility for political functions (Schneider, 2003a). In
order to measure decentralization, it is important to identify the unique characteristics that set a
core dimension apart from the other dimensions, and their interrelatedness and interaction.

22. According to Hutchcroft (2001), Fesler (1965) argued that scholars of public
administration and scholars of politics all have a great deal to say about issues of centralization
and decentralization, but unfortunately there is all too little interaction between their respective
bodies of work. Fesler (1965) noted that the division of labor developed in the discipline of
political science has tended to a division between those who study public administration and
administrative law on the one hand, and those who study political parties, public opinion,
electoral behavior, and legislative institutions and processes, on the other (cited in Hutchcroft,
2001). Fesler (1965) observed that the dichotomy blinds each group to relevancies that the other
might contribute, and discourages the development of scholars who would specifically blend the
findings and approaches of the two fields. Svara (2001) also notes that the knowledge and values
of those who do the ongoing work of government complement the knowledge and values of those
who ultimately set the course for government and ensure that it stays on course, and dividing
the partners or skewing the relationship in one direction or the other means that an important
contribution is missing.

23. Fesler (1965) also noted that decentralization is a complex concept with a range of
meanings across different disciplines as well as a number of conceptual tensions. According to
Hutchinson (2015), Fesler (1965) noted that (a) centralization and decentralization are
antinomies, neither term can individually capture the full spectrum of possible governance
arrangements, and neither term has a midpoint; (b) decentralization essentially refers to the
division of power, making it difficult to measure; and (c) it is hard to measure degrees of
decentralization within a given country, such as between different units such as regions, states or
provinces, and local governments, or between equivalent units that are very distinct such as
urbanized provinces and their rural equivalents. In the debate on administrative and political
centralization/decentralization, there may also be a risk of compartmentalization of
administrative and political centralization/decentralization, and creating a conceptual dichotomy
in considering extremes of centralization/decentralization continuum as either good or evil
especially in the functional distribution of roles in multilevel governance. For example,
Hutchcroft (2001) combines the administrative continuum and the political continuum into a
single matrix that allows for analysis of the complex interplay that exists between the two realms,
and provides a demonstration of the applicability of this framework to a broad range of polities.
The synergy between administrative and political decentralization is demonstrated by Porter and
Olsen (1976), who argued that (a) tasks (functions), values, and organizational structure are
related, as each task performed by government has a unique set of economic, political, and
administrative characteristics; (b) each set is associated with different administrative and
structural arrangements; and (c) the structural arrangements chosen for the accomplishment of a
task will affect how well an administrators objectives and values will be achieved. Golembiewski
(1977) notes that Fesler (1965) and Porter and Olsen (1976) see decisions about decentralization

9
and centralization as involving a complex simultaneous juggling of three classes of variables:
values, tasks, and structure.

24. According to Bird and Vaillancourt (1998; 2006), six questions must be answered with
respect to intergovernmental finance in any country:

a) The question of expenditure assignment: Who should do what?

b) The question of revenue assignment: Who should levy what taxes?
c) The question of vertical imbalance: How should any imbalance between the revenues and
expenditures of subnational governments be resolved?
d) The question of horizontal imbalance or equalization: To what extent should fiscal
institutions attempt to adjust for differences in needs and capacities between different
government units at the same level of government?
e) The question of access to capital markets: What, if any, rules should exist with respect to
subnational borrowing?
f) The process by which these questions are answered, that is, the institutional framework
within which the technical and political problems of fiscal federalism are resolved.

25. Intergovernmental transfers have a vertical dimension (total pool of funds allocated to
subnational governments by the higher level government) and horizontal dimension (amounts
received by individual subnational governments), although most research and political attention
is devoted to the latter (Bahl and Wallace, 2007). Horizontal imbalances typically arise when two
areas differ in terms of their taxable resources per head, or in terms of needs per head, or in terms
of unit costs (King, 1997). Four ways in which revenue-expenditure gap might be closed are
increasing revenues at the provincial level, reducing provincial expenditures, matching
expenditure functions with revenue (or revenue-raising power), and some centrally collected
revenues could be transferred to provincial governments (McClelland, 1961; Bird and
Vaillancourt, 1998; Bird and Smart, 2002). In many developing countries, vertical fiscal imbalance
arises because subnational governments have few taxing powers while the provinces are vested
with a wide variety of expenditure assignments (Charles E. McLure, 2001). Other than simply
closing the fiscal gap, intergovernmental fiscal transfers may have many objectives e.g. (a) to
equalize revenue effort, or expenditure levels, or outcomes in terms of services provided; (b) to
achieve objectives more directly related to growth and efficiency in resource allocation such as
encouraging local governments to build critical public works or to provide more services that
provide spillover benefits to residents of other areas; (c) to recognize that certain areas may have
some right to certain incomes, for example, because the natural resources that give rise to those
incomes are physically located there (principle of derivation) e.g. Narok County Government
collection of park entry fees to the Masai Mara National Reserve 10; and (d) explicitly political
objectives, such as making it possible for even the poorest areas to sustain a certain level of public
sector activity. Oates and Schwab (1991) also show that efficient heterogeneous outcomes can be
sustained only if communities have the capacity for differential taxation of a specific form: the
levying of higher taxes on those whose presence raises the cost per capita of supplying local

10
See Walpole, Karanja, Sitati and Leader-Williams (2003), Matheka (2005), Waithaka (2012), Oyugi (2014)
and Mwaura (2016) on the history of how some regions in Kenya managed to have community-owned
wildlife areas and sanctuaries by independence in 1963. The National Parks were managed by the central
government, while National Reserves were held in trust, and managed, by County Councils (and by County
Governments in the post-2010 constitutional dispensation).

10
services such as education and public safety. The subsequent local tax system is likely to be
superregressive with higher tax bills required for lower-income households. Oates and Schwab
(1991) argue that these inefficiencies can be addressed to some degree through a system of
equalizing intergovernmental grants, which lends support for a system of grants based on the
effects of differing group composition on the cost of producing local services.

26. Many countries use revenue assignments to measure fiscal capacity (the ability of
governmental units to raise revenues from their own sources), and expenditure assignments to
generate some variety of formula intended both to equalize public expenditures in localities with
differing needs and capacities, and to stimulate local fiscal efforts (Shah, 2007). The objectives of
formula grants include reflecting regional differences in expenditure needs, using indicators such
as population; indicators of physical factors that may lead to greater costs of service provision e.g.
land area 11, population density, and urbanization; measures to reflect the concentration of high
cost populations in the local government areas, for example, the percent of families living below
the poverty line, the percent of people on pensions, the percent of school-aged children, etc;
indicators of infrastructure needs, such as miles of paved highways and percent of households
with access to adequate water supply; and an institutional component. In addition, the literature
recommends establishing hold harmless or grandfathering provisions that ensure that all
recipient governments receive at least what they received as general-purpose transfers in the pre-
reform period, before phasing-in of the full package of reforms (Shah, 2007).

27. There is extensive literature on the impact of decentralization on developmental

outcomes, including economic growth, macroeconomic stability, poverty and income
distribution, and service delivery and political accountability. For example, Rodriguez-Pose and
Bwire (2004) assess the horizontal link between devolution and regional economic growth in six
national contexts (Germany, India, Italy, Mexico, Spain and USA); Mehmood and Sadiq (2010)
analyze the relationship between human development and fiscal decentralization in Pakistan to
find out the channels through which decentralization stimulates the pace of economic growth
and affects the provision of health and education facilities across the provinces; Capuno (2007)
provides a case study of the decentralization of health and education services in the Philippines;
Habibi, Huang, Miranda, Murillo, Ranis, Sarkar and Stewart (2003) address evolving patterns of
fiscal decentralization in Argentina based on health and education indicators; Davoodi and Zou
(1998) show how the degree of fiscal decentralization affects the growth rate of the economy
using a cross-country panel data set of 46 developed and developing countries over the period
1970-89; and Jtting, Corsi, Kauffmann, Mcdonnell, Osterrieder, Pinaud and Wegner (2005)
reviewed the literature for nine, regionally dispersed, countries, and did not find hard,
measurable evidence of the impact of decentralization on poverty. Martinez-Vazquez (2011) and
Martinez-Vazquez, Lago-Peas and Sacchi (2015) offer comprehensive reviews of the literature
on the impact of fiscal decentralization on the economy, society and politics, and the issue
therefore need not detain us here.

11
Boex (2002) observes that the costs of providing local government services increase with geographical
size of a local government and less densely populated areas typically require higher levels of government
service and create higher costs because it is more costly to serve a population that is more spread out.
However, even if a small percentage of the formula would be based on land area, sparsely populated,
mountainous areas would receive several times more resources in per capita terms than an average district.
Consequently, without capping the influence of land area in the formula, inclusion of land area in the
formula would thus result in excessive variations in resource allocations among local governments.

11
2.2 MEASUREMENT OF DEVOLUTION

28. Schakel (2008; 2009) conceives decentralization as a single, continuous dimension ranging
from centralization in which the central government monopolizes decision-making authority, to
decentralization in which subnational governments have extensive decision-making authority
that falls short of a monopoly over authority. Several authors differentiate among decentralization
with respect to decision-making, appointment, electoral, fiscal or personnel (Treisman, 2002), or
between fiscal, political and administrative decentralization (Schneider, 2003a).

29. Treisman (2002) typology consists of (a) vertical decentralization (number of tiers); (b)
decision-making or the extent to which subnational actors have right to make political decisions
as defined in the constitution and enabling legislation; (c) appointment decentralization or extent
to which executive appointments are made by actors at same or lower tier rather than from above;
(d) electoral decentralization or extent to which subnational officials are elected; (e) fiscal
decentralization or share of subnational governments in total tax revenues or public expenditures;
and (f) personnel decentralization or share of subnational governments in total government
administration employees.

30. The common measures of fiscal decentralization in the literature include:

a) Subnational share of total government expenditures;

b) Intergovernmental grant share (i.e. grants from higher tier governments) as a percentage
of total subnational revenue;
c) Subnational own revenue (i.e. revenues from taxes plus fees and levies) as a percentage of
total subnational revenue;
d) Subnational tax revenue share as a percentage of total subnational revenue; and
e) Subnational tax revenue share as a percentage of total government tax revenue (Oates,
1972; Bahl, 1999; Ebel and Yilmaz, 2002; Stegarescu, 2005; Sharma, 2006; Schakel, 2009).

31. The indicators can be broken down into expenditure (a, b) and revenue (c, d, e) aggregate
fiscal indicators. The fiscal indicators are widely employed as an overall measure of
decentralization, and are mainly computed using the Government Finance Statistics (GFS)
database maintained by the International Monetary Fund, or the national accounts of individual
countries. However, the indicators have been criticized as they do not differentiate well between
decision-making authority and the authority to implement, and do not measure effectively
differences in subnational implementation powers. In addition, Rodden (2004; 2006) observes that
it is difficult to know what to make of expenditure decentralization data without additional data
on the regulatory framework for subnational finance, and adds that perhaps the most basic
consideration is whether expenditure decentralization is funded by intergovernmental grants,
revenue that is shared with the center according to a fixed formula, or the mobilization of own-
source revenue through independent taxes, user fees, and borrowing.

32. Letelier-Saavedra and Sez-Lozano (2015) state that a vacuum still exists when it comes to
measuring fiscal decentralization for the separate functions of the state, and address that challenge
by estimating an empirical model that explains the fiscal decentralization of six specific public
goods (education; health; housing; social protection; recreation, culture and religion; and
transportation) using data available from the International Monetary Fund as well as from other

12
sources. Their results based on a balanced panel of forty-four countries suggest that fiscal
decentralization does not exhibit the same pattern across specific government functions. The
estimations show that only education, health, and social protection measurements of fiscal
decentralization (FD) are sensitive to the income per head. Education FD appears to get lower as
income per head rises, which suggests that centrally coordinated public provision of education is
considered a better option by the wealthier median voter. Education is the only function in which
urbanization leads to more FD, as cities appear to be in a position to run and fund public schools.
This implies that fiscal decentralization should not be seen as an all-across-the-board strategy to
modernize the state, and specific functional dimensions of devolution should be dealt with
separately. Despite criticisms of the IMFs Government Finance Statistics in relation to
measurement of decentralization, Osterkamp and Eller (2003) also used the data to compute the
degree of decentralization by functional categories (or types of expenditures) in Australia, Canada,
Denmark, France, Germany, Ireland, Luxembourg, Netherlands, Norway, Russia, Spain,
Switzerland, United Kingdom and United States 12.

33. Fiscal indicators on the expenditure side do not tell whether the expenditure comes from
conditional or unconditional grants, whether the central government determines how the money
should be spent, whether it sets the framework legislation within which subnational governments
implement, or whether subnational governments spend the money autonomously (Organisation
for Economic Co-operation and Development, 2001; Ebel and Yilmaz, 2002; Boex and
Simatupang, 2008). In addition, the GFS does not distinguish the sources of tax and non-tax
revenues, intergovernmental transfers, and other grants; and hence there is no information on
whether revenues are collected through shared taxes, piggybacked taxes 13, or locally determined
own-source revenues (Ebel and Yilmaz, 2002). However, OECD (2001) made progress in
identifying sources of subnational revenues, namely, tax revenues, non-tax revenues and
intergovernmental grants; with tax revenues and intergovernmental grants further divided into
those which subnational governments have total or significant control over a tax as defined by an
own control over tax rate or a revenue tax base and rate, and those where subnational
governments have limited or no control over the rate and base of a tax.

34. Intergovernmental transfers or grants can be broadly classified into two categories:
general-purpose (unconditional) and specific-purpose (conditional or earmarked) transfers.
General-purpose transfers (unconditional non-matching grants) are provided as general budget
support, with no strings attached. These transfers are typically mandated by law, but occasionally

12
The IMF classifies data in ten different functional categories, namely, General Public Services; Defense;
Public Order and Safety; Economic Affairs; Environmental Protection; Housing and Community Amenities;
Health; Recreation, Culture and Religion; Education; and Social Protection. The subgroups under Economic
Affairs include agriculture, forestry, fishing and hunting; fuel and energy; mining, manufacturing and
construction; transport; and communication (International Monetary Fund, 2014) see also Dziobek,
Mangas and Kufa (2011) on measuring fiscal decentralization using the IMFs databases. The Classification
of the Functions of Government (COFOG) was developed by the Organization for Economic Co-operation
and Development (OECD) and published by the United Nations Statistics Division. COFOG has three levels
of detail: Divisions, Groups, and Classes. The Divisions could be seen as the broad objectives of government,
while the Groups and Classes detail the means by which these broad objectives are achieved (United
Nations, 2000).
13
A piggyback is a tax imposed on top of another tax, e.g. where subnational governments tax the same base
as the national government, but may decide on their own tax rates (Tanzi, 1996; Inman and Rubinfeld,
1996; Oates, 1999; and Joumard and Kongsrud, 2003).

13
they may be of an ad hoc or discretionary nature. Specific-purpose, or conditional, transfers are
intended to provide incentives for governments to undertake specific programs or activities.
These grants may be regular or mandatory in nature or discretionary or ad hoc. The latter is
further split into (a) non-matching transfers that provide a given level of funds without local
matching, as long as the funds are spent for a particular purpose; and (b) matching grants, or cost-
sharing programs, that require that funds be spent for specific purposes and that the recipient
match the funds to some degree (Ulbrich, 2003; Shah, 2007; Blchliger and King, 2006, 2007).
Measures of fiscal autonomy normally distinguish between tied funds given to local bodies for
particular programs and subject to stringent conditions, and untied funds that do not have such
conditions attached to them and often represent the proceeds of tax sharing (Mitra and Verma,
1997; Stegarescu, 2005).

35. Blchliger and King (2006; 2007) and Blchliger and Rabesona (2009) provide an update
on progress made by the Organisation for Economic Co-operation and Development in
establishing statistical databases on tax autonomy and intergovernmental grants in sub-central
finance, building on the work of the OECD (1999) on tax autonomy and Bergvall, Charbit, Kraan
and Merk (2006) on typology of grants. The term tax autonomy captures various aspects of the
freedom sub-central governments (SCGs) have over their own taxes, and encompasses features
such as sub-central governments right to introduce or to abolish a tax, to set tax rates, to define
the tax base, or to grant tax allowances or reliefs to individuals and firms. The main dividing line
in the taxonomy of grants separates earmarked from non-earmarked grants.

36. The indicator set for tax autonomy comprises five main categories of autonomy and
several subcategories, ranked in decreasing order from highest to lowest taxing power. Altogether
13 categories were established to encompass the various tax autonomy arrangements in OECD
countries. As summarized in Thornton (2007), the OECD classification of sub-national tax
revenues ranges from (a) where the sub-national government can set both the tax rate and the tax
base, to (e) where the central government sets both the base and the tax rate; while tax sharing
schemes are divided into four categories from (d.1) where the sub-national government can
determine the revenue split, to (d.4) where the national government can decide the revenue split.
Both earmarked and non-earmarked grants are divided further into mandatory and discretionary
transfers, reflecting the legal background that governs their allocation. Mandatory earmarked
grants may be further subdivided into matching and non-matching grants, i.e. whether the
transfer is linked to SCG own expenditure or not; while a final subdivision of earmarked grants is
between grants for capital expenditure and grants for current expenditure. Non-earmarked grants
may be further subdivided into block and general purpose grants, where the latter provide more
freedom of use; and since both forms are unconditional, the distinction often collapses (Bergvall,
Charbit, Kraan and Merk, 2006).

37. According to Duc Hong Vo (2008a; 2009), the empirical measurements of fiscal
decentralization do not put sufficient distinction between subnational revenue and own-sourced
revenue over which a subnational jurisdiction has policy autonomy. As a result, Vo (2008a; 2009)
developed a fiscal decentralization index (FDI) consisting of two main elements: fiscal autonomy
and fiscal importance of subnational governments. The fiscal autonomy (FA) is represented by the
ratio of subnational governments own-sourced revenue (total subnational revenue less grants
received from the central government) to subnational governments expenditure; while the fiscal
importance (FI) was defined by ratio of expenditure made by subnational governments to total
public sector expenditures by all levels of government within the country (national government

14
and all subnational governments, excluding fiscal transfers from one government to another). The
fiscal decentralization index (FDI) is based on the fiscal autonomy and fiscal importance and is
the geometric average of the two measures. Using the methodology developed by Vo (2009),
Aristovnik (2012) assesses the degree of fiscal decentralization in emerging market economies in
Eastern Europe, using measures of fiscal autonomy and fiscal importance of subnational
governments, and the composite fiscal decentralization index.

38. Stegarescu (2005) focuses on the revenue side of fiscal decentralization (own financial
resources) and thus complements the study by OECD (1999) on tax autonomy. The first measure
of revenue decentralization sums all sub-federal tax revenue from taxes for which sub-federal
governments may determine either rates, bases or both, and then dividing the sum by total
government tax revenue; while the second measure sums all tax revenue from shared taxes for
which sub-federal governments may codetermine the revenue distribution or other allocation
details of the joint taxation system, and then dividing the sum by total government tax revenue.
Baskaran and Feld (2013) studied the effect of fiscal decentralization on economic growth for
twenty-three OECD countries from 1975 to 2008 using the approaches proposed by Stegarescu
(2005) and OECD (1999). Baskaran (2010) measured expenditure decentralization by simply
dividing all expenditures made by subnational governments by total government expenditures,
while the measure for the vertical fiscal imbalance was constructed by dividing subnational
revenues from federal grants by total subnational revenues. Gemmell, Kneller and Sanz (2013)
also follow Stegarescu (2005) and construct two measures of expenditure decentralization and
three measures of revenue decentralization, calculated as shares of consolidated general
government spending or revenue. In addition, Uchimura and Suzuki (2009) study on fiscal
decentralization in the Philippines used five indicators of decentralization, namely, (a) the local
share of total fiscal expenditure, (b) the local share of total fiscal revenue, (c) local dependency on
intergovernmental fiscal transfers, (d) local fiscal autonomy, and (e) local expenditure discretion.

39. In their discussion on the optimal number and size of competing subordinate units of
government, Brennan and Buchanan (1980) present at least four elements that need to be
considered as relevant to any answer to this question: costs of mobility, potentiality for collusion,
ranges of publicness, and economies of scale in administrative organization. The costs of moving
(actual costs of shifting among locations and subjective or psychological costs involved in shifts
among locations along scales of preference) presumably increase with geographical distance, and
therefore the potential for fiscal exploitation varies inversely with the number of competing
governmental units in the inclusive territory. A second element that also point toward the
desirability of a multiplicity of jurisdictions is the potentiality for collusion among separate units
with respect to their mutual exercise of their assigned taxing powers, which is expected to vary
inversely with the number of units. However, the remaining two elements of economies of scale
in consumption and the costs of administration and organization tend to point in the direction of
a smaller number of units and toward a combination of functional authorities within single units.
Epple and Zelenitz (1981) add that increasing the number of local jurisdictions limits, but cannot
eliminate, the ability to exercise discretionary governmental power, since a government given
taxing powers in a jurisdiction with fixed boundaries can exploit the immobility of land and share
in the rents accruing to that land. Building on Brennan and Buchanan (1980), Oates (1985) moots
the idea of a non-fiscal index of decentralization e.g. (a) the absolute number of local
government units in the state (L), or (b) some variants of L involving the normalization of the
number of local governments for land area and for population size. Stegarescu (2005) discusses the
size and number of sub-central authorities, the population-normalized number of sub-central

15
jurisdictions, or even the number of tiers of sub-central government, as alternative measures of
decentralization. Although larger authorities might be expected to be more autonomous, the
reorganization of local communities into greater local units has a centralizing effect from the
point of view of the municipalities involved (e.g. Thika municipality within Kiambu county),
while it is also doubtful whether multi-tiered sub-central government systems can be considered
more decentralized than single-tiered systems 14 . Stegarescu (2005) concludes that, even if
providing some information on the number of veto players, indicators of decentralization which
compare the sheer number of subcentral jurisdictions with different statutes and degrees of
autonomy across countries seem quite problematic and require stringent common definitions.

40. In the Italian article Di un indice di decentramento finanziario (1950), Aldo Scotto was
the first to develop a fiscal decentralization index (Michael McLure, 2007), known as Scottos
index. Scottos index is still not available in English, but a summary of it appears in Michael
McLure (2007) and an extensive discussion is provided by Vo (2008a, 2008b). The Scotto index
was a composite of two separate indices: one for decentralisation in the public raising of revenue;
and another for decentralisation in the expenditure of public funds. As summarized in Breuss and
Eller (2004), most subsequent independent attempts represented fiscal decentralization by the
ratio of local to total public sector expenditure, although a sizeable number also used local to total
public sector revenue shares. Scottos index is still superior to such measures as it is also sensitive
to the number of sub-central governments as well as sub-national fiscal shares. Two components
of Scottos index, one for revenue (Dr) and the other for expenditure (De), are defined as: D= 1/ (P0
+ P1/n1 + P2/n2), where P stands for proportion, and the subscripts 0,1 and 2 indicate the number
of governments national, regional (first-order level of SNGs) and local (second-order level of
SNGs). The sum of all revenue (expenditure) shares is unity, and as such P0 + P1 + P2 = 1. Scottos
index is the arithmetic mean of the two components, that is, FDIs = (Dr + De)/2. Scottos index is
sensitive to the revenue (expenditure) shares of each government level. In addition, when the
number of governments in each tier of SNGs increases, Scottos index also increases, and the
number of SNGs therefore contributes to the sensitivity of Scottos index (Vo, 2008a; Vo, 2008b).
The Scottos (1950) index appears to have been a response to Stegarescu (2005) challenge that
indicators of decentralization which compare the sheer number of subcentral jurisdictions
seem quite problematic and require stringent common definitions, though the response predates
the challenge by more than half a century.

41. Jemna, Onofrei and Cigu (2013) provide a summary of measures of local revenue
autonomy that include:

a) Decentralization Variable, as the ratio of own revenues of local budgets and total revenues
of local budgets, where own revenues of local budgets is the sum of tax revenues for

14
These tensions are aptly captured by Fesler (1968): The degree to which a countrys administrative
system is centralized or decentralized is more readily gauged when the system has two, rather than three,
tiers of government. The paired relations in a three-tier system are national-state, state-local, and national-
local (and even state-state and local-local relations, when they involve voluntary surrender of some powers
to a joint authority). In any of these paired relations, the centralist or decentralist forces may predominate,
and consistency in this respect among the pairs is not assured. Consequently, the same state government
that complains of inadequate decentralization by the national government may be attacked by local
governments for centralization at the state capital. And failure of state governments to use their powers to
meet the needs of cities may create a vacuum that the national government is urged by city governments to
occupy, resulting in direct national-local relations.

16
 which local governments have significant or full discretion over rates and/or relief, the
non-tax revenues for which local governments have significant or full discretion over
rates and/or relief, the general-purpose grants allocated according to objective criteria,
and unconditional specific grants(based on Ebel and Yilmaz, 2002);
b) Own Revenue Ratio, which is the same as the Decentralization Variable except that the
denominator includes total revenues of the central/state budget (based on Meloche,
Vaillancourt and Yilmaz, 2004);
c) Composite Indicator of Fiscal Autonomy, as the ratio of tax revenues for which local
governments have significant or full discretion over rates and/or relief to sum of total tax
revenues of subnational and central government (based on Sutherland, Price and Joumard,
2006; and Blchliger and King, 2006, 2007); and
d) Revenue Autonomy of a Local Government, measured as the share of own revenue to
total current local government revenue (based on Ermini, 2009).

42. Due to problems of encompassing decision-making and implementation authority, the

indicators include measures of political and administrative decentralization. These include (a)
whether the country has a federal constitution; (b) whether or not a countrys regional and local
executives are elected; (c) whether or not the central government has the legal right to override
the decisions and policies of lower levels of government; (d) revenue raising authority; (e)
whether a countrys central government regularly and unconditionally transfers a portion of
national taxes to lower levels of government; and (f) expenditure assignments e.g. for basic
education and infrastructure especially roads (Litvack, Ahmad and Bird, 1998; Brancati, 2006).

43. A World Bank study (Ndegwa, 2002) measured the extent of decentralization using three
indices to reflect the three aspects of decentralization: political, administrative and fiscal. Political
decentralization was computed from the mean of the following: the number of elected
subnational tiers, the score for the existence of direct elections for local governments, and the
score for turnout and fairness of such elections. Administrative decentralization was tracked using
three indicators: the score for the clarity of roles for national and local governments provided by
the law, the score indicative of where the actual responsibility for service delivery resided, and
the score indicative of where the responsibility for (hiring and firing) civil servants resided. Fiscal
decentralization was measured using two indicators: the score given for the arrangements for
fiscal transfers from the central government to localities, and the score corresponding to the
proportion (offered as a range) of public expenditure controlled by the localities.

44. The overall devolution index in Ndegwa (2002) includes indicators of downward and
upward accountability, and potential durability of the system. Downward accountability was
defined by the average of the score for direct elections of local government, the score for local
elections turnout and fairness, and the score for the type of local participation. Upward
accountability was the average of the score for local government status of accounts and audits, and
the score for the existence of service delivery standards. The durability of the system was
indicated by its institutional foundations and by the longevity of those particular arrangements.

45. Generally, the measurement of devolution uses indicators that cut across Stevens (1946;
1951; 1959) taxonomy of measurement which identified four classes of scales: nominal scale that
serves only to distinguish one event or class of events from another (e.g. the set of numbers used
to identify each member of a team); ordinal scale that permits a rank ordering of measured events;
interval scale that entails a constant unit of measurement and so permits the calculation of

17
differences between any two values e.g. age, temperature (as ordinarily measured in degrees
Celsius and Fahrenheit) and altitude; and ratio scale that features a constant unit of measurement,
but in addition allows the expression of two values as a ratio since a true zero exists e.g. weight,
height, measures of volume, absolute (thermodynamic) temperature, and earned income in a
given period (see also Woodworth and Schlosberg, 1954; Teghtsoonian, 2001; and Matheson,
2006). These include Boolean data type (true/false, yes/no) and typologies or components of
devolution (e.g. the distinction between administrative, political and fiscal decentralization)
measured on nominal scale, ordinal measurements of dimensions of political and administrative
decentralization, and ratio measurements of revenues and expenditures. For this reason, most
studies derive policy implications from the findings of each constituent indicator and its
components (e.g. whether subnational leaders are elected, as a component of political
decentralization) rather than a composite of indicators of political, administrative and fiscal
decentralization.

46. According to Veiga, Kurian and Ardakanian (2015), accountability involves a relationship
between a principal and an agent in which a principal (citizen-client) is able to keep in check the
powers of an agent (service provider e.g. subnational government). Dimensions of accountability
of a subnational government to its citizens include (a) political accountability on the way policy is
conducted and services are delivered; (b) administrative accountability on issues such as
recruitment, procurement, and land use and planning; and (c) fiscal/financial accountability on
the management of local finances and its outcomes, including reporting on what they have
achieved with their expenditures and introducing/reinforcing participatory budgeting practices.
Accountability can be promoted through obligation of public authorities to explain how they are
carrying out their responsibilities (supply-side accountability) or citizen oversight (demand-side
accountability). The measures proposed by Veiga, Kurian and Ardakanian (2015) for
strengthening political, administrative and financial accountability implies that a careful analysis
of performance along the three dimensions of devolution (political, administrative and fiscal)
provides broad indicators of accountability (see also Agrawal and Ribot, 1999; Bovens, 2007; and
Yilmaz, Beris and Serrano-Berthet, 2010).

47. In an assessment of measures of decentralization, Ebel and Yilmaz (2002) found that
empirical studies on the impacts of decentralization yield substantially different results depending
on the decentralization measure used. Abdelhak, Chung, Du and Stevens (2012) added that the
current methodologies and data collection efforts on the causes and effects of decentralization
provide policy makers and the research community with a patchwork of information regarding
decentralization, rather than providing a single, consistent, and robust dataset regarding the depth
and breadth of decentralization in countries around the world.

48. However, a turning point in measurement of decentralization was provided by the

germination of two ideas. The first idea was the observation by Bahl (2008) that decentralization
is the empowerment of people by the empowerment of their local governments (also cited in
Boex and Simatupang, 2008; Boex and Yilmaz, 2010; and Boex, 2012). According to Boex and
Simatupang (2008), Bahl (2008) understanding of decentralization beyond mere shifting of power
away from the centre includes (a) fiscal empowerment of subnational governments to deliver
public services and infrastructure, and (b) empowerment of people and communities to direct
their subnational government officials to use their financial resources in accordance with local
needs and preferences. The second idea germinated from an innocent footnote in Raich (2005)
that observed that, in terms of electoral politics, a local citizen has a higher probability to

18
influence a local than a national representative, with a weight of 0.001 in a local jurisdiction of
1,000 voters and 0.0001 in larger voter population of 10,000. Raich (2005) concluded that the
weight of these individual voters can be interpreted as simple probabilities of citizens influencing
their representatives see also Borck (2002). The failure to take jurisdiction size into account in
the expenditure decentralization ratio implies that India is much more decentralized than an
average OECD country, since 52.0 percent of public spending in India occurs at the subnational
level (with States and Union Territories having an average population of 30 million), compared
with 31.8 percent in an average industrialized country (Boex and Simatupang, 2008). The claim
that the source or origin of local revenues (own-revenue versus international aid or
intergovernmental transfers) is important because local governments treat revenue from different
sources in different ways was labeled by Raich (2005) as the origin-base criterion.

49. According to Boex and Simatupang (2008), the measure of fiscal empowerment by a
representative individual depends on several factors, namely, voice over public spending at each
government level, and degree of fiscal control or autonomy exercised by the government unit at
that level of government. The measure of voice partly depends on population at each government
level and the individuals voice over public decisions at each level, and posits that voice will be
inversely related to the number of constituents in a jurisdiction so that the higher the population
of the jurisdiction, the smaller the relative voice of each individual. In addition to the relative loss
of the individuals voice as the number of constituents increase, additional loss to constituents
voice occurs as the size (in terms of population and geography) and diversity (whether
socioeconomic, ethnic, linguistic or religious) of a government jurisdiction increases. Another
determinant of voice is how receptive and responsive political decision-makers are to the
preferences of the communities that they serve, and cites the presence of elected officials at the
relevant government level (since an elected official is interested in maximizing the number of
supporters or votes in his or her respective jurisdiction). The proposed measure of fiscal
empowerment consequently gives citizens of smaller (less populous) countries relatively more
favorable scores compared with the traditional expenditure decentralization ratio, and India falls
from being one of the most decentralized countries in the world to one of the least fiscally
empowered nation (Boex and Simatupang, 2008).

50. The conventional measures of decentralization compute indices of political,

administrative and fiscal dimensions of decentralization and then derive a composite index using
appropriate weights. In contrast, Boex and Simatupangs (2008) proposed measure arrives at a
single variable that quantifies the overall degree of fiscal empowerment that is achieved through
fiscal and political decentralization. The proposed measure appear to subsume the administrative
dimension under the political dimension, the political variables (e.g. voter turnout) are treated as
inputs to the formula (rather than as intermediate outputs in the conventional measures), and the
concept of distance (based on population or physical features) used to infer voice is contestable
where functions for each level of government differ. In the Kenya case, for example, the functions
of the national government include foreign affairs, national defense, police services, judiciary,
national economic policy and statistics, education, and national trunk roads; while county
functions include agriculture, county health services, and county transport (see Annex 1 for the
distribution of functions between the national government and county governments). It could be
argued that the county functions require more community inputs in policy formulation and
implementation compared to, say, defense or university education. Apart from improvement in
measurement of decentralization through inclusion of population, the political variables used are
fairly similar to those used in computing the political dimension of decentralization.

19
51. The proxy for distance or voice (inverse of population) could be moderated through an
appropriate nonlinear distance decay function (e.g. double-log Pareto or lognormal model
applied on jurisdictional shares of population in subnational measurement of voice) to reflect the
fact that individual voice does not fade (decrease) linearly with the inverse of population see
Taylor (1971), Sen and Smith (1995), Fellmann, Getis and Getis (2003), and Fingleton and
McCann (2007) 15. This implies that increasing jurisdiction population hundredfold will decrease
the influence of population on voice by a factor of less than 100. In addition, since dimensions
(units of measurement) of distance decay functions are normally difficult to define, the computed
values need to be normalized to a range of 0.000 to 1.000 through selection of appropriate
minimum and maximum attainable values. The analysis of voice also needs to take into
consideration time-space compression (reducing perceived distance) through technologies such as
mass media, mobile telephony, Internet and travel (Harvey, 1990; Kirsch, 1995; Dodgshon, 1999;
and May and Thrift, 2001). The distance decay function is based on the so-called First Law of
Geography that everything is related to everything else, but near things are more related than
distant things (Tobler, 1970) see also Tobler (2004) 16. However, the concept of distance in
deciphering voice is a visual misnomer since jurisdictions with low populations have lower
distance but higher voice, and the concept is only a convenient device to enable importation
of algebraic forms from distance decay models which traditionally employ nonlinear functions.
The concept is also used in marriage decisions based on cultural locations, religious locations,
racial locations or ethnic locations as measures of distance (Sen and Smith, 1995; and Morrill
and Pitts, 1967).

52. Boex and Simatupang (2008) acknowledge the difficulties in conceptualizing and
measuring empowerment, citing Munck and Verkuilen (2002) on conceptualizing and measuring
democracy; Keefer (2004) on the sources of good governance and progress made in
understanding the effects of different dimensions of governance on economic development; and
Alsop, Bertelsen and Holland (2006) and Alsop (2007) on the concept and measurement of
empowerment. In particular, Alsop, Bertelsen and Holland (2006) and Alsop (2007) go beyond
governance as leadership and the quality of bureaucratic performance, to empowerment as
enhancing an individuals or groups capacity to make purposive choice and transform that
choice into desired outcomes which resonates with Bahl (2008) view of decentralization as the
empowerment of people by the empowerment of their local governments. According to Alsop
(2007), if a person or group is empowered, they possess the capacity to make effective choices;
that is, to translate their choices into desired actions and outcomes; and this capacity is primarily
influenced by two sets of interrelated factors: agency and opportunity structure. Agency is an
actors ability to make meaningful choices, and opportunity structure is defined as those
institutional aspects of the context that determine their ability to transform agency into effective
action.

15
Taylor (1971), Sheppard (1984) and Johnston (2009) have illustrations of distance-decay curves and
transformations, and other spatial interaction models.
16
Tobler (1970) has a great resemblance to Isaac Newtons principle of Universal Gravitation (Newton,
1846) that every particle of matter is attracted by, or gravitates to, every other particle of matter, with a
force inversely proportional to the squares of their distances. The so-called First Law of Geography was
broader than Newtons law as it did not necessarily assume an inverse squared distance functional form, and
referred to everything rather than only physical matter (and could therefore be broadly interpreted to also
include ideas, migration, and regional and international trade) see Haggett, Cliff and Frey (1977) and Roy
and Thill (2004).

20
53. The definitional problems on devolution spill over into measurement problems, and the
various indices of decentralization are not harmonized or integrated in any meaningful way, if
they ever will. For example, the main variable in administrative decentralization is distribution of
the workforce between national and subnational governments, though the outcome may reflect
bloated workforce due to political jobbery, and even underutilization of old employees as
incoming governors recruit their confidants to strategic positions in the subnational government.
The variables in political decentralization are unlikely to change from year to year since they are
anchored in the constitutional dispensation; while fiscal decentralization focuses on
intergovernmental fiscal transfers and rarely relate these with the distribution of functions
between national and subnational governments despite the cardinal rule of decentralization that
finance follows function. The assigning of equal weights to administrative, political and fiscal
decentralization appears to be based on the Principle of Indifference (Insufficient Reason) or the
Equal Distribution of Ignorance, though the mathematical principle attributed to Jacques
Bernoulli (1654-1705) and Pierre-Simon Laplace (1749-1827) was on outcomes of a trial assumed
to have equal probability (e.g. tossing a fair coin, or drawing a white or a black ball from an urn
for it is known how many balls of each kind are in the jar) see Keynes (1921) and Fisher,
Dickson and Bonynge (1922).

54. The IMFs Government Finance Statistics (International Monetary Fund, 2014) recognizes
the existence of state governments exercising some of the functions of government at a level
below that of central government and above that of the government institutional units existing at
a local level, and local government units whose fiscal, legislative, and executive authority
extends over the smallest geographical areas distinguished for administrative and political
purposes and typically provide a wide range of services to local residents, some of which may be
financed out of grants (transfers) from other levels of government. In addition, if a regional unit
is entirely dependent on funds from central government, and if the central government also
determines the ways in which these funds are to be spent at the regional level, it should be
treated as an agency of central government for statistical purposes, rather than as a separate level
of government. As argued by Boex (2011), Boex and Vaillancourt (2014) and Boex and Edwards
(2015), the focus of the empirical fiscal decentralization literature on only finances of elected or
devolved local governments has systematically excluded other types of decentralized
expenditures, including deconcentrated and delegated expenditures. Boex and Edwards (2015)
show that the exclusion of activities of any deconcentrated administrative bodies below the
central level, as well as spending by central government line ministries (or other central
government agencies) that support the frontline delivery of public services in a direct and
localized manner, has been overlooking substantial amounts of local public sector expenditures.

55. Martinez-Vazquez and Timofeev (2010) developed a Composite Ratio of fiscal

decentralization expressed as Revenue Ratio/(1-Expenditure Ratio), which should be adjusted for
cases where decentralized systems involve substantial grants to the central budget from foreign
and subnational entities and cases where the equalization grant system includes negative transfers
from richer subnational governments to a central pool or the budget. Martinez-Vazquez and
Timofeev (2010) claim that the Composite Ratio performs better than other attempts of
combining expenditure and revenue ratios, including (a) Akai and Sakata (2002) that takes the
average of the two ratios, and (b) Vo (2008a) where the functional form results in a measure
essentially equivalent to the revenue ratio. Schneider (2003a) culls the intellectual inputs from the
fields of economics (fiscal decentralization theories), public administration (administrative

21
decentralization) and political science (political decentralization), and addresses the degree to
which these dimensions are interrelated and the conceptual and empirical difficulties of
measuring and aggregating the three dimensions of decentralization. Schneider (2003a) offers an
empirical test of that definition using confirmatory factor analysis of data from sixty-eight
countries in 1996, which generates scores that allow countries to be measured according to their
type and degree of decentralization. On his part, Pina-Snchez (2014) proposed the development
of a measurement framework using a Bayesian factor analysis model that combines multiple
measures of decentralization regardless of their level of measurement (mixed ordinal and
continuous outcomes). Pina-Snchez (2014) applied the model to a set of 14 indicators for 33
OECD countries to develop a more encompassing index of decentralization. Alfred North
Whitehead (1929) stated that the safest general characterization of the European philosophical
tradition is that it consists of a series of footnotes to Plato. In the case of decentralization and its
measurement, it is safe to assume that the last word has not been spoken and the final verdict is
not in.

2.3 LEADERS, FOLLOWERS AND EMPOWERMENT

56. Thody (2000) observes that there is literature on leadership, but little or no advice on how
to behave when you follow a leader; and since follow images are negative, there is a tendency for
transmutation of followership into followersheep due to the popular notion of followers as
mindless sheep that simply follow the herd 17. For example, a qualitative study to deconstruct the
meaning of followership in various industries showed that some individuals socially construct
definitions around passivity, deference and obedience, while others emphasize the importance of
constructively questioning and challenging their leaders (Carsten, Uhl-Bien, West, Patera and
McGregor, 2010). The individuals held followership schema along a continuum from more passive
(e.g. blindly obedient) to more proactive (e.g. change agent) views, which was related to
contextual variables that operate in a given organization.

57. Among the 18 propositions on leadership and followership, Heller and Van Til (1982)
states that (a) leadership and followership are related concepts, neither of which can be
comprehended without understanding the other; (b) good leadership enhances followers, just as
good followership enhances leaders; (c) in many cases, the follower is a potential leader who
chooses not to become active in a given situation; (d) where all seek to lead, or all seek to follow,
there can be no leadership or followership; and (e) the need for participative leadership-
followership style, and flexible and egalitarian leader-follower roles. Kelley (2008) also argues that
star followers think for themselves, are very active, and have very positive energy and do not
accept the leaders decision without their own independent evaluation of its soundness. Kelley
(2008) adds that star followers are the primary defenders against toxic leaders or dysfunctional
organizations; and for this happen people have to be taught that followership role includes

17
For example, Frantz Fanon (1963) observed that, in presence of a political party member in many
independent regions of Africa, the people keep mum, behave like sheep, and pay tribute to the
government and the leader. But in the street, away from the village of an evening, in the cafe or on the
river, the peoples bitter disappointment, their desperation, but also their pent-up anger, can be clearly
heard. Instead of letting the people express their grievances, instead of making the free circulation of ideas
between the people and the leadership its basic mission, the party erects a screen of prohibitions. It is
perhaps pertinent to echo the words of Frederick Douglass (1857) that the limits of tyrants are proscribed
by the endurance of those whom they oppress.

22
courageous conscience, and followers need societal support that encourage people to exercise
their courageous conscience. Stech (2008) present a case for a leadership-followership paradigm
that addresses both leadership and followership at the same time, and that is applicable to a wide
range of leadership and followership contexts, including voluntary associations, elected bodies,
neighborhoods and communities, social movements, and occupations and professions.
Followership appears to be a missing dimension in development and empowered participatory
governance as much of the literature on followership is related to business management and much
of it presents followership as a byproduct of leadership (Thody, 2000).

58. In The Hero as Divinity (1840), Thomas Carlyle (1901) formulated the Great Man
theory, when he stated that the history of the world is but the biography of great men,
reflecting his belief that heroes shape history through both their personal attributes and divine
inspiration. Thomas Carlyle (1901) argued that the history of what man has accomplished in this
world, is at bottom the History of the Great Men who have worked here and all things that we
see standing accomplished in the world are properly the outer material result, the practical
realization and embodiment, of Thoughts that dwelt in the Great Men sent into the world. Hegel
(1857) also wrote about great historical men whose own particular aims involve those large issues
which are the will of the World-Spirit. One of the critics of Thomas Carlyles formulation of the
Great Man theory was Herbert Spencer (1874), who believed that the men Carlyle called great
men were merely products of their social environment (see also, Caneiro, 1981). Spencer (1874)
stated that you must admit that the genesis of a great man depends on the long series of complex
influences which has produced the race in which he appears, and the social state into which that
race has slowly grown 18 . However, William James (1880) described the causes that make
communities change from generation to generation as the accumulated influences of individuals,
of their examples, their initiatives, and their decisions, contrary to the Spencerian school that the
changes are irrespective of persons, and independent of individual control. William James (1880)
concluded that the evolutionary view of history, when it denies the vital importance of
individual initiative, is, then, an utterly vague and unscientific conception, a lapse from modern
scientific determinism into the most ancient oriental fatalism. William James therefore
emphasized that environments and individuals shape each other reciprocally 19 . As argued by
Harter (2003), the prior deliberations by William James and others need to be revisited as they are
of contemporary relevance to the role of individuals, followers and their environments in
fostering transformational change of societies.

18
Herbert Spencer (1874) opined that: If it be a fact that the great man may modify his nation in its
structure and actions, it is also a fact that there must have been those antecedent modifications constituting
national progress before he could be evolved. Before he can re-make his society, his society must make him.
So that all those changes of which he is the proximate initiator have their chief causes in the generations he
descended from. If there is to be anything like a real explanation of these changes, it must be sought in that
aggregate of conditions out of which both he and they have arisen. Early reviews of the Great Man theory
include Cooley (1897), Barnes (1919) and Gillette (1916).
19
Sidney Hook (1943) also states that at certain times and conditions, men of unique power and ability can
alter the course of history. However, Hook (1943) sets up a distinction between the merely eventful man
who influences the course of history, and the event-making man, who is an eventful man whose actions
are the consequences of outstanding capacities of intelligence, will, and character rather than accidents of
position When we speak of the hero or great man in history we shall mean the event-making man.
Hook (1943) cautions that there are few historical figures that will fit snugly into either classification. We
must leave to historians the delicate task of ascertaining whether any particular hero of human history is,
in respect to some significant happening, an event-making character or merely lucky.

23
59. A transformational leader is not necessarily identified through elections or seniority in
public and private office. As observed by Lipman-Blumen (2005) in her penetrating analysis on
toxic leaders, do not look for saints among formal leaders as saints rarely seek elected or
appointed office and seldom enter the rough-and-tumble of politics or the corporate world 20.
After Joseph interpreted Pharaohs dream, Joseph told Pharaoh that it is for thee, my lord king,
to find some man that has the wisdom and the skill for it, and put the whole of Egypt under his
charge, and he must appoint a commissioner for each region, to collect a fifth of the harvest
during the seven years of plenty which are now upon us, and store it up in barns (Knox Bible,
Genesis 41: 40-41). Though Josephs twofold framework of providence and planning combined
divine and human credentials (Brodie, 2001), it is instructive that Pharaoh appointed Joseph
rather than his courtiers and commissioners to have charge of all of Egypt except the royal
throne. The triad of follower, leader and great men determines how societies evolve, and their
attributes and local and international environments are important in the course of achieving
societal transformation and empowerment.

3. ILLUSTRATION FROM INDIA

3.1 DECENTRALIZED GOVERNANCE IN INDIA

60. As observed by Rao (1998) and Singh and Srinivasan (2006), India represents a classic case
of a federation with constitutional demarcation of functions and finances between the center and
the states. Separate legislative, executive, and judicial arms of government are constituted at both
central and state levels. The Constitution recognizes that the states tax powers are inadequate to
meet their expenditure needs and, therefore, provides for the sharing of revenues from personal
income tax and Union excise duty. States in need of additional assistance can be also be given

20
Lipman-Blumen (2005) uses toxic leaders as a global label for leaders who engage in numerous
destructive behaviors and exhibit certain dysfunctional personal characteristics. Lipman-Blumen (2005)
adds that to count as toxic, these behaviors and qualities of character must inflict some reasonably serious
and enduring harm on their followers and their organizations. The intent to harm others or to enhance the
self at the expense of others distinguishes seriously toxic leaders from the careless or unintentional toxic
leaders, who also cause negative effects. The policy choices presented by Lipman-Blumen (2005) as
safeguards against toxic leadership include (a) accountability forums, (b) repairing flawed process for
selecting leaders, (c) creating respectable departure options as many leaders cling to their role because they
cant bear giving up the comfortable perks that leaders usually enjoy, and (d) term limits. Lipman-Blumen
(2005) argues that the processes by which we select and keep leaders in public and private office often
attract the wrong candidates for the wrong reasons; and cites Thomas Jefferson (1905) who described his
perspective on the danger this way: Whenever a man has cast a longing eye on them [offices], a rottenness
begins in his conduct. There can also be toxic followers who can use techniques such as conspiracies, back
channeling, triangulation and mobbing to waylay the best leaders (Balda and Balda, 2012). Furnham (2011)
observed that many have attempted to categorize these [toxic followers] into different groups such as
bystanders, acolytes, true believers or, more simply, conformers and colluders. Conformers tend to be
immature with negative self-concept, whilst colluders are more selfish, ambitious, destructive and openly
supportive of toxic tyrants. Johnson (2014) adds that followers with high personal standards can go bad
(engage in unethical and illegal activities such as theft, financial fraud, manufacturing and sale of harmful
products, and corruption) through moral disengagement mechanisms that encourage individuals to justify
harmful behavior, to minimize personal responsibility for harm, and to devalue victims.

24
grants-in-aid. The Constitution requires the president of India to appoint a Finance Commission
every five years (or earlier) to review the finances of the center and the states and recommend
devolution of taxes and grants-in-aid for the ensuing five years.

61. Each state is divided into districts, with further subdivisions (tehsil or taluka or mandal),
and each subdivision contains a varying number of villages, which form the base of the panchayat
system. Urban municipalities form a separate system, with four grades, based primarily on size. In
1992, two separate constitutional amendment bills were passed, covering Panchayats
(democratically elected village councils) and municipalities, respectively, and came into force as
the 73rd and 74th amendments to the Constitution of India in 1993. The amendments required
individual states to pass appropriate legislation, since local government remained a state subject
under the constitution, and individual states have proceeded to do so (Singh, 1996). The Indian
fiscal federalism between center-state relations therefore raises similar issues with state-local
interactions. However, Mathew (2016) notes that the only reference to the Panchayati Raj in the
Indian Constitution was in Article 40, which read: The State shall take steps to organize village
panchayats and endow them with such powers and authority as may be necessary to enable them
to function as units of self-government. In addition, Article 243 of the Constitution of India
covers general provisions pertaining to panchayats, including giving the Legislature of a State the
powers to make provisions on the composition of panchayats, representation of the Chairpersons
of the panchayats at the intermediate level and at the district level, reservation for women in
panchayats, and reservation of seats in the panchayat for Scheduled Castes and Scheduled Tribes.

62. The 73rd constitutional amendment included a schedule of 29 subjects (including

agriculture, animal husbandry, land and water management, irrigation, roads, education,
electricity, and welfare programs) as panchayat responsibilities; specific responsibilities for
preparing development plans; the creation of district planning committees to consolidate the
plans prepared by panchayats and municipalities; and additional provisions concerning eligibility
for and composition of rural local governments. The 74th Amendment provides a parallel set of
reforms for urban and transitional areas (see Mathur, 2006, for urban India; and Alok, 2006, for
rural India). Large metropolitan areas offer different challenges and opportunities in expenditure
assignment and potential for own-revenue in comparison with remote rural regions (Bahl and
Linn, 1992; Bird, Ebel and Wallich, 1995; Oates, 1999; Bird, 2011; Bird, Dafflon, Jeanrenaud and
Kirchgssner, 2003; Mathur, 2006; and Smoke, 2007).

63. State governments are expected to provide adequate funds for local governments through
grants, the assignment of tax revenues, and authority to collect taxes, tolls and fees. Each state is
required to establish a finance commission (with five-year terms, as is the case with the central
finance commission) to determine the principles for providing local governments with adequate
resources (Oommen, 2010). Khemani (2007) tested whether delegation to an independent agency
makes a difference by contrasting the impact of partisan politics on two types of fiscal transfers to
states in the Indian federation over a period of time, 1972-1995. The results showed that transfers
that are determined by the central political executive are indeed distributed to favor particular
states that are politically important for the central ruling party, while transfers that are delegated
to an independent agency serve to constrain such partisan impact.

64. According to Mitra and Verma (1997), the logic for creation of units of self governance
below the state level (panchayat in the rural areas and municipalities in the urban areas) is
fourfold. First, it allows greater participation by the people in the process of governance. Second,

25
it is expected to lead to greater efficiency in the production and distribution of public goods.
Third, it is expected to provide a good training ground for public officials destined for higher
responsibilities, and last but not least, it addresses the general desire for a more accessible and
responsive government.

65. Alok (2006) observes that rural local governments in India are supposedly responsible for
rendering essential services, including sanitation, drinking water supply, street lighting, and rural
roads. They are also empowered to collect certain tax and nontax revenues. In most cases,
however, a considerable gap between own resources and requirements can easily be seen. The gap
is more noticeable for rural local governments than for their urban counterparts because of their
narrower resource base. Hence, rural local governments largely depend on financial support from
their state governments21.

3.2 THE COMPILATION OF DEVOLUTION INDEX

66. In the Indian context, the Devolution Index is defined as an aggregate of functions, funds,
and functionaries transferred by a state government to the Panchayati Raj Institutions (PRI), and
have been in use since 2006-2007 (Nagaraj and Soni, 2013). The Devolution Index had been
prepared primarily based on the research paper of Alok and Bhandari (2004) see also Alok
(2011). It measures the relative ranks of states and the extent of democratic decentralization. The
original index was revised in 2009 to include Framework in addition to the 3F (functions, funds
and functionaries). The concept of Framework seeks to rank states in accordance with their
adherence to the four basic constitutional mandates as enshrined in the 73rd Amendment, namely,
the presence and functioning of (i) state finance commission, (ii) regular elections (in a span of
five years), (iii) state election commission, and (iv) district planning committee. These four
components within the Framework are not comprehensive enough to accommodate all the
provisions envisaged in the Act but it has been assumed that the other mandatory provisions had
been adhered to by all the states. These four requirements have to be fulfilled by the states for the
purpose of calculation of devolution index from 2008-09 onwards. The revised version of the
devolution index is a stage-wise process, with the first stage being the fulfillment of Framework
criterion, and the second stage evaluates the devolution of functions, functionaries and finances.

67. According to Devolution Index Report 2014-15 titled How effective is devolution across
Indian States? Insights from the field, undertaken by the Tata Institute of Social Sciences, the
indicators used to compute the Devolution Index relate to three components and three tiers. The
three components are devolution of functions, transfer of functionaries, and devolution of
finances, and also attempts to assess the comparative achievements of States in establishing
systems of Infrastructure, Governance and Transparency (IGT). Data on each indicator is
collected for all the three levels of panchayats, namely, District, Block and Gram Panchayat (the
lowest level of elected government in rural India).

21
However, dependence on the centre is not unique to India. Hill, Balisacan and Piza (2007) and
Hutchcroft (2012) highlight many dysfunctional aspects of the internal revenue allotment (IRA) in the
Philippines, including (a) very substantial dependence on national government resources; (b) poor
incentives for revenue generation; and (c) more inefficient spending at the local level, evidenced by higher
percentages of non-career staff, an a priori indicator that normal recruitment procedures are bypassed.

26
68. The devolution of functions is based on two sets of indicators: the 29 sectoral functions
mandated by the Constitution of India as well as some general and administrative functions, and
the institutions transferred to PRIs. Devolution of functionaries is based on two indicators: the
number of own and transferred functionaries available at the Panchayat; and the composition of
the functionaries based on their categorization as professional, technical, administrative and
ministerial. Devolution of finances measures the quantum of funds that the Panchayat spent
autonomously. Infrastructure, Governance and Transparency have two indicators: infrastructure
as measured by percentage of Panchayat with rooms, computers and internet; and percentage of
Panchayat that meet a threshold of accounting standards.

69. Each indicator may have different maximum and minimum values, and different mean
values. The indicators are therefore normalized using a city-block (sometimes called Manhattan)
distance, which is a special case of the Minkowski class of -distance functions similar to those
used in Foster-Greer-Thorbecke (1984) family of poverty measures and the components of the
human development index (Batchelor, 1978; Wilson and Martinez, 1997; Anand and Sen, 1997;
Subramanian, 2004; and Subramanian, 2005) 22. The normalized distance function takes the form:
(actual value minimum value)/ (maximum value minimum value), where minimum and
maximum values for each indicator are observed among all the States. Each normalized index gets
equal weight in the component index, and the composite devolution index allocates equal weights
to the three components (Devolution of Functions; Functionaries and Finances; and
Infrastructure, Governance and Transparency).

4. TOWARD A DEVOLUTION INDEX FOR KENYA

4.1 THE CONSTITUTION AND THE ENABLING LEGISLATION

70. According to Articles 35 and 36 of the 1963 constitution (Kenya, 1963), Kenya was
divided into the Nairobi Area and 40 Districts nested within seven regions, with each of the 41
areas electing a Senator. The regions were Coast (Tana River, Lamu, Kilifi, Kwale, Mombasa,
Taita), Eastern (Marsabit, Isiolo, Meru, Embu, Kitui, Machakos), Central (Kiambu, Thika, Fort

22
As observed by Resende and de Sousa (2004), relatedness, expressing vicinity or diversity, is
often measured by a distance function. The Minkowski distance function takes the form D(x, y) =
(|xi - yi|r)1/r, where r is the Minkowski parameter and x and y are input vectors (one typically
being from a stored instance, and the other an input vector to be classified), with Manhattan/city-
block distance function assuming r=1 and therefore taking the form D(x, y) = |xi-yi|, and the
Euclidean distance function with r=2 and taking the form D(x, y ) = (|xi-yi|2)1/2 (Batchelor, 1978;
Wilson and Martinez, 1997; Legendre and Legendre, 1998; Deza and Deza, 2009). The Minkowski
inequality is applied in studies on the decomposability of the human poverty index among
groups within a country. The groups may be defined in terms of stratum (rural-urban), region, or
gender (male-female). Suppose m are mutually exclusive and collectively exhaustive groups, nj the
size of population subgroup j, and n is the total population of the country, then (nj/n) Pj()
P() summed over j =1, 2, m. Strict equality only holds when =1 (headcounts of poverty),
based on the Minkowski inequality elaborated in Hardy, Littlewood and Plya (1934, page 30)
and Harold T. Davis (1936, page 141); and applied to the human poverty index in Anand and Sen
(1997), and United Nations Development Programme (1997).

27
Hall, Nyandarua, Kirinyaga, Nyeri), Rift Valley (Turkana, Samburu, West Pokot, Trans Nzoia,
Elgeyo-Marakwet, Baringo, Laikipia, Nandi, Uasin Gishu, Kericho, Nakuru, Narok, Kajiado),
Nyanza (Central Nyanza, South Nyanza, Kisii), Western (Bungoma, Kakamega, Busia), and North-
Eastern Region (Mandera, Wajir, Garissa) 23. Along the way, Central Nyanza and South Nyanza
were replaced by Kisumu, Siaya, Homa Bay and Migori; Kisii was split into Kisii and Nyamira;
Kericho into Kericho and Bomet; Meru into Meru and Tharaka-Nithi; Machakos into Machakos
and Makueni; Kakamega into Kakamega and Vihiga; and Thika quietly removed from the list 24.

71. According to the Districts and Provinces Act 1992 (No. 5 of 1992 and No. 11 of 1992),
Kenya was divided into Nairobi area and 46 districts nested within seven provinces. The
Constitution of Kenya 2010 retained the administrative divisions in the Districts and Provinces
Act 1992 (including the numbering of districts/counties), renamed the 47 districts into counties,
and abolished any reference to Region (in the 1963 constitution) or Province (in the Districts and
Provinces Act 1992). Article 1(3)(4) of the Constitution of Kenya 2010 states that the sovereign
power of the people is exercised at (a) the national level and (b) the county level; and the word
central only appears in Article 231 in relation to the Central Bank of Kenya. However, much of
the contemporary commentary on the Constitution of Kenya 2010 erroneously uses the words
national and central interchangeably in reference to the National government.

72. The World Banks World Development Indicators 2016 shows that Kenyas surface area is
580.4 thousand square kilometers, population 44.9 million, and per capita Gross National Income
in purchasing power parity US $2,940; with the corresponding statistics for United States of

23
Mombasa was the capital of what was historically known as the Seyidie Province. Kiambu was also spelt
as Kyambu (Cranworth, 1912; and Parmenas Githendu Mockerie, 1934). Brief sketches of the life and works
of Parmenas Githendu Mukiri (Mockerie) appear in: The United Committee for the Taxation of Land
Values (1934), L. S. B. L. (1935), Parmenas Githendu Mockerie (1936), Bogonko (1982), Calder (1983),
Thurston (1987), Mackenzie (1991), Berman and Lonsdale (1992), Arlene A. Elder (1993), Lonsdale (1999;
2002), Campbell (2007), Muoria-Sal, Frederiksen, Lonsdale and Peterson (2009), Snaith (2010), Kinyua
(2010), Matera (2008; 2010; 2015), and Dubino (2013).
24
Thika was created as a sub-district in 1927; assumed district status in 1934; it then included portions of
Fort Hall, Nairobi and Machakos District; and Captain Cyril George Usher was appointed District
Commissioner with effect from 22 October 1934 (Kenya, 1934a; Kenya, 1934b; Patricia Stamp, 1986).
According to the National Assembly Official Record (Hansard) of 11 February 1966, Julius Gikonyo Kiano,
Minister for Labour, said that when we introduced the county council system of local government, the old
settler district Thika was finished. All the parts of the former Thika area south of the Chania River became
part of Kiambu County, and all the parts north of the Chania River of the former Thika became part of
Muranga County. All the Graduated Personal Tax and any other money collected today from those areas
goes to the Kiambu County and Muranga County respectively. The Assistant Minister for Lands and
Settlement, Jesse Mwangi Gachago, said that the colonial authorities gave Thika the status of a district for
the sole purpose of protecting the interests of the settlers in the area. The National Assembly resolved to
urge the Government to remove the overlapping jurisdiction between the Muranga County Council and
Thika District Administration, and if necessary to introduce such legislation as may be necessary for that
purpose. The Statistical Abstract 1967 (Kenya, 1967) stated that during 1966, Thika District was divided
for administrative purposes between Kiambu and Fort Hall Districts, along the line of the river which
previously divided the District between Kiambu and Muranga County Councils. The part of Thika District
administered with Fort Hall consists of 231 square miles, all of which is Alienated Government Land. As
per the Government Lands Act (Cap 280 of the Laws of Kenya), government land included land leased to a
private individual or company or reserved for use by a government department or corporation or institution
(alienated land), or land that had not yet been leased or allocated (unalienated land).

28
America at 9,831.5 thousand square kilometers, 318.9 million and US $55,900. The governance
architecture is therefore identical to splitting United States into 796 surface area equivalents, 334
population equivalents and 6,347 income equivalents where an attribute (area, population,
income) equivalent is the ratio of US value over the average for a Kenyan county.

73. The objects of the devolution of government as provided under Article 174 of the
Constitution of Kenya 2010 are:

a) to promote democratic and accountable exercise of power;

b) to foster national unity by recognizing diversity;
c) to give powers of self-governance to the people and enhance the participation of the
people in the exercise of the powers of the State and in making decisions affecting them;
d) to recognize the right of communities to manage their own affairs and to further their
development;
e) to protect and promote the interests and rights of minorities and marginalized
communities;
f) to promote social and economic development and the provision of proximate, easily
accessible services throughout Kenya;
g) to ensure equitable sharing of national and local resources throughout Kenya;
h) to facilitate the decentralization of State organs, their functions and services, from the
capital of Kenya; and
i) to enhance checks and balances and the separation of powers.

74. The constitution provides for (a) the Controller of Budget who shall oversee the
implementation of the budgets of national and county governments by authorizing withdrawals
from public funds under Articles 204 (equalization fund), 206 (consolidated fund and other public
funds) and 207 (revenue fund for each county government); and (b) the Auditor-General to audit
and report on the accounts of the national and county governments, and other arms of
government (e.g. funds and authorities of the national and county governments, courts,
commissions and independent offices established by the Constitution, the National Assembly,
Senate, and county assemblies). Apart from oversight role by commissions and independent
offices (Auditor-General and Controller of Budget) established under Article 248 of the
constitution, the governance architecture includes functional jurisdictions established under
various pieces of enabling legislation e.g. Water Act 2002 in the case of water services boards. The
Commission on Revenue Allocation (2015) has recommended that the devolved functions
currently being performed by the Water Services Boards and the Regional Development
Authorities be unbundled and transferred to county governments (see also, Kenya, Council of
Governors, 2015). The water services boards are Athi, Rift Valley, Tana, Tanathi, Coastal, Lake
Victoria South, Lake Victoria North, and Northern; and all receive both recurrent and
development budget from the Ministry of Water and Irrigation apart from Athi and Rift Valley
water services boards which fund their budgets using Appropriations-in-Aid (Kenya, Commission
on Revenue Allocation, 2015; Kenya, Transition Authority, 2015a). The Water Act 2016 addresses
these concerns and also amends the County Governments Act 2012 requiring (a) a county
government to comply with the respective policy and standards provided by the National
Government, and (b) a county government or any agency delivering services in the county to
adopt and implement tariffs and pricing policy subject to the existing National Government laws
and policies. The absence of a clear national policy on single-function jurisdictions and how they

29
interact with the division of functions between the national and county governments is a fertile
ground for obscurity and confusion.

75. Article 191 of the Constitution titled Conflict of Laws provides for a market-preserving
federalism by ensuring that counties do not take actions that are prejudicial to the economic,
health or security interests of Kenya or another county; or impedes the implementation of
national economic policy; especially on matters that require uniformity across the nation (e.g.
maintenance of economic unity, respect for mobility of factors of production, promotion of
economic activities across county boundaries, and protection of the environment). Article 209 of
the constitution states that only the national government may impose income tax, value-added
tax, customs duties and other duties on import and export goods, and excise tax; a county may
impose property rates, entertainment taxes, and any other tax that it is authorized to impose by an
Act of Parliament; and the national and county governments may impose charges for the services
they provide. Article 209(5) adds that the taxation and other revenue-raising powers of a county
shall not be exercised in a way that prejudices national economic policies, economic activities
across county boundaries or the national mobility of goods, services, capital or labour.

76. The proponents of market-preserving federalism argue that the economic gains theorized
by fiscal federalists will only be achieved in contexts where there is a clear delineation between
the authority of national and subnational officials, subnational governments have principal
authority over the economy, the central government polices the common market and ensures the
mobility of goods and factors across subgovernment jurisdictions, each level of government is
forced to internalize the costs of its own borrowing, and the national government is not so
powerful as to be able to alter unilaterally the scope of authority of each level of government
(Weingast, 1995; Montinola, Qian and Weingast, 1995; Qian and Weingast, 1996; and Qian and
Weingast, 1997) 25. As observed by Wibbels (2005), where such conditions exist, a federation is

25
The dilemma implicit in the standard recommendation in the literature for a strong but limited
government is captured by Pranab Bardhan (2000) who quotes the French poet Paul Valery: If the state is
strong, it crushes us; if it is weak, we perish see also Tanzi (1997; 2011) and Rodden and Rose-Ackerman
(1997). Figueiredo and Weingast (2005) investigate the twin dilemmas of (a) the national government
destroying federalism by overawing its constituent units, and (b) preventing the constituent units from
undermining federalism by free riding, insufficient provision of public goods, and other forms of failure to
cooperate. They conclude that, to survive, the federal structures must be self-enforcing, that is, the center
and the subnational units must have incentives to fulfill their obligations within the limits of federal
bargains.

30
expected to be market-preserving in the sense that political institutions credibly commit
authorities to respect economic and political rights 26.

77. Devolution has been operationalized through the enactment of various enabling
legislation, namely, the Public Finance Management Act 2012, and the various devolution laws
which includes the Transition to Devolved Government Act 2012, the County Governments Act
2012, the Urban Areas and Cities Act 2011, the Intergovernmental Relations Act 2012, and the
County Governments Public Finance Management Transition Act 2012.

78. The Transition to Devolved Government Act 2012 provides a framework for the
transition to devolved government pursuant to Article 15 of the Sixth Schedule to the
Constitution, and for connected purposes, and includes establishment of the Transition Authority.
The functions of the Transition Authority includes coordinating the transition to the devolved
system of government; facilitating analysis and phased transfer of the functions provided under
the Fourth Schedule of the Constitution to the national and county governments; determining the
resource requirements for each of the functions; and recommending the necessary measures
required to ensure that the national and county governments have adequate capacity during the
transition period to enable them undertake their assigned functions.

26
Vertical tax competition may bring about what Treisman (2007) calls vertical overgrazing due to overall
increase in bribes and its sister activity (taxation) levied by the layers of government. The reference to
corruption (bribery) as a sister activity to taxation, and the costliness of corruption (e.g. shifting a countrys
investments away from the highest value projects, and maintaining monopolies and preventing entry) is
from Shleifer and Vishny (1993). According to Berkowitz and Li (2000), a governments tax rights are
poorly defined when it and other governments and agencies can unilaterally levy taxes on the same tax
base, and Chinese local governments have more clearly defined tax rights than their Russian counterparts,
which may explain the difference in Chinas growth compared to Russia. Treisman (2006) and Jin, Qian and
Weingast (2005) also attribute Chinas rapid growth to its high local retention rates and Russias 1990s
stagnation to the central clawback of local revenues. Lin and Liu (2000) and Jin, Qian, and Weingast (2005)
measure fiscal decentralization in China after 1985 by the marginal retention rate of locally collected
budgetary revenue (how much of the revenue increments were kept by the provincial governments),
arguing that this captures the regional fiscal autonomy and fiscal incentives for provincial governments to
promote local business development. Blanchard and Shleifer (2001) also argue that provincial governors in
Russia often had an independent power base and were opposed to the central government, while political
centralization in China meant that leaders of local governments were appointed by the central government
and evaluated on the basis of their success in promoting the goals of the centre. In China, local governments
actively contributed to the growth of new firms, while local governments in Russia have typically stood in
the way, be it through taxation, regulation or corruption see also Bardhan and Mookherjee (2006c) for a
succinct summary of the literature on decentralization and government accountability in China and Russia.
However, unlike the market preserving federalism model used to explain the political economy of reform-
era China, Tsui and Wang (2004) paints a somewhat different picture of local governments as subordinate
and less autonomous agents of the centre, as the system was based on a set of performance criteria that
induce local cadres to allocate their fiscal resources in ways commensurate with the preferences of the
centre. Xu (2011) argues that Chinas regionally decentralized authoritarian regime is characterized by a
combination of political centralization and economic regional decentralization. Xu (2011) adds that by
linking regional performance to officials promotion, tournament-like regional competition provides high-
powered incentives to sub-national officials to initiate and to implement market-oriented reforms, while
simultaneously limiting corruption see also Tsai (2004) and Cai and Treisman (2006). Tsui and Wang
(2004) conclude that it is not a case of meals prepared by separate stoves but separate stoves under a
single menu.

31
79. The County Governments Act 2012 is intended to give effect to Chapter Eleven of the
Constitution that provides for county governments powers, functions and responsibilities to
deliver services and for connected purposes. The Intergovernmental Relations Act 2012
established (a) a framework for consultation and cooperation between the national and county
governments and amongst county governments; and (b) mechanisms for the resolution of
intergovernmental disputes pursuant to Articles 6 and 189 of the Constitution, and for connected
purposes. The Act provided for the establishment of the National and County Government
Coordinating Summit (including Intergovernmental Relations Technical Committee, and the
Intergovernmental Relations Secretariat) and Council of County Governors, and transfer and
delegation of powers, functions and competencies to the other level of government 27. Article 19
of the Intergovernmental Relations Act 2012 provided for establishment of Council of County
Governors. The functions of the Council include consideration of matters referred to the Council
by a member of the public in Article 20(1)g, and there is therefore no mandatory public or civil
society participation. However, Article 38 of the Intergovernmental Relations Act 2012 confers
the National and County Government Coordinating Summit the authority to make regulations for
the better carrying out of the provisions of this Act, which may include procedures for public
participation under this Act.

80. The Basic Education Act (No. 14 of 2013) provided for the establishment of County
Education Boards, whose functions include overseeing the operation and management of youth
polytechnics, preprimary education including early childhood care, and education programmes in
the county. The roles of county government include the provision of funds required for the
development of the necessary infrastructure for institutions of basic education and training used
for conducting preprimary education, childcare facilities, homecraft centres and village
polytechnics. The Basic Education Act of 2013 states that the national government may, upon
request and with agreement between both governments, transfer its functions relating to
infrastructure development of primary schools and secondary schools to a county government,
and may also allocate conditional grants to that county government to cater for the additional
responsibilities arising from the transfer.

81. The Urban Areas and Cities Act (Chapter 275) of 2011 provides for the classification,
governance and management of urban areas and cities; criteria of establishing urban areas; and for
the principle of governance and participation of residents and for connected purposes, as required
by Article 184 of the 2010 Constitution. A city is defined as having a population of at least
500,000, municipality (at least 250,000) and town (at least 10,000). Save for city counties (Nairobi
and Mombasa), the management of cities and municipalities is vested in the county government
and administered on its behalf by a board appointed through a competitive process by the county

27
Bolleyer (2009) distinguishes four intergovernmental interaction modes: (a) unilateral adaptation of a
measure observed in another jurisdiction unrelated to any intergovernmental agreement; (b) ad hoc
coordination as the result of direct governments interaction only whenever it serves their individual
interest; (c) co-decision denoting regular joint decision-making; and (d) the supragovernmental mode or the
voluntary creation of collective authority by some or all governments that supersedes the authority of the
individual governments in the sphere of responsibility assigned to it. In 1962, Senator Edmund S. Muskie of
Maine described intergovernmental relations as the hidden dimension of government: Performing as
almost a fourth branch of government in meeting the needs of our people, it nonetheless has no direct
electorate, operates from no set perspective, is under no special control, and moves in no particular
direction (United States Congress, 1962; also cited in Wright and Stenberg, 2007; Falleti, 2005; and Falleti,
2010).

32
executive committee, with the approval of the county assembly; a manager who shall implement
the decisions and functions of the board and shall be answerable to the board; and such other staff
or officers as a the county public service may determine. The funds of a board shall mainly consist
of monies allocated by a county assembly for the purposes of the management and service
delivery of the board; and its annual books of accounts are submitted to the County Executive
Committee for transmission to the Auditor-General. The functions of cities and municipalities as
provided in the Urban Areas and Cities Act of 2011 go beyond the functions of county
governments as provided in the Fourth Schedule of the 2010 constitution, especially with respect
to education.

82. Members of county assemblies have the roles of representation, legislation, and oversight.
In their representation role, they push the development agenda of their electorate through the
county assemblies. Once such agenda passes through the necessary legislative and budgetary
hurdles, the members of county assemblies may create pressure to favor particular suppliers
especially from their wards, and thus appropriate themselves executive powers over and above
their representation, legislative and oversight roles (contrary to Article 9(2) of County
Governments Act 2012). The operational relationship and separation of powers between the
national government and the legislature (National Assembly and the Senate) may therefore not be
wholly mirrored at the county level, which may provide an avenue for local elite capture
(Prudhomme, 1995; Bardhan and Mookherjee, 2000; Bardhan, 2002).

83. Part VII of the County Governments Act 2012 states that each county shall have a County
Public Service Board whose functions include establishment and abolition of offices in the county
public service, appointment of persons to hold or act in those offices, confirming appointments,
and exercising disciplinary control over and removal of persons holding or acting in those offices.
In case of conflict and disputes between the members of county assemblies and the county
executive (governor and deputy governor), and between professional staff and the county
executive, the system does not appear to have arbitrators on operational issues, which could lead
to gridlock in operations and policy making, abuse of office by the county executive and members
of county assemblies, and extraneous and imponderable factors in recruitment of county public
service and selection of suppliers 28.

84. The Local Government (Amendment) Act 1984 provided for the appointed by the Public
Service Commission (a) to every municipal council a town clerk, town treasurer, town engineer,
medical officer of health, and a public health officer; and (b) county and town council officers
(clerk, treasurer and engineer or works superintendent). As provided in Article 141 of the Local
Government Act (now repealed), the officers had the right to attend all meetings of that local
authority and of committees and subcommittees. If an officer advised the local authority or a
committee and the local authority or committee resolved to act against or reject his advice, he
could require that his advice be recorded in the minutes of that local authority or committee, and

28
See Gibson (2005) on national democratization and subnational authoritarianism. Gervasoni (2010) posits
that less democratic subnational regimes are more likely in provinces that receive disproportionately large
central government transfers and practically forgo local taxation. Gervasoni (2010) considers resource rents
(e.g. from oil and minerals) as a special case of fiscal rents, that is, revenues accruing to a state from an
external source, that do not depend on broadly taxing the domestic economy, and that have the potential to
be much larger than what such taxation could yield. Rentier incumbents therefore appear to be a threat to
democracy regardless of the specific source of their revenues.

33
the local authority could not act in accordance with a resolution which acts against or rejects the
advice of the officer unless and until the Minister for Local Government approved the resolution
in writing. The 1984 amendment was rightly criticized for taking away the powers of peoples
representatives (councilors, mayor and deputy mayor elected from among the councilors in a
municipal council, and chairman and vice-chairman elected from among the councilors in a
county or town council), but the opposite where professionals may be at the mercy of members of
county assemblies and county executive could have deleterious impact on staff morale and quality
of public services.

85. Article 84 of the Public Procurement and Asset Disposal Act 2015 provides some relief
since it gives the head of procurement function of a procuring entity the discretion to review the
tender evaluation report and provide a signed professional opinion to the accounting officer on
the procurement or asset disposal proceedings, which may provide guidance on the procurement
proceeding in the event of dissenting opinions between tender evaluation and award
recommendations. It adds that in making a decision to award a tender, the accounting officer
shall take into account the views of the head of procurement in the signed professional opinion.
The Public Procurement and Asset Disposal Act 2015 provides room for professional opinion in
procurement, but may not provide sufficient protection to professional staff, and does not cover
the whole range of policy and operational issues that the county executive/assembly and
professionals may have conflicting opinions on.

4.2 ELEMENTS OF DEVOLUTION IN RELATION TO KENYA

4.2.1 Functions

86. Article 186 of the Constitution recognizes that a function or power that is conferred on
more than one level of government is a function or power within the concurrent jurisdiction of
each of those levels of government, while a function or power not assigned by the Constitution or
national legislation to a county is by default a function or power of the national government. The
functions (powers) are therefore either exclusive to one level of government, concurrent to more
than one level of government, or residual (unassigned) but by default assumed to be a function of
the national government 29.

87. The functions of the Regional Assemblies as set out in Schedule 1 of the Constitution of
Kenya 1963 included (a) matters that are within exclusive legislative competence of Regional
Assemblies (Schedule 1: Part I), (b) matters that are within the concurrent legislative competence
of Parliament and Regional Assemblies (Schedule 1: Part II), and (c) matters to which executive
authority of regions extends but which are not within legislative competence of Regional
Assemblies (Schedule 1: Part III) see also Okoth-Ogendo (1972). According to Article 66(2),
Parliament did not have power to make laws for any part of Kenya other than the Nairobi Area
with respect to any matter specified in Part I of Schedule 1 of the 1963 Constitution. Article 72(3)
also specified that the executive authority of the Government of Kenya included all matters not

29
See, Brian Smith (1981), Ekpo (2007) and Ekpo and Englama (2008) for federal-state relations in Nigeria,
where legislative power has an exclusive list under the federal government, concurrent list as the province
of federal and state governments acting concurrently, and residual powers which belong exclusively to the
States, under which a State can legislate in matters that are not explicitly stated in the Exclusive Legislative
List or in the Concurrent Legislative List.

34
specified in Schedule 1 of the Constitution. Apart from the larger geographical scope of Regions in
the 1963 constitution (seven Regions excluding Nairobi Area), the distribution of functions
between National and the county governments as set out in the Fourth Schedule of the
Constitution of Kenya 2010 closely mirrors Schedule 1 of the 1963 constitution. The main
difference is that the 1963 Constitution placed primary (Standards 1-4), intermediate (Standards
5-8) and secondary education under Regional Assemblies, but excluding specified national schools
and colleges and any school for handicapped or disabled persons 30. The evolution of sharing of
powers and functions among areal jurisdictions includes the Local Government Act (Chapter 265
of the Laws of Kenya), the Transfer of Functions (Roads) Regulations, 1970 (Legal Notice No. 35
of 1970), the Transfer of Functions (Health and Education) Regulations, 1970 (Legal Notice No. 41
of 1970), the 2010 Constitution, and the Urban Areas and Cities Act of 2011; but does not include
fiscal relations between the Centre and Regions envisaged in the 1963 constitution since they
were hardly implemented.

88. According to the Transition Authority (Kenya, Transition Authority, 2015b), one of the
main indicators of implementation of devolution and in particular transition is the effective
analysis and transfer of devolved functions to the County Governments. The Transition Authority
has carried out three phases of transfer of functions to County Governments: via Legal Notice No.
16 of 1st February 2013, Kenya Gazette Supplement No. 116 (Legal Notices No. 137-183) of 9th
August 2013, and Legal Notice No. 33 of 17th March 2014. The functions for the initial transfer to
the county governments were those that were being undertaken by the defunct local authorities,
as they did not require a lot of new infrastructure, structures and mechanisms to deliver services
to the public (Legal Gazette Notice No.16 of 1st February 2013).

89. Phase Two of the Transfer of Functions was undertaken on 9th August 2013 vide Legal
Notices No. 137-183, but did not include functions that the Transition Authority deemed not
ready for transfer, notably the management of Agricultural Training Centres and Agricultural
Mechanization Stations, the personnel emoluments for all the transferred functions, the roads
function (pending agreement on classification), the mechanical and transport equipment
functions, and electricity, gas reticulation and energy regulation among others. The national
government continued performing these functions on behalf of the county governments as efforts

30
The fiscal relations between the Centre and Regions envisaged by the 1963 constitution included (a)
remitting to the Regions all tax or duty levied in respect of importation into Kenya of motor spirit or diesel
oil, and all excise tax or duty levied in Kenya, which included a specified percentage sharing formula among
Regions; (b) for commodities other than motor spirit or diesel oil, remitting to the Regions a sum equal to
thirty-two per cent of the proceeds of tax or duty in respect of importation into Kenya and excise tax or
duty levied in Kenya, and dividing among the Regions in shares proportionate to the respective numbers of
the inhabitants of each Region; (c) the proceeds of any tax, duty or fee levied in respect of the licensing of
motor vehicles or the drivers of motor vehicles were revenues of the Region; (d) sharing of any royalty
levied in respect of the extraction in Kenya of minerals (other than soda), with a specified formula for
vertical sharing between the Centre and Regions and horizontal sharing among regions; (e) payment of any
royalty levied in respect of the extraction of soda from the Lake Magadi soda deposit to the Rift Valley
Region; and (f) the central Government was to pay to each Region a sum equal to half the expenditure
incurred by that Region in respect of the Regional Contingent of the Police Force for that Region. Property
taxes and taxes on persons accrued to the Regions, other than taxation of bodies corporate and partnerships.
However, constitutional amendments undertaken during 1964-68 repealed the provisions relating to
Regions, and established a unicameral legislature by abolishing the Senate and merging the two Houses
(Okoth-Ogendo, 1972; Stamp, 1986).

35
to provide the necessary capacity continued. Phase Three of Transfer of Functions entailed the
transfer of the management and assets of Agricultural Training Centres and Agricultural
Mechanisation Stations under the agricultural sector, and was effected vide Legal Notice No. 33 of
17th March 2014.

90. A number of functions are shared by national and county governments, depending on
what is perceived as national and county responsibilities. For example, while the national
government was assigned universities, tertiary educational institutions, primary and secondary
education, and special education, counties were assigned preprimary education, village
polytechnics, home-craft centres and childcare facilities. Similarly, the national government was
assigned national referral health facilities, while counties are responsible for county health
facilities and pharmacies, ambulance services, primary healthcare, and veterinary services
(excluding regulation of the profession) 31 . The national government was assigned the
construction and operation of national trunk roads, while the county governments were assigned
county roads. In June 2015, the government published The Kenya Roads Bill 2015 that
categorizes all roads into 15 classes to be shared between national and county governments, while
the seven road classes under the national government are split between the Kenya National
Highways Authority and a yet-to-be formed Kenya National Secondary Roads Authority. The
management of public primary schools was the responsibility of city counties (Mombasa and
Nairobi) and municipalities nested within predominantly rural counties (e.g. Kisumu and Nakuru)
prior to the promulgation of the 2010 Constitution via the Transfer of Functions (Health and
Education) Regulations, 1970 (Legal Notice No. 41 of 1970). It is also unclear how preprimary
schools attached to public primary schools would be treated in the assignment of functions since
preprimary education is a county function and primary education a function of the national
government.

91. Olson (1969) introduced the notion of fiscal equivalence which posits that, for every
collective good, there is a unique boundary for which a separate government is needed, so that
there can be a match between those who receive the benefits of a collective good and those who
pay for it. This implies aligning the costs and benefits of impure public good provision with
multi-tiered federal systems, each with overlapping physical boundaries, but each with unique
boundaries relating to the provision of specific public goods. In pure public goods, one persons
consumption does not interfere with any other persons consumption of the same good, while
impure public goods are partially rivalrous or congestible and are often excludable e.g.
recreational facilities, police and fire protection, and roads and bridges (Cornes and Sandler,
1996). The question of whether the county revenue and expenditure functions individually or
collectively meet the criteria of fiscal (spatial-fiscal) equivalence is an empirical one.

92. Some functions assigned to counties have low revenue potential, while others are likely to
increase county revenue and have a relatively low impact on county expenditure (e.g. trade

31
It is safe to assume that a given citizen can carry out comparisons of performance in provision of goods
and services that are close substitutes, whether the benchmark government inhabits the same or a different
jurisdictional level from that in which the citizen dwells (Breton, 2006). The ability to compare
performance horizontally, coupled with geographical proximities, may see people of one jurisdiction seek
healthcare from neighboring jurisdictions, while vertical comparisons may lead to dependence on services
from higher-tier government see also Mukui (2012) on externalities (uncompensated interdependences)
in demand and provision of health services.

36
development and regulation). Since the funds component will capture own-revenue, those
functions with high revenue potential could be assigned low weights within the functions
component, or be used to measure functional autonomy under the devolution of funds.

4.2.2 Revenue and Expenditure Assignments

93. The county functions itemized in Schedule 4 of the Constitution have expenditure and
revenue implications. Under each of the 14 functions, it will be necessary to split them further.
For example, functions under agriculture include (a) crop and animal husbandry, (b) livestock sale
yards, (c) county abattoirs, (d) plant and animal disease control, and (e) fisheries. It is likely that
(a) crop and animal husbandry, (d) plant and animal disease control, and (e) fisheries are
expenditure assignments, while (b) livestock sale yards, and (c) county abattoirs are revenue
assignments. The sub-items under the 14 broad county functions in Schedule 4 of the
Constitution are agriculture (5), county health services (7), pollution and public nuisances (4),
cultural activities (9), county transport (5), animal control and welfare (2), trade development and
regulation (5), county planning and development (5), pre-primary and lower tertiary education
(4), implementation of specific national government policies on natural resources and
environmental conservation (at least 2), county public works and services (2), fire fighting
services and disaster management (at least 2), control of drugs and pornography (2), and public
participation in local governance 32.

94. The main sources of own revenue are: (a) property rates, which are levied under the
Valuation for Rating Act (Cap 266 of the Laws of Kenya) and the Rating Act (Cap 267), where
Valuation for Rating Act guides the preparation of the valuation roll and the Rating Act provides
for imposition of rates and forms of rating that are applicable; (b) business licensing through the
Single Business Permit; (c) entertainment taxes on the basis of Article 209(3)(b) and Fourth
Schedule (Part 2, 4) of the Constitution; (d) agriculture produce cess on tradable agricultural
produce; (e) other user fees and charges mainly linked with service provision; (f) licensing of
outdoor advertising; and (g) natural resources (exploitation and conservancy), where Narok

32
Dixit (2002) makes a distinction between providing services (e.g. education and healthcare) and coercing
resources or actions from the public (such as taxation, regulation and law enforcement), but adds that in
reality we have mixtures; for example, driving licenses are both a service and an instrument of
enforcement, and health inspection of restaurants provides a service to potential customers by carrying out
enforcement on the restaurateurs.

37
County is responsible for 70% of the Kshs 2 billion collected in 2015/16 33. Own-source revenue
contributed 13.7% of County Governments total receipts in 2013/14, 13.7% in 2014/15 and 12.1%
in 2015/16, or an average of 13% in the first three years of devolution; while transfers from the
National Government accounted for more than 84% over the same period (Kenya, 2017).

4.2.3 Intergovernmental Fiscal Transfers

95. Article 202 of the Constitution states that revenue raised nationally shall be shared
equitably among the national and county governments, and that county governments may be
given additional allocations from the national governments share of the revenue, either
conditionally or unconditionally. In addition, the equitable share of the revenue raised nationally
that is allocated to county governments shall be not less than fifteen percent of all revenue
collected by the national government, calculated on the basis of the most recent audited accounts
of revenue received, as approved by the National Assembly. Article 203 of the Constitution
requires that the following criteria shall be taken into account in determining the equitable
shares: (a) the need to ensure that county governments are able to perform the functions allocated
to them; (b) the fiscal capacity and efficiency of county governments; (c) developmental and other
needs of counties; (d) economic disparities within and among counties and the need to remedy
them; (e) the need for affirmative action in respect of disadvantaged areas and groups; and (f) the
need for economic optimization of each county and to provide incentives for each county to
optimize its capacity to raise revenue.

96. The Constitution also provided for the Equalisation Fund into which shall be paid one
half percent of all the revenue collected by the national government each year calculated on the
basis of the most recent audited accounts of revenue received, as approved by the National
Assembly. The national government shall use the Equalisation Fund only to provide basic services
including water, roads, health facilities and electricity to marginalized areas to the extent
necessary to bring the quality of those services in those areas to the level generally enjoyed by the
rest of the nation, so far as possible. The national government may use the Equalisation Fund
directly or indirectly through conditional grants to counties in which marginalized communities
exist. Article 204(2) of the Constitution refers to marginalized areas (which is not necessarily
synonymous with marginalized counties), and is intended to address horizontal equity nationally
and within the poorer counties. The Constitution of Kenya 2010 therefore sets a minimum of

33
The Rating Act, Cap 267 of the Laws of Kenya, provides that there shall be paid to the rating authority an
annual contribution in lieu of rates (CILOR) by (a) the Government in respect of Government land, and (b)
the community in respect of land vested in the community or any officer or authority of community. The
CILOR payable is calculated in accordance with the Valuation for Rating Act, Cap 266 of the Laws of
Kenya, provided that the public land would be rateable property if it were not public land. CILOR is, in
essence, property rates owed by the government for its property (Kelly, 1999). The World Bank Local
Government Finance Study (World Bank, 1992) noted that Government was heavily indebted to local
authorities as a landowner but the exact amount of unpaid CILOR was impossible to calculate as liabilities
had not been regularly notified by the Commissioner of Lands. Menon, Mutero and Macharia (2008) also
noted that CILOR funds are inadequate and unpredictable, making it difficult for local authorities to plan
for their utilization. The Task Force on Devolved Government of Kenya (2011) observed that the law
should require all the national government institutions, independent commissions, independent offices,
state corporations and non-state institutions to budget and pay rates due to their respective County
Governments. This entails the discontinuation of the CILOR payment system currently in operation due to
its ineffectiveness see also ActionAid International Kenya (2011).

38
fifteen percent of all revenue collected by the national government as the equitable share
allocated to county governments; while the Equalisation Fund is fixed at one half per cent of all
the revenue collected by the national government each year. In addition, Article 204 of the
Constitution that established the Equalisation Fund lapses twenty years after the effective date,
though Parliament (the National Assembly and the Senate) may enact legislation to extend it for a
further fixed period of years.

97. The Constitution established the Commission on Revenue Allocation, whose principal
function is to make recommendations concerning the basis for the equitable sharing of revenue
raised by the national government (a) between the national and county governments, and (b)
among the county governments. Every financial year, the Annual Division of Revenue Bill and
County Allocation of Revenue Bill are introduced in Parliament, with the former dividing
revenue raised by the national government among the national and county levels of government;
and the latter dividing among the counties the revenue allocated to the county level of
government.

98. The Commission on Revenue Allocation prepared the first revenue sharing formula
which was approved by the National Assembly in November 2012. The formula was based on five
parameters, namely, population (45%), poverty gap (20%), land area (8%), basic equal share (25%)
and fiscal responsibility (2%) 34. There were no proposed measures of Fiscal Responsibility, and it
is not apparent whether it relates to fiscal effort (e.g. increase in revenue collection over time)
and/or transparency and accountability. The population parameter may, or may not, reflect
populations in need of various services within the functions allocated to county governments by
the constitution e.g. in healthcare and preprimary education.

99. The Commission on Revenue Allocation has proposed the use of seven parameters in the
second revenue sharing formula. These are population (45%), basic equal share (25%), poverty
gap (18%), land area (8%), fiscal responsibility (1%), development factor (1%) and personnel
emoluments factor (2%). Fiscal discipline is calculated based on a countys own revenue receipts
as a proportion of a countys total expenditure receipts to average ratios across all counties; and a
county development factor is constructed with an allocation of a weight of 50 percent on health
indicators, 25 percent on education indicators, and 25 percent on infrastructure (Kenya,
Commission on Revenue Allocation, November 2014). The first generation formula capped a
countys proportion of land area between 1% and 10%, while land in the second generation
formula is uncapped. The poverty parameter uses the poverty gap index to ensure that the poorest
of the poor get the highest allocations, but it is unlikely that cost of delivering services increases
linearly with a countys land area (Mukui, 2012).

34
Land area includes national parks, game reserves, privately-owned ranches and plantations, gazetted
forests, water mass and unoccupied land. See Onyango, Keraro, Irungu and Aluoch (2015) for analysis of the
adequacy of the Commission on Revenue Allocation parameters for allocating the Equitable Share among
counties in Kenya. Mukui (2012) proposed the use of square root of land area as proxy for differences in
costs of providing services in spatial domains of different sizes see also, Greenberg and Zimmerman (2008)
and Greenberg, Irving and Zimmerman (2009) for US distribution of federal security funds to States. In
particular, Greenberg, Irving and Zimmerman (2009) used the square root of area as a multiplier in the
objective function due to the likelihood that security needs would not increase linearly with a linear
increase in land area.

39
100. For financial years 2013/14 and 2014/15, county governments were allocated Kshs 190
billion and Kshs 226.66 billion, respectively, as unconditional transfers. In addition, counties with
Level Five Hospitals were given a conditional allocation of Kshs 3.4 billion and Kshs 1.87 billion
for financial years 2013/14 and 2014/15, respectively. The equitable share of revenue was
increased in 2015/16 to Kshs 259.77 billion, in addition to Kshs 3.60 billion as grant for Level 5
Hospitals, Kshs 3.32 billion for Free Maternal Health Care, Kshs 900 million as Compensation for
User Fees Foregone, and Kshs 3.3 billion from the Road Maintenance Fuel Levy Fund. In 2013/14,
County governments generated a total of Kshs 26.3 billion from local sources, compared to Kshs
33.85 billion realized in 2014/15 and Kshs 35.02 billion in 2015/16. On average,
intergovernmental fiscal transfers constituted 88 percent of the total actual expenditures of
county governments for financial year 2013/14.

101. In addition to transfers to counties, the National Government Constituencies

Development Fund Act (No. 30 of 2015) recognizes the constituency as a platform for
identification, performance and implementation of national government functions, where
constituency means one of the two hundred and ninety areas into which Kenya is divided for
the purposes of election of members of the National Assembly. The National Government
Constituencies Development Fund (NG-CDF) consists of not less than 2.5% of all the national
governments share of revenue as divided by the annual Division of Revenue Act enacted
pursuant to Article 218 of the Constitution. The projects are in respect of works and services
falling within the functions of the national government under the Constitution; and must be
community-based in order to ensure that the benefits are available to a wide cross-section of the
inhabitants of a particular area. The intergovernmental fiscal transfers from national to county
governments are expressly provided for in the Constitution of Kenya 2010, with minimum
amounts based on all the revenue collected by the national government each year; while the
National Government Constituencies Development Fund is anchored on enabling legislation, is
for implementation of national government functions, and the total allocation is a percentage of
the national governments share of revenue (net of transfers to counties).

4.3 TOWARD A FRAMEWORK FOR MEASURING DEVOLUTION IN KENYA

102. As noted in the case of India, the devolution index is an aggregate of the functions, funds
and functionaries transferred by the state governments to Panchayati Raj institutions. The
analysis of the Framework for devolution is country-specific and needs to measure the extent to
which constitutional provisions with respect to devolution have been implemented in practice,
and reflected in the enabling legislation enacted to implement the letter and spirit of the
Constitution. This is expected to include the institutional setup, transfer of functions and funds,
capacity building to the lower tiers of government, and intergovernmental fiscal relations
between the national government and the county governments and horizontally between the
county governments. At the county level, the only indicator included is accountability with
respect to adherence to Fair, Accountable, Incorruptible and Responsive (F.A.I.R) governance
(Ivanyna and Shah, 2014; Shah, 2014a).

103. Article 176 (2) of the Constitution of Kenya 2010 provides that every county government
shall decentralise its functions and the provision of its services to the extent that it is efficient and
practicable to do so, but does not specify the spatial definition of sub-county decentralization,
and different counties may therefore follow different approaches (Boex and Kelly, 2011). The
County Governments Act 2012 (revised edition 2014) provides for creation of decentralized units,

40
namely, urban areas and cities within the county established in accordance with the Urban Areas
and Cities Act 2011, sub-counties equivalent to the constituencies within the county established
under Article 89 of the Constitution, wards within the county established under Article 89 of the
Constitution and section 26 of the Act, village units in each county as may be determined by the
county assembly of the respective county, and such other or further units as a county government
may determine. The Act also established the office of the sub-county administrator, office of
Ward administrator, and office of village administrator. Article 116 of the Public Finance
Management Act 2012 also gives counties the power to establish county public funds, probably
including Ward Development Fund, with members of county assemblies playing oversight rather
than executive roles (Kenya, Council of Governors, 2014). However, pending the enactment of
the necessary enabling legislation by the county assemblies to define the nature of such sub-
county decentralization, the decentralization process in Kenya can be considered as two-tier
spatial governance architecture (national and county).

4.3.1 Administrative and Political Decentralization

104. Article 6 of the Constitution states that Kenya is divided into counties as specified in the
First Schedule; and the governments at the national and county levels are distinct and
interdependent and shall conduct their mutual relations on the basis of consultation and
cooperation. The aspects of administrative and political decentralization are provided in Chapter
11 of the Constitution, including election and composition of county assemblies, election of
county speaker by the county assembly, recruitment of the county executive, election of county
governor and deputy governor, and cooperation between national and county governments. The
administrative and political aspects of devolution are therefore a part of the analysis of framework
and the extent to which such framework is reflected in the enabling legislation and actual
implementation. The measurement of administrative decentralization also needs to assess the
(positive or negative) roles of national institutions that are involved in the affairs of devolved
units e.g. the Controller of Budget and the Commission on Revenue Allocation.

4.3.2 Fiscal Decentralization

105. The elements of fiscal decentralization include (a) intergovernmental fiscal transfers, and
(b) transfer of functions. Intergovernmental fiscal transfers include regular transfers based on the
framework provided by the Commission on Revenue Allocation under the Equitable Share;
conditional grants (e.g. for Level-5 hospitals) based on principal-agent relationship since this is a
national function; and conditional grants under the Equalization Fund to counties with
marginalized communities, also under the principal-agent relationship. In addition, Article 187 of
the Constitution provides for mechanisms for transfer of functions and powers between levels of
government, and arrangements to ensure that resources necessary for the performance of the
function or exercise of the power are transferred.

41
4.3.3 Low-Hanging Fruit for a Devolution Index 35

106. Due to the nature of the Constitution of Kenya 2010, administrative and political
decentralization can be analyzed as part of devolution framework and the extent to which that
framework has been conceived through enabling legislation and in actual implementation. The
issues of capacity building and creation of mechanisms to ensure Fair, Accountable, Incorruptible
and Responsive (FAIR) county governance will merit discussion with relevant stakeholders with a
view to generating dimensions of measurement to be tried at a later date 36.

107. The commonly used indicators using interval scale data are subnational share of total
government spending/revenue, complimented by identification of subnational autonomy and
discretion on expenditure and revenue arrangements. The need for understanding subnational
autonomy arises because expenditure data does not separate local expenditures that are mandated
by the central government or are spent on behalf of central government; revenue/resources data
may fail to give breakdown between own revenue, intergovernmental transfers and other grants,
and subnational borrowing; and may not specify what proportion of intergovernmental transfers
is conditional as opposed to general purpose (Ebel and Yilmaz, 2002).

108. The elements of devolution in relation to Kenya that are currently quantifiable are
intergovernmental fiscal transfers, the extent to which functions have been transferred to the

35
Low hanging fruit refers to the fruit that grows low on a tree and is easy to reach, and therefore refers to
something that can be achieved very easily. The poetic clich has a long history, in both its literal and
figurative meaning. These include stooping to gather the low-hanging fruit (George Eliot, 1859); and jest
at love, as at a fruit low hung (Wilfred Scawen Blunt, 1893); at home, no rich fruit, hanging low (George
MacDonald, 1893); the trees bent their branches fruit-laden (Dora Sigerson, 1893); when low-hung fruit
is hardly clinging (Edmund Gosse, 1879); whose tender fruit did reach so low (Herman Melville, 1876);
the golden fruit hung low (Aaron Hill, 1753); whilst others low, and laden with their fruit (Charles
Goodall, 1689); and various translations of Torquato Tassos play, Amyntas, from Italian to English e.g. to
reach the fruit from the low-hanging boughes (Henry Reynolds, 1628; Walter W. Greg, 1906), the lowest
hanging fruit (Leigh Hunt, 1820) and could hardly reach to seize the luscious fig/ Depending from its
fragrant, lowly tree (Percival Stockdale, 1770). However, the low-hanging fruit should only be an
immediate option since it is less exposed to the sun, compared with the fruit higher up, and therefore ripens
slowly.
36
It is difficult to impress upon leaders of the moral necessities of combating corruption in Kenya, whether
in private or public sectors. Thomas Carlyle (1843) comes to mind in his appeal to capitalists: The Leaders
of Industry, if industry is ever to be led, are virtually the Captains of the World, if there be no nobleness in
them, there will never be an Aristocracy more. In reaction to Archbishop Mandell Creightons moral
relativism that was uncritical of past leaders, Dalberg-Acton (1887; 1907) argued that all people, leaders or
not, should be held to universal moral standards. Dalberg-Acton (1907) stated that: Power tends to corrupt,
and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise
influence and not authority, still more when you superadd the tendency or the certainty of corruption by
authority. There is no worse heresy than that the office sanctifies the holder of it. As argued by Fox (2010),
transparency is supposed to generate accountability as it mobilises the power of shame, yet the shameless
may not be vulnerable to public exposure. The constitution established an independent Ethics and Anti-
Corruption Commission and two independent offices (Auditor-General and Controller of Budget) although
controlling corruption [in Kenya] is less about the content of formal rules than about their enforcement
Kramon and Posner (2011). There may be meaning in assigning stealing and adultery two commandments
each in the Decalogue, one for coveting and the other for committing the act, though the link with
decentralization is contentious (in stealing) or nonexistent (in adultery).

42
counties, and the extent to which the county governments are eager to raise own revenue. Two
measures of devolution of finances commonly employed are (a) financial autonomy as measured
by Total state expenditure on assignments and grants to local bodies in a given year/Total state
expenditure (expenditure and net lending) in the same year; and (b) functional autonomy as
measured by Quantum of untied funds at the disposal of local bodies in a given year/Total funds
available with local bodies in the same year (Mitra and Verma, 1997). The two indices can be
normalized to yield a composite index of devolution of finances. The interpretation of the
composite index needs to be supplemented by analysis of transfer of revenue functions, and the
extent to which the county governments are eager to raise own revenue.

109. The issue of own revenue is important for design and success of federalism and
supranational governments (e.g. European Union) due to lack of adherence to fiscal discipline
(Milesi-Ferretti, 2004; Milesi-Ferretti and Moriyama, 2006; Sanguinetti and Tommasi, 2004; Koen
and van den Noord, 2005; von Hagen and Wolff, 2006; and Alt, Lassen and Wehner, 2014).
Lower-level tiers that are dependent on higher-level transfers tend to engage in off-budget
activities, fiscal gimmicks or creative accounting, and underreport or put little effort toward local
revenue collection due to the dual problem of common tax resources and soft budget
constraints (Inman and Rubinfeld, 1996; Wildasin, 1997; de Mello, 2000; Pisauro, 2001; Tanzi,
2001; Flscher, 2007; Melo, Pereira and Souza, 2014; and Shah, 2014a). The common pool
problem is like fishermen, who might collectively favor limits on overfishing but who
individually race to fish the declining stocks (Treisman, 2007).

110. Fiscal window dressing may include (a) recording yearly financial deficits as unpaid
commitments, (b) reclassification of expenditures in an attempt to fulfill spending limits set for
allocation between recurrent and development expenditures, and (c) improperly using earmarked
funds, for example health and educational funds, to finance infrastructure projects and campaign
expenses. Using an unbalanced panel of 27 OECD countries over the period 1970-2011,
Reischmann (2016) examined whether electoral motives influenced creative accounting, as
measured by the difference between the change in public debt and the deficit (stock-flow

43
adjustment) 37. The results suggest that governments strategically engaged in creative accounting
before regular elections so as to sugarcoat the budget balance. In particular, the greater the
electoral risk, the greater the incentives governors will have to pass deficits on to their rival
successors via unpaid commitments (Melo, Pereira and Souza, 2014).

111. As observed by Wildasin (1997), Pisauro (2001), Tanzi (2001) and Oates (2005b), the
potential sources of risk for local fiscal discipline include (a) having the central governments
implicit assurance that they will be bailed out if unable to meet their financial obligations; and (b)
perceiving the opportunity cost of nationally assigned and collected public revenues to be lower
than the revenues true social cost (the common pool problem) see also Dahlby (2008) for a
detailed analysis of the marginal cost of public funds in a federal system of government. The
larger the gap between local governments expenditure responsibilities and assigned revenue
bases, the worse the common pool problem. Schneider (2003b) also proves empirically that tax
collection goes down when power gravitates around local elected politicians, while Bahl and Linn
(1992) provide empirical evidence that an extensive use of transfers may discourage local tax
effort because local governments face lower incentives to search for new sources of revenue or to
more efficiently collect existing taxes.

112. Fiscal populism as a strategy for winning elections and retaining public office can
jeopardize the services subnational governments manage (but for which the central government
may have ultimate political responsibility), and too often the central government then gets
dragged in to provide bailouts, which can disrupt its own fiscal sustainability and reward the

37
As summarized in Irish Fiscal Advisory Council (2012), stock-flow adjustments (SFA) are
defined as the difference between the annual change in gross debt and the budget deficit (see
Anke Weber, 2012; Irwin, 2012; Seiferling, 2013; Abbas, Belhocine, El-Ganainy and Weber, 2014;
Cottarelli and Escolano, 2014; and Reischmann, 2016). This ensures consistency between net
borrowing (flow) and variation in the stock of gross debt. A positive SFA means that the
government debt increases more than the annual deficit (or decreases less than implied by the
surplus); while a negative SFA means that the government debt increases less than the annual
deficit (or decreases faster than implied by the surplus) see Hallerberg and Yloutinen (2010).
Following Barro (1979) and Bohn (2008), the governments budget identity describes that the
change in debt in period t equals the deficit in period t: Bt - Bt-1 = Dt, and Dt = Gt - Rt, where Bt-1
denotes debt at the beginning of period t, Bt denotes debt at the end of period t, Dt denotes the
deficit in period t, Gt denotes expenditures (including interest payments) in period t, and Rt
denotes revenues in period t (Reischmann, 2016). The debt level in period t is thus equal to the
initial debt level in period t-n plus the accumulated deficits. When the governments budget
identity (Bt - Bt-1 = Dt) does not hold, the difference between the change in debt and the deficit is
called a stock-flow adjustment (SFA) (von Hagen and Wolff, 2006). If the stock-flow adjustment is
positive, public debt increase by more than the budget deficit in period t would imply: Bt - Bt-1 =
Dt + SFAt. Such adjustments can arise for various reasons, including, (a) valuation effects (e.g. the
impact of exchange rate changes on the domestic currency value of foreign currency denominated
debt); (b) time of recording effects (deficits are based on accrual accounting while the change in
debt is based on cash flows); (c) below the line transactions such as privatization of state assets
and transactions in state-held financial assets; and (d) occasionally is a result of deliberate
attempts to obfuscate the true deficit. Irwin (2012) provides a useful summary of the various
accounting stratagems which governments have used to meet fiscal targets (thereby sidestepping
the need for true adjustment) and remedial actions to limit this type of fiscal non-transparency.

44
populist fiscal tactics of the recipient subnational governments (Webb, 2004). Carlsen (1994)
observes that central government needs to prevent local authorities from using deficits
strategically to press for higher grants, as local authorities can induce central government to
supply extra funds to avoid major tax rises or severe cutbacks in spending, and thus regulation of
local sector borrowing reduces local governments incentives to undertake strategic actions
directed at central government. Ter-Minassian (2007) adds that (a) due to the common pool
problem, each subnational government will have little incentive to save a windfall in shared
revenues, as it may fear that it could lead to future reductions in its share, in favour of higher-
spending jurisdictions; (b) if intergovernmental transfers to some subnational jurisdictions are
inadequate to meet centrally mandated standards in the provision of the public goods and services
they are responsible for, pressures to run deficits may mount; and (c) constitutionally established
autonomy enjoyed by subnational governments may prevent the central government from setting
and enforcing effective budget constraints on them.

113. As observed by Fjeldstad (2002) based on a study on local government taxation and state-
society relations in Tanzania, administrators prefer generating enough tax revenue to cover their
wage bill, while politicians are less inclined to raise taxes since it could reduce their popularity
and thus reduce their chances of reelection. If local sources of revenue were sufficiently large to
enable subnational governments to finance their expenditure tasks without having to depend on
central government support, they may still attempt to externalize the cost of their spending on
the common national pool by failing to raise the revenues that will meet their financial
obligations and leaving it to central government to bail them out. In addition, a subnational
government may under-provide services that produce substantial spillover benefits (e.g. a hospital
located near a highway) in order to induce national government bailouts, resulting in inefficient
outcomes for the system as a whole 38. The urban residents may also feel that their tax revenues
are used by county officials for the benefit of rural county residents, and thus reduce their

38
Apart from the usual explanations for growth of government in the federalism literature (e.g. Ehdaie,
1994; and Jin and Zou, 2002), Bagaka (2008) explored the financial implications of fiscal decentralization
under the Constituency Development Fund on the central governments operating budget in Kenya. The
devolved funds were utilized to start healthcare capital projects (clinics) at the local level, but at a cost of
exporting tax burdens (operations and maintenance) to the central government. This growth was
particularly influenced by the number of new employees and medical supplies needed to bring the local
capital projects into operation. In the current constitutional setup, this would be analogous to counties
funding capital projects for functions that fall under the national government (e.g. construction of primary
and secondary schools). Weingast, Shepsle and Johnsen (1981) define pork barrel projects as those whose
benefits are geographically concentrated and whose costs are spread through general taxation, and are
normally quite visible and monumental projects geared toward increasing the legislators electoral safety as
part of personal-vote seeking behavior (Olson, 1969; Weaver, 1986; Shugart, Valdini and Suominen, 2005).
However, DelRossi and Inman (1999) found that the price elasticities of legislators demand for distributive
public goods, such as flood control and large navigation projects, are relatively high and concluded that
one solution to the common pool resource problem is to have the legislators constituents pay a greater
share of the marginal costs of these local goods (also cited in Sato, 2007).

45
incentive to pay local taxes (Boex and Kelly, 2011) 39. Low revenue effort, coupled with deliberate
underreporting or misclassification of own revenue, is likely to give poor indicators of local fiscal
capacity and financial autonomy of subnational governments.

114. The concept of soft budget constraint was originally introduced by Kornai (1979; 1986)
to describe the behavior of state-owned enterprises in socialist states which were insulated from
the threat of bankruptcy as they could count on help from higher authorities to bail them out of
their financial difficulties. Dewatripont and Maskin (1995) illustrated the soft budget problem as a
sequential game in credit markets between lenders and borrowers. The term soft budget
constraint was broadened by Kornai, Maskin and Roland (2003) to encompass any entity that
operates with the expectation that there is a supporting organization that will underwrite its
financial losses. As argued by Oates (2005b; 2008), such an expectation of assistance undercuts the

39
As observed by Boex and Kelly (2011), there is a clear tension between the desire to strengthen the
county level on one hand (which in fact might result in the centralization of function to the county level),
and the desire to follow the subsidiarity principle, which would empower the people by assigning functions
and responsibilities to the lowest level in the territorial-administrative structure that would be able to
perform these functions in an efficient manner and strengthen urban development and management.
Smoke and Whimp (2011) also observe that: the revenues generated by county governments will come
mainly from urban areas that will lose their status as independent local governments. If predominantly
rural county governments allocate these resources away from urban services, the viability of urban centers
that drive Kenyas economy may be undermined. Handley, Kruse, Owegi and Whimp (2013) also list one
of the challenges of devolution as protecting the urban growth engine as a number of substantial urban
centers with viable existing local governments will thus be effectively recentralized into their county
administration, which may jeopardize the economic development potential of Kenyas urban areas.

46
incentives for more responsible fiscal behavior. The source of such perverse expectations 40 has
been explained as an outcome of a sequential game between the central government and fiscally
distressed decentralized governments (e.g. Wildasin, 1997; Qian and Roland, 1998; Goodspeed,
2002; Inman, 2003). The system itself induces fiscally irresponsible behavior, and the solution to
the problem thus involves a fundamental reform of political and fiscal institutions to alter the
whole structure of incentives for budgetary decision-making see also Pisauro (2001), Rodden
(2002), Plekhanov and Singh (2006), Sato (2007), Vigneault (2007), Besfamille and Lockwood
(2008), and Martinez-Vazquez (2011). However, Crivelli and Staal (2013) cautions against hard
and soft as two extreme positions on a scale of stringency, since much of the literature does not
take into account spillover effects that lead to underprovision of local public goods, as the bailout
may be in the interest of those individuals that are not located in the district inducing a bailout
41.

40
The term spirit of perverseness was coined by Edgar Allan Poe in his short stories The Black Cat, The
Imp of the Perverse and The Tell-Tale Heart to describe the primitive impulses of the human heart that
makes a man commit a vile or a stupid action, for no other reason than because he knows he should not;
and to do wrong for the wrongs sake only (Poe, 1884). He added that I am not more certain that I
breathe, than that the assurance of the wrong or error of any action is often the one unconquerable force
which impels us, and alone impels us to its prosecution. In The Black Cat, for example, the narrator
declares that he hanged the cat because I knew that in so doing I was committing a sin a deadly sin that
would place his immortal soul even beyond the reach of the infinite mercy of the Most Merciful and Most
Terrible God. Metempsychosis (transmigration of the soul) was also a prominent theme in Edgar Allan
Poes (1850; 1909) short stories Metzengerstein, Morella and Ligeia, principally to wreak vengeance on
the narrator for wrongs inflicted in an earlier life (Snodgrass, 2005). In the corporeal realm of public policy,
the more common notion is that of perverse incentives (negative unintended consequences), especially in
relation to the potential distorting effects of taxation in the form of costly administration of taxes and
radical tax-avoiding behavior. A notable example is the window tax a kind of predecessor of the modern
property tax levied in England between 1696 and 1851 on dwellings, with tax liability based on the
number of windows. The tax led to efforts to reduce tax bills through such measures as the boarding up of
windows and the construction of houses with very few windows, with the attendant pernicious health and
aesthetic effects (Oates and Schwab, 2015) see also Andrew E. Glantz (2008), John Young (1794), Stephen
Dowell (1884; 1888), M. Humberstone (1841) and Edwin R. A. Seligman (1899; 1914). The second example
was the introduction of the hut tax in Kenya in 1901 as a method of tapping wealth from Africans. The
government had no accurate way of getting at the true value of this wealth other than by looking at the
number of wives a man had, as it was assumed that a womans hut belonged to her male relative, who was
her owner, and hence a tax on huts was a wife tax. The main avenue of tax avoidance was by overcrowding
into fewer huts with the effect that peasants were no longer constructing new huts (Tarus, 2004). The
colonial administration countered this overcrowding by introducing a Native Hut and Poll Tax Ordinance
in 1910 that was exacted from the owners of huts and from every adult male who did not own a hut. The
poll tax was levied on every able-bodied male over the age of sixteen, with armpit hair as one of the proxies
for eligible age since chronological age was often not well recorded see also Charles Eliot (1905), Charles
Allsopp Hindlip (1905), Lugard (1922), Lonsdale and Berman (1979) and Aiyar (2011).
41
A potential source of spillovers in contiguous counties is the difference between night population
(enumerated in population and housing censuses and used in the formula for horizontal allocation of
revenue among counties) and day population (e.g. Nairobi and its dormitory towns in Kiambu, Machakos
and Kajiado counties). However, the expenditure functions allocated to county governments are unlikely to
have significant interjurisdictional spillovers, compared to functions such as secondary and postsecondary
education and national referral and (former) provincial hospitals that were allocated to the national
government.

47
115. The functions in the Fourth Schedule of the Constitution include services that have the
characteristics of (a) private goods (e.g. agricultural services, water supply, sewerage and drainage,
and sanitation), (b) public goods (e.g. health services, county roads and street lighting, preprimary
education and basic tertiary education, and fire fighting services and disaster management), and
(c) regulatory duties and the development of markets (e.g. control of air and noise pollution and
other public nuisances, trade development and regulation, and control of drugs and pornography).
Article 209(4) of the constitution also permits the national and county governments to impose
charges for the services they provide. Since each level of government can levy user fees in the
course of providing services, each function in the Fourth Schedule of the constitution has
implications on revenue and expenditure. An unbundled list of functions needs to be elaborated,
together with each functions implication for expenditure and own revenue in urban and rural
spaces and in different spatial domains 42 . The dimension of functions should only include
expenditure assignments, as stipulated in Fourth Schedule of the Constitution, with the indicative
list in the Schedule being elaborated further into distinct functions; while unbundled functions
that are net sources of revenue are part of measurement of financial autonomy under fiscal
decentralization.

5. INFORMATION AS A CATALYST FOR BUDGETARY REFORM

116. Alesina and Perotti (1995; 1999) observed that budgets of OECD countries were extremely
complicated, and were therefore able to hide government liabilities, by either shifting them to
future budgets, or using funds that are outside the budget. Alesina and Perotti (1999) observed
that a related common practice is that of adopting overoptimistic projections of macroeconomic
variables, so that revenues are overestimated and spending needs are underestimated. Then, at the
end of the fiscal year, bad luck is held responsible for the unexpected additional deficit. In
addition, politicians have little incentive to produce simple, clear, and transparent budgets as
explained by (a) the theory of fiscal illusion, where voters typically overestimate the benefits of
public spending and underestimate the costs of taxation, current and future; and/or (b) creating
ambiguity even when they face a rational electorate so as to retain a strategic advantage and thus

42
Unbundling of functions refers to the process of further clarification of functions with the specific intent
of defining and allocating functions and competencies to various actors in a manner that leads to effective
and efficient production of a public service (Kenya, 2011).The unbundling of functions and their revenue-
expenditure implications under different spatial domains can give a general picture of (a) own-revenue
potential, and (b) the relevant parameters in design of intergovernmental fiscal transfers to address
horizontal fiscal imbalances. The demand and costs of delivering services under each expenditure
assignment is likely to be influenced differently by each parameter (e.g. population and its gender-age
profile, land area, state of infrastructure, and poverty incidence and depth), while the proportion of an
expenditure function to total county or sub-county expenditures is likely to exhibit wide disparities across
the nation.

48
use fiscal deficits and overspending to achieve opportunistic goals 43. For example, Poterba (1994)
notes that, in gubernatorial election years, tax increases and spending cuts are both significantly
smaller than at other times. Therefore, opportunistic politicians who want to be reelected can
take advantage of this confusion by raising spending more than taxes in order to please the
fiscally illuded voters 44. Alesina and Perotti (1995) have raised some doubts about the role of
fiscal illusion as the main explanation of large and persistent deficits. However, lack of
transparency and voters confusion can certainly interfere negatively with effective budget
control, particularly when substantial fiscal adjustments are needed.

117. von Hagen and Harden (1994; 1995; 1996) provided the first comprehensive empirical
analysis of the effects of budgetary procedures on fiscal outcomes in European countries. von
Hagen and Harden (1994) study on national budget processes and fiscal performance started from
the premise that the budget process is a constitutional instrument of each member state of the
European Union as a bond between the executive branch of government and the legislature. They
show that accountability deficit tend to produce results that are conducive to fiscal illusion and
to fiscal deficit bias (ignoring the future tax costs of borrowing). Their results showed that one of
the important parameters of the budget processes is the informativeness of the budget draft. The
national budgetary procedures are therefore important determinants of fiscal performance, and

43
The theory of fiscal illusion or what Cavaco-Silva (1977) and Peacock (1992) call a state of permanent
fiscal anaesthesia - is illustrated clearly by Wagner (1976) and Buchanan and Wagner (2000), while Hahn
(1949) had studied illusion in the context of the illusions of the war boom and Keynesian economics
(including the illusion of an easy-money policy and deficit spending). John Stuart Mill (1848) had also
observed that there is a popular feeling, of old standing, in favour of indirect, or it should rather be said in
opposition to direct, taxation, as an Englishman dislikes, not so much the payment, as the act of paying
and the money which he is required to pay directly out of his pocket is the only taxation which he is quite
sure that he pays at all see also Sausgruber and Tyran (2005). Oates (1988) and Dollery and Worthington
(1996) examine the empirical analysis of the five main hypotheses subsumed under the generic term fiscal
illusion. The five hypotheses are (a) revenue structure complexity, as the total tax load on an individual is
fragmented so that he confronts numerous small levies rather than a few significant ones; (b) income
elasticity of the revenue system, where revenue systems with a relatively high income elasticity tend,
during periods of economic growth, to be associated with more rapid budgetary expansion; (c) the flypaper
effect which holds that a tendency exists for categorical intergovernmental lump sum grants to increase
public expenditure by more than an equivalent increase in income from other sources; (d) renter illusion,
where an increase in a jurisdictions proportion of renters will ceteris paribus increase the level of
expenditures since only voters directly levied (owners) will correctly perceive the tax-price of the local
public good; and (e) debt illusion, where voters are more aware of the costs of public sector programs if they
are paid for through current taxation rather than public sector borrowing. As observed by Banzhaf and
Oates (2013), the hypothesis of a renter effect would be consistent with renters being more likely to
support those investments financed with property taxes and perhaps debt, but not those financed with sales
taxes. The pervasive finding that local jurisdictions tend to spend more on local services the larger the
fraction of renters among their residents is supported by Oates (2005a) who found a typical renter effect on
local public expenditure of the order of ten percent. However, Oates (1988) observes that the fiscal-illusion
literature has identified a number of instances of potential illusion, but it has not explored with much care
or rigour their conceptual underpinnings.
44
Following Watson (1982) reasoning, it can be argued that Kenyas new constitution (and the enabling
legislation that gave it life and meaning) is a capital asset that gave rise to an initial allocation of portfolios,
and can be traded (negotiated exchanges) when the actual and expected values of these assets change. The
returns to custodians (though perhaps not the owners) of constitutional capital (politicians) may take the
form of cash or consumption services, and for this to occur these politicians must maximize their chances
for reelection.

49
can contain fiscal illusion and deficit bias, thereby avoiding excessive levels of government
spending and excessive debts and deficits.

118. Alesina and Perotti (1995; 1999) and Stein, Talvi and Grisanti (1999) define budgetary
institutions as the set of rules, procedures, and practices according to which budgets are drafted,
approved, and implemented. Stein, Talvi and Grisanti (1999) divided budgetary institutions into
three different categories: namely, (a) rules that impose numerical constraints on the deficit e.g.
balanced-budget rules; (b) procedural rules that govern the drafting of the budget by the
executive, its discussion in the legislature, and its execution; and (c) the transparency of the
budgetary process, that is, the extent to which the budget document provides an accurate
representation of projected expenditures, revenues, and deficits, including avoidance of
extrabudgetary items, hidden liabilities, and contingent liabilities. In the context of fiscal
decentralization, Sutherland, Price and Joumard (2006) define fiscal rules as a set of institutional
constraints on policymakers decision-making discretion. Such rules may be imposed on sub-
central governments by a higher level of government, or sub-central governments may adopt
them themselves where constitutional arrangements grant them the autonomy to do so.

119. Based on review of several empirical studies, Poterba and von Hagen (1999) also reported
that transparency appears to be correlated with budget outcomes, where a transparent budget
process is one that provides clear information on all aspects of government fiscal policy,
consolidates all fiscal activity into a single bottom line, and are easily available to the public and
to participants in the policymaking process 45. Dabla-Norris, Allen, Zanna, Prakash, Kvintradze,
Lledo, Yackovlev and Gollwitzer (2010) present multi-dimensional indices of the quality of
budget institutions in low-income countries. The paper provides preliminary empirical support
for the hypotheses that strong budget institutions help improve fiscal balances and public external
debt outcomes; and countries with stronger fiscal institutions have better scope to conduct
countercyclical policies. In addition, the analysis suggests that the most significant institutions
are those related to planning and implementing the budget, and to the sustainability,
comprehensiveness, and transparency of the budget process (Dabla-Norris, Allen, Zanna,
Prakash, Kvintradze, Lledo, Yackovlev and Gollwitzer, 2010).

120. Studies have adopted various measures of performance depending on whether the
comparisons are between nation states or subnational units. For example, Plekhanov and Singh
(2006) study on subnational government borrowing focused on vertical fiscal imbalance, the
existence of any bailout precedent, and the quality of fiscal reporting. Stein, Talvi and Grisanti
(1999) study on the links between institutional arrangements and fiscal performance in Latin
America considered four measures of performance, namely, the size of the public sector, fiscal
deficits, the size of the public debt, and the degree of procyclicality of fiscal policy in response to
business fluctuations; and two institutional dimensions, namely, electoral systems and budgetary

45
A comprehensive definition of fiscal transparency is given by Kopits and Craig (1998) also cited in Alt,
Lassen and Rose (2006): Fiscal transparency is defined as openness toward the public at large about
government structure and functions, fiscal policy intentions, public sector accounts, and projections. It
involves ready access to reliable, comprehensive, timely, understandable, and internationally comparable
information on government activities whether undertaken inside or outside the government sector so
that the electorate and financial markets can accurately assess the governments financial position and the
true costs and benefits of government activities, including their present and future economic and social
implications.

50
procedures. Stein, Talvi and Grisanti (1999) defined procyclicality of fiscal policy as the tendency
for public expenditures to increase and tax rates to decline during economic expansion, and the
opposite during recessions see also Alesina, Hausmann, Hommes and Stein (1999), Manasse
(2006) and Alesina, Campante and Tabellini (2008) for a detailed discussion of procyclicality of
fiscal policy.

121. In a study on the institutional responses to subnational government borrowing adopted by

a sample of 43 countries over the period 1982-2000, Plekhanov and Singh (2006) showed that one
of the effective constraints for containing local fiscal deficits included the quality of fiscal
reporting. In particular, common standards of subnational governments budgeting and financial
reporting facilitated monitoring of their budget execution, making the enforcement of rules more
effective. Plekhanov and Singh (2006) also show that the success of cooperative arrangements
(between the national and the lower levels of government) depend on the presence of common
standards in financial reporting, and increases the effectiveness of centrally imposed fiscal rules.

122. Ahmad, Albino-War and Singh (2006) observed that standardized generation of
information was a major feature of the reform of subnational finances in Brazil in the late 1990s.
The Fiscal Responsibility Law approved in 2000 (a) introduced a golden rule provision (borrowing
only for investment and not to fund current spending); (b) imposed new uniform accounting,
planning and transparency requirements on all levels of government; (c) attempted to enhance
the credibility of the central governments no-bailout commitment; and (d) mandating prison
sentences for illegal efforts to issue bonds and stipulating the dismissal of a mayor or governor if
debt limits or personnel expenditure ratios are exceeded. Consequently, the fiscal position of
states improved significantly 46.

123. Ahmad, Albino-War and Singh (2006) argue that budgets must be presented in a common
format, as there are normally problems with managing macroeconomic challenges where
common reporting standards are absent. Ahmad, Albino-War and Singh (2006) showed that
decentralization relying solely on community safeguards will generally be insufficient to ensure
pro-poor spending, and that there needs to be concomitant emphasis on the generation of
accurate and timely information on the actual spending, if not on the outcomes. This needs to be
supplemented by effective mechanisms to detect, prevent and punish misuse of resources or
diversion of funds.

124. Poterba and von Hagen (1999) notes that in empirical work, there are concerns about the
endogeneity of budget rules, as they are not randomly assigned to nations or subnational
jurisdictions, but rather are either (a) the product of deliberate choice by voters and/or their
elected representatives, or (b) endogenous to past performance since institutional and budgetary
reforms take time to implement. The causes of endogeneity are usually (a) uncontrolled

46
However, Samuels (2003a; 2003b) cautions that (a) many of Brazils municipalities lacked the technical
capacity to fulfill the bills administrative requirements for budget planning and transparency; (b) economic
crisis could trigger a revisit to the issue of subnational debt and debt refinancing; and (c) one uniform rule
might not apply since exogenous economic shocks will not have similar effect in each and every state and
municipality. In particular, Samuels (2003a) described federalism in Brazil as predatory at both vertical
and horizontal scales, with the vertical characterized by states and municipalities preying on the central
governments coffers, and the horizontal characterized by presence of strong incentives toward competition
rather than cooperation between subnational units. On the latter, subnational units renounce tax revenue
to attract investment and as a result all governments lose revenue.

51
confounder(s) that affects both budgetary processes and outcomes e.g. administrative and political
capital; and (b) a loop of causality between budgetary processes and outcomes. The association
between an explanatory factor and an outcome is therefore the combination of direct effect,
indirect effects, and joint effects attributed to a common cause. However, much of the
epidemiological and economics literature on confounding has given priority to the concept of
confounding over that of a confounder. VanderWeele and Shpitser (2013) argue that control for
all confounders should suffice to control for confounding, and each confounder in some
context helps eliminate or reduce confounding bias see also Robins and Morgenstern (1987),
Morabia (2011), Tan (2013), and Chambaz, Drouet and Thalabard (2014). Poterba and von Hagen
(1999) note that further work is needed to explain where budget rules come from, and what
factors lead to changes in these rules over time. As stated by Watson (1982), though in a different
context, post hoc ergo propter hoc obviously is not the surest analytical guide, though perhaps it
does not always lead the analyst astray.

125. The abovementioned studies provide some empirical and intuitive analysis that relates
budgetary outcomes to budgetary processes, and that one of the important parameters of the
budget process is the informativeness of the budget draft. The transparency of the budgetary
process includes avoidance of extrabudgetary items, hidden liabilities, and contingent liabilities.
The fiscal reporting of national and subnational units should also adopt common standards as this
facilitates monitoring of budget execution and increases the effectiveness of centrally imposed
fiscal rules 47. In addition, decentralization relying solely on community safeguards will generally
be insufficient to ensure pro-poor spending. As summarized in Poterba and von Hagen (1999),
the empirical evidence suggesting that institutions matter is stronger than the evidence on the
mechanisms by which these institutions matter.

126. The common reporting formats would assist in future detection of anomalies in the
formula for horizontal sharing of revenues among counties based on factors such as (a) the
relevance of the parameters and their associated weights in relation to expenditure functions; (b)
accuracy of data for the selected parameters; (c) costs of providing various services in different
spatial domains; (d) spillover effects across spatial jurisdictions, and between national and county
governments for shared functions (e.g. health); (e) demand for public services based on, say,
burden of disease and private provision of similar services; and (e) and own-revenue potential of
various functions transferred to the counties. As argued by Shah (1996), expenditure needs have
traditionally been more difficult to define than is the revenue equivalent (fiscal capacity) see
also Mclarty (1997) response to Shah (1996) and his reply in Shah (1997). An equalization
program that finances most of provincial expenditures separates spending and taxing decisions,
and therefore eliminates a measure of local accountability, may create incentives for fiscal
mismanagement, and could be associated with high public employment and wages (Shah, 1996).

127. There may therefore be a case for adopting common financial reporting standards, which
could include a common data classification system such that financial data meets global standards

47
As observed by Fairlie (1906) more than a century ago, in most American cities municipal accounts and
financial reports are still unintelligible to the ordinary citizen; and even where an understandable system is
adopted in a particular city it is likely to be of little use in making comparisons with other cities using other
systems. It is only on the basis of a uniform system that accurate and comparable information can be
secured. Fairlie (1906) also cited John Stuart Mill (1873) observation that power may be localized, but
knowledge, to be most useful, must be centralized.

52
of government finance statistics, e.g. in accordance with the Classification of the Functions of
Government (COFOG) in United Nations (2000) and International Monetary Fund (2014), and
classifications of revenue and expense in Appendix 8 of International Monetary Fund (2014). The
Government Finance Statistics Manual (International Monetary Fund, 2014) requires that the
same rules governing the treatment of the production of goods and services by central and state
government units are applied to local governments. The standardization of reporting systems
would simplify the work of statistical agencies charged with preparing consolidated accounts of
the public sector, and will have economies of scale in terms of conceptualization, centralized
training, and knowledge management. The analysis of comparable budgets will make it possible to
understand trends in costs of delivering services in different geographical domains, which could
be useful in future revisions of the formula for horizontal sharing of revenue among counties.
Comparable and publicly available data would also attract independent researchers, and thus
provide an evidence-based forum for charting the future of devolution in Kenya. In addition,
modern budgeting techniques (e.g. program budgeting, performance budgeting and zero-based
budgeting) presuppose broad knowledge about local issues, such as fiscal indicators and sector
performance. The monitoring of performance-based contracting, whereby different incentive
mechanisms are built into contracts with service providers such as district water companies, also
requires a carefully designed information system that goes beyond accounting data (Yilmaz,
Hegedus and Bell, 2003).

128. The enabling legislation provide for harmonization of reporting standards via Article 104
of the Public Finance Management Act 2012, which states that the responsibilities of a County
Treasury includes consolidating the annual appropriation accounts and other financial
statements of the county government in a format determined by the Accounting Standards
Board, and ensuring compliance with accounting standards prescribed and published by the
Accounting Standards Board from time to time. The sharing of information is not restricted to
vertical communication between national and county governments, as Article 5(d) of the
Intergovernmental Relations Act 2012 states that one of the objectives of intergovernmental
structures is providing a forum for sharing and disclosing of necessary data and information.

129. Charles Lamb (1822) essay on the discovery of roast pork is believed to be the source of
the idiom burning a whole house down to roast a pig (overkill) and is often cited as an
illustration that discovery, and innovation, can be accidental and spontaneous. However, there
are costs to changing budgetary processes and products (packaging of financial information), and

53
there is therefore need for coordinated program of activities, and perhaps technical assistance
from relevant local and international institutions 48.

6. CLIENTELISM AND ELITE CAPTURE

6.1 CLIENTELISM

130. According to van de Walle (2007) typology, three distinct forms of clientelism can be
distinguished: tribute, patronage and prebends. Tribute describes the traditional practice of gift
exchange in peasant societies, in which patron and client are engaged in bonds of reciprocity and
trust. The second form (patronage) can be defined as the practice of using state resources to
provide jobs and services for political clienteles, and is typically dispensed through political
parties in order to gain electoral advantage. A third type (prebendalism) involves handing out a
public office to an individual in order for him/her to gain personal access over state resources. For
example, hiring a member of ones ethnic group for a senior position in the customs office is an
example of patronage, but allowing the customs officer to use the position for personal
enrichment is an example of a prebend (van de Walle, 2007) see The Catholic Encyclopedia
(Herbermann, Pace, Pallen, Shahan and Wynne, 1913) for a formal definition of prebend.

131. Max Weber (1978) described prebends or prebendal organization of offices as all cases of
life-long assignment to officials of rent payments deriving from material goods, or of the
essentially economic usufruct of land or other sources of rent, in compensation for the fulfillment
of real or fictitious duties of office, for the economic support of which the goods in question have

48
In Charles Lambs (1822) anti-vegetarian satire, A Dissertation upon Roast Pig, pigs perished when the
hut of a Chinese swineherd caught fire. The swineherd burnt his fingers on the hot body of a pig and
naturally licked his fingers to alleviate the pain. In the process, he discovered the rich flavor of roast pig,
and shortly after all China was ablaze with burning pig pens sacrificed for the sake of producing the new
delicacy; and the insurance offices one and all shut up shop see the succinct summary in Armsby (1917).
Perhaps to give pigs a good name, what legislative and reform processes are (messy and complicated but
with positive results) and what they are not (spontaneous) use sausages and roast pork as metaphors. As
observed by the illustrious rhymer John Godfrey Saxe, laws, like sausages, cease to inspire respect in
proportion as we know how they are made (University of Michigan, The Chronicle, 27 March 1869). As a
corollary, sausage-makers (lawmakers) could also develop distaste for sausages (obeying the law) see Lord
David Neuberger (2015). In his speech at the Annual Conference of the Supreme Court of New South
Wales, Sydney, Lord David Neuberger had observed that eating sausages is fattening and voluntary,
whereas obeying the law is neither. That is just as well because many people who have engaged in sausage-
making will not thereafter eat sausages, whereas I have observed no such distaste for obeying the law
among law-makers. Lord David Neuberger added that the political give and take can often seem pretty
unedifying, involving, as it does, messy compromises, last minute amendments, sops to interest groups, half-
baked concessions, crowd-pleasing sound-bites, and grandstanding provisions. John Godfrey Saxe is known
for the poem The Blind Men and the Elephant retelling an Indian fable that has been used as a metaphor
for religious intolerance so oft in theologic wars (John Godfrey Saxe, 1859).

54
been permanently allocated by the lord (italics in original) 49. In Africa, much of the recent
research on prebandalism has focused on Nigeria see, for example, Joseph (1983; 1987),
Uwazurike (1996), Lewis (1996), Ikpe (2000) and the collection of articles in Adebanwi and
Obadare (2013). Perhaps researchers shy away from using the word prebandalism due to its
ecclesiastical origins (Herbermann, Pace, Pallen, Shahan and Wynne, 1913; and Brewer, 1882);
looting the cathedrals estate was not the deliberate intention in appointing prebendaries; the
official stipends (prebends) earned by prebendaries were fairly modest (Gilbert, 1836); and its
modern usage sometimes suggest that the malfeasance is the deliberate choice of the appointing
authority rather than an outcome by the beneficiary of patronage. As observed by Bearfield
(2009), a narrowly constructed definition of patronage (as evil and corruption) may have
precluded empirical examination of the concept of patronage, and has distracted scholars from the
study of patronage in other types of organizations.

132. Clapham (1985) adds that clientelism is a relationship of exchange in which a superior
(or patron) provides security for an inferior (or client), and the client in turn provides support for
the patron. The form taken by this security may be physical or legal protection, land or a job,
some kind of economic development assistance, even religious intercession, while support can
include military service, voting, economic labour power, information (Clapham, 1985) 50. Stokes
(2009) uses patronage and vote-buying as subclasses of clientelism, and defines clientelism in
electoral mobilization as the proffering of material goods in return for electoral support. It is
different from (a) pork barrel politics, in which benefits are paid to one or a few districts while
costs are shared across all districts; or (b) programmatic redistributive politics in which resources
are distributed to some groups e.g. unemployment and old age benefits (Stokes, 2009). The
conceptual scheme of distributive politics distinguishes between programmatic and non-
programmatic distribution, depending on the political context in which it is carried out and on
how faithfully it reflects formalized rules. In programmatic distribution, the rules of distribution
are public and shape actual distribution; while non-programmatic distribution that is contingent
on individuals vote is normally referred to as clientelism/machine politics, and
clientelism/machine politics directed at the party falls under patronage.

133. Other studies that cover the conceptual framework for the study of clientelism include
Graziano (1976), Kitschelt (2000), Kitschelt and Wilkinson (2007), Bearfield (2009) and Hilgers
(2011); while studies specific to vote-buying include Stokes (2007; 2005), Nichter (2008), and
Gans-Morse, Mazzuca and Nichter (2014). Hilgers (2011), for example, calls for a conceptual
differentiation between vote-buying and clientelism, as the exchange under vote-buying is one-
shot and each side in the bargain does not necessarily have to adhere to the terms of the bargain

49
Max Weber (1978) also coined the term patrimonialism (patrimonialismus) to describe situations where
the administrative apparatus is appointed by and responsible to the top leader, and lacks the bureaucratic
separation of the private and the official sphere. See Bendix (1960) for a presentation of Max Webers
views on patrimonialism, and Swedberg (2005) for Max Weber dictionary entries on patrimonialism and
prebendalism.
50
According to Kaufman (1974), clientelism always manifests the following characteristics: (a) the
relationship occurs between actors of unequal power and status; (b) is based on the principle of reciprocity;
that is, it is a self-regulating form of interpersonal exchange, the maintenance of which depends on the
return that each actor expects to obtain by rendering goods and services to each other and which ceases
once the expected rewards fail to materialize; and (c) the relationship is particularistic and private,
anchored only loosely in public law or community norms see the summary of Kaufman (1974) in
Brinkerhoff and Goldsmith (2002).

55
see also Stokes (2005; 2007). Roniger (2004) emphasizes the need for analysis to move beyond
formal principles and ideals (e.g. universal citizenship, procedural versus participatory
democracy), toward the real workings of democracy through tracing identifiable parameters such
as the political use of public jobs (political jobbery) or the biased use of developmental projects as
a means of patronage 51.

134. Citing Vincent Lemieux (1987), Roniger (2004) states that clientelism triggers a double
transformation in the statuses of individuals, as clients renounce their autonomy as citizens, and
patrons gain a position of dominating authority. In the same vein, Roniger (2004) argues that
clientelism is a strategy of partial political mobilization that differs from more universal patterns,
such as programmatic appeals or mobilization motivated by parties achievement records. Lande
(1977) offers a more generic definition of patron-client relationships as a a vertical dyadic
alliance, i.e., an alliance between two persons of unequal status, power or resources each of whom
finds it useful to have as an ally someone superior or inferior to himself (cited in Stokes, 2009).
Stokes (2009) concludes that the dyadic part of the definition underscores the face-to-face
quality of clientelism, and the alliance part emphasizes the repeated character of the
relationship. However, Kitschelt (2000) contends that personalistic clientelism based on face-to-
face relations with normative bonds of deference and loyalty between patron and client
represents one end of the continuum of informal political exchanges without legal codification,
while the opposite end to this traditional clientelism stands the modern clientelism of
anonymous machine politics and competition between providers of selective incentives see also
Riordon (1905), Scott (1969), Reid and Kurth (1992), Stokes (2005), Nichter (2008), and Gans-
Morse, Mazzuca and Nichter (2014) for an insightful discussion of machine politics.

135. Building on Nichter (2008), Gans-Morse, Mazzuca and Nichter (2014) present a model of
diverse portfolios of strategies employed by political machines during elections that include (a)
vote buying (rewards opposing or indifferent voters for switching their vote choices), (b) turnout
buying (rewards unmobilized supporters for showing up at the polls), (c) abstention buying
(rewards indifferent or opposing individuals for not voting and thus reducing the number of votes

51
Earlier writings that used the term political jobbery include Adams (1869), Bradford (1870), Stanwood
(1871), Jay (1878), James Madison (Gay, 1890), Walker (1891), Du Bois (1898), Droppers (1898), Sumner
(1899), Andrews (1900), Dock (1903), Goldwin Smith (1906), Brown (1907), Fairlie (1906), Ostrogorski
(1910), Taussig (1913), Evans (1921), Hagan (1930), Tugwell (1932), Grant (1933) and Theodore Roosevelt
(Morison, 1951); George Miller Calhoun (1913), Quigley (1933) and P. J. Rhodes (1986) do not use the term
political jobbery but cover the same ground; Adams (1869), Whitridge (1889), Gaillard Hunt (1896), Fish
(1902; 1905) and Ostrogorski (1910) include a discussion of the spoils system (patronage) in United States
under presidents Andrew Jackson and Abraham Lincoln, as defined by Adams (1869) as the practice of
removing officials in order to appoint political or personal friends to their vacant posts; while Alesina,
Baqir and Easterly (2000) and Alesina, Danninger and Rostagno (2001) are algebraic reincarnations of Orth
(1912) though not necessarily through metempsychosis (transmigration) of Samuel P. Orth (1873-1922).
John C. Calhoun (1851; 1992) described the spoils system as the most corrupting, loathsome and dangerous
disease, that can infect a popular government It is a disease easily contracted under all forms of
government; hard to prevent, and most difficult to cure, when contracted; but of all the forms of
governments, it is, by far, the most fatal in those of a popular character. William Arthur Lewis, economic
advisor to Kwame Nkrumah, Ghanas post-independence president, also complained that development
policy in Ghana had turned into political jobbery and that, as economic advisor, there is a limit to what
one can take, and I get tired of sticking around just to play nursemaid to grown men (Tignor, 2006; and
Gilley, 2015) see also Murphy (2006).

56
received by opposition candidates), (d) double persuasion (provides benefits to citizens in order to
induce their electoral participation and influence their vote choices), and (e) rewarding loyalists
(provides particularistic benefits to supporters who would vote for the machine anyway). Based
on findings from an empirical study in rural Paraguay, Finan and Schechter (2012) show that
vote-buying is sustained, in part, by intrinsic reciprocity since (a) middlemen are much more
likely to target individuals who reciprocate even in anonymous voting (secret ballot), and (b)
politicians actually know which party voters prefer and are simply paying them to turn out to
vote. According to Szeftel (2000), clientelism in Africa is nearly always based on politicisation of
identity whose result was the development of factional competition articulated through the
language of ethnic (but also religious and racial identities) 52.

136. The literature shows that clientelism has a variety of political and economic outcomes,
including democratic accountability, corruption, and provision of public goods. The dominant
stylized fact in this body of literature is that, in clientelism, it is jobs that are exchanged for votes,
as a job is a credible, selective, and reversible method of redistribution, which ties the
continuation utility of a voter to the political success of a particular politician (Robinson and
Verdier, 2013). As shown by Robinson and Verdier (2013), clientelism normally emerges in
countries where productivity is low, and thus, poverty both causes and is caused by clientelism
see also Kitschelt and Wilkinson (2007). According to Bardhan and Mookherjee (2012),
clientelism may even create perverse incentives among politicians to prevent long-term
development in order to keep the price of votes low 53. In the same vein, Magaloni, Diaz-Cayeros
and Estvez (2007) argue that as a country develops and the pivotal voter becomes wealthier,
clientelism should erode as a dominant form of political exchange simply because it becomes too
costly; Medina (2007) states that economic development erodes the political power of patrons,
and it is a small step to speculate that the patron, knowing this is true, is less than energetic in his
pursuit of economic development; while Medina and Stokes (2007) add that the resource that
gives the patron an advantage over the challenger matters less to high-skilled, high-income
people as the well-paid engineer is less worried about the loss of public employment than is the
low-skilled clerk.

137. Apart from clientelism a la Pranab Bardhan and Dilip Mookherjee, Khemani (2010)
highlights the risk of political capture especially in local jurisdictions below the regional level
(municipalities, towns and villages) whose spending is almost exclusively financed by grants from

52
As argued by Arriola (2009), African leaders have used ministerial appointments as an instrument for
managing elite relations, with the understanding that the holders of those cabinet positions will use their
ministries to enrich themselves and shore up their own regional or ethnic support bases, and then deliver
them to the president when called upon. Francois, Rainer and Francesco (2015) analysis of ethnicity of
cabinet ministers shows that African ruling coalitions are surprisingly large and that political power is
allocated proportionally to population shares across ethnic groups.
53
The idea is consistent with Acemoglu and Robinson (2006) where political elites may block technological
and institutional development because of a political replacement effect. Acemoglu and Robinson (2006)
argue that fearing replacement, political elites are unwilling to initiate change and may even block
economic development, especially when political competition is limited and their power is threatened.
Acemoglu and Robinson (2000) add that existing powerful interest groups may block the introduction of
new technologies in order to protect their economic rents (as new technology and economic change may
affect the distribution of political power), much in the same way economic monopolies might wish to block
the introduction of a new technology by a rival that will capture the market see also Krusell and Ros-Rull
(1996) on how some agents seek to prevent the adoption of new technologies.

57
both regional and national governments. Khemani (2010) argues that such grants-financed
decentralization may target local spending to vote-buying, patronage or pork barrel projects at the
expense of effective provision of broad public goods. In such a political environment, clientelist
transfers only target some of poor or only in small amounts to a larger number of the poor.

138. Clientelism affects policy preferences as it is likely to be associated with fiscal liberalism
(expanding public expenditure) as opposed to fiscal austerity (Roniger, 2004). Keefer (2007)
identifies systematic differences in performance between younger and older democracies (based
only on the presence of competitive elections), and shows that younger democracies are more
corrupt, spend more on public investment and government workers, and prefer clientelist policies
(underprovide nontargeted goods, overprovide targeted transfers to narrow groups of voters, and
engage in excessive rent seeking). In the case of Southeast Asia, Scott (1972) showed that the
patron-client bonds interact with electoral politics to create distributive pressures which, in turn,
often lead to inflationary fiscal policies and vulnerability of regimes to losses of revenue.

139. Bardhan and Mookherjee (2012) show that (democratic) clientelism has several negative
consequences for allocation of public services, welfare, and empirical measurement of
government accountability in service delivery see also Bardhan and Mookherjee (2000) and
Mansuri and Rao (2012). These include directing resources toward private transfer programs with
short-term payoffs at the expense of public goods or private benefits of a long-run nature such as
education or health services. Moreover, the transfers (and even infrastructure investments) tend
to be directed toward swing voters (e.g. with large numbers of voters who are indifferent between
the parties) at the expense of voters who are not amenable to switching votes 54 , and the
allocations are therefore unequally distributed even among deserving beneficiaries (Bardhan and
Mookherjee, 2012). They add that these adverse consequences of clientelism tend to be missed by
conventional measures of government accountability that focus only on targeting of public
services to intended beneficiary groups, without regard to the composition of these services or
allocation within beneficiary groups. These results also suggest that community monitoring may
be constrained since community members may be unwilling to monitor providers when benefits
are largely nonexcludable (as they are for roads), or they may be unable to detect corruption
when the activity entails technical inputs (e.g. in construction).

54
Dahlberg and Johansson (2002) investigated whether there were any tactical motives behind the
distribution of a grant by the incumbent government to municipalities a couple of months before the
Swedish election in 1998. They found strong support for the model advanced by Lindbeck and Weibull
(1987; 1993) and Dixit and Londregan (1996; 1998) in which the incumbent government distributes
transfers to regions where there are many swing voters; and did not find any support for the Cox and
McCubbins (1986) model that predicts that the incumbent government transfers money to regions where
they already have high support. Despite relatively higher transfers and investments directed toward swing
voters, Feddersen and Pesendorfer (1996) demonstrate the existence of a swing voters curse, where less
informed indifferent voters strictly prefer to abstain rather than vote for either candidate even when voting
is costless see also Fey and Kim (2002) comments on Feddersen and Pesendorfer (1996). As summarized in
Persson and Tabellini (2000), Baron (1994) and Grossman and Helpman (1996) distinguish between
informed and uninformed voters, where the former are fully informed and completely unaffected by
campaign contributions. The uninformed, on the other hand, are uninformed about economic policy
platforms and respond exclusively to campaign contributions. The overall effectiveness of campaign
contributions in swaying voters is then related to the frequency of uninformed voters in the population.

58
140. Alesina, Baqir and Easterly (2000) note that examples of bloated public employment
abound, citing Washington, D.C., where in 1992, 1 out of every 13 residents was a city employee;
and Kenya in the 1990s where civil servants employed by 21 separate cabinet ministers and at
least 93 separate government enterprises made up for about half of all formal wage employment
(based on Grosh, 1991). They provide theoretical and empirical support as to why inequality
would increase government employment, and that politicians disguise their redistributive policies
in the form of public employment in order to avoid opposition to explicit tax-transfer schemes.
Alesina, Danninger and Rostagno (2001) examine the regional distribution of public employment
in Italy. The study shows that public employment is used as a subsidy from the North to the less
wealthy South, and about half of the wage bill of the South can be thought of as redistributive (in
excess of what it should be relative to various ways of calculating a benchmark). In addition, the
heavy reliance on attractive public jobs discourages the development of market activities in the
South as private sector jobs are not sought after, and the economy in the South is overly
dependent on public jobs that are of the nature of permanent welfare. In one of the early uses of
the word clientelism, Orth (1912) noted that there are nearly a million functionaries in France
and that there is one civil servant to every forty inhabitants and one to every eleven voters.

141. In his Essay on Fiscal Federalism, Oates (1999) stated that federalism may be useful in
fostering innovation through laboratory federalism in which many, parallel small-scale
experiments can be undertaken at the sub-central level. As summarized in Baskaran, Feld and
Schnellenbach (2016), Rose-Ackerman (1980) and Strumpf (2002) argued that information
resulting from political experiments is a pure public good, implying free-riding incentives;
Kotsogiannis and Schwager (2006) hold that self-interested representatives can even use policy
innovations to increase their scope for extracting rents from office, because voters are uncertain
about what could have been achieved with a different policy; while Rincke (2009) shows that the
impact of other districts innovation activity on a districts innovation score is much stronger in
communities where incumbents face a high risk of being elected out of office.

142. In the same vein, Besley and Case (1995a) and Salmon (1987) have argued for the
relevance of yardstick competition as a mechanism allowing voters to assess the competence of
their own representatives by comparing their policies with political results in neighboring
jurisdictions. In yardstick competition, voters evaluate their local policy-maker based on the
relative success of her fiscal policies compared to those of her neighbors, using her neighbors
performance as the benchmark. Building on Shleifer (1985), Besley and Case (1995a) show that
yardstick competition forces incumbents to care about what other incumbents are doing, for
example, in tax-setting. Besley and Case (1995a) found that there is positive co-movement in the
tax rates across state boundaries, and this positive co-movement is not found among governors
who are not eligible for reelection; and governors who face a binding term limit seem to spend
and tax more see also Besley (2006). In addition, Besley and Case (1995b) show that the main
effect of term limits is to generate a fiscal cycle, with incumbents holding spending below the
states mean in their first term in office and spending significantly above the states mean in the
lame-duck term. Case and Rosen (1993) and Baicker (2005) show that a state governments level
of per capita expenditure is positively and significantly affected by the expenditure levels of its
neighbors.

143. Salmon (1987) and Breton (1985) argued that competition takes place both between
governments on the same level of jurisdiction (e.g. between the governments of the provinces)
and between governments on different levels (e.g. between the provincial governments and the

59
federal government). Breton and Fraschini (2007) add that a look at some of the goods and
services governments supply or have historically supplied cannot but lead to the conclusion that
governments must be competing with families, churches, charitable organizations, cooperatives,
and other bodies that supply goods and services that are close substitutes to the goods and services
supplied by governments. Among these are day care, health and nursing, old age security,
unemployment insurance, and so forth. In addition, governments sometimes compete in markets
by providing goods and services such as transportation, broadcasting, education, insurance, car
production, oil exploration, and so on. The interdependence of the public and private sectors is in
other words all-pervasive see also Breton and Fraschini (2004). Kayser and Peress (2012) also
observe that when the economy in a single country contracts, voters often punish the
government, while voters turn against their governments much less frequently when many
economies contract. This suggests that voters in a wide variety of democracies benchmark
national economic growth against that abroad, and thus punish (reward) incumbents for national
outcomes that underperform (outperform) an international comparison 55. Yardstick competition
can also extend to governments without territory. For example, Trejo (2009) studied religious
market structure drawing on an original dataset of indigenous mobilization in Mexico and on life
histories and case studies. Trejo (2009) showed that, when the Catholic clergy in Latin America
was confronted by the expansion of U.S. mainline Protestantism, they became major institutional
promoters of rural indigenous causes (e.g. indigenous mobilization, social services, ecclesiastic
decentralization, and the practice of religion in their own language).

144. According to Breton and Fraschini (2007), competition between governments in a given
governmental system is an application of the theory of labor tournaments introduced in
economics by Lazear and Rosen (1981). The theory of yardstick competition as a tournament
among subnational units has been applied to Philippines in Solon, Fabella and Capuno (2009) and
Capuno, Quimbo, Kraft, Tan and Fabella (2015). For example, Solon, Fabella and Capuno (2009)
found that incumbent governors improve their reelection chances with higher spending on
economic development services, other things being constant. Moreover, governors who are
members of political clans also have higher development spending especially when faced with
rival clans 56 . Capuno, Quimbo, Kraft, Tan and Fabella (2012; 2015) also found that local
governments expenditures on social and economic services are influenced by the fiscal behavior
of its neighboring localities but the effect is nil on local revenue mobilization. Capuno, Quimbo,
Kraft, Tan and Fabella (2015) conclude that the results support a policy promoting greater access

55
Almost half a century ago, Oates (1972) had stated that The result of tax competition may well be a
tendency toward less than efficient levels of output of local services. In an attempt to keep taxes low to
attract business investment, local officials may hold spending below those levels for which marginal
benefits equal marginal costs, particularly for those programs that do not offer direct benefits to local
business (also cited in Wilson,1986; and Wellisch, 2004). Zodrow (1986) had also noted that Tiebout-type
communities are inefficiently organized or inappropriately stratified by taste/class; while Fiorina and Noll
(1978) argued that each voter/consumer decides which candidate to vote for by examining the welfare
implications of competing platforms and selecting the one promising the voter the greatest individual
welfare, and extended the rational choice theory of electoral competition to include the election of
representatives from separate districts. The theory of yardstick competition added (a) migration (out of
office) by incumbents into the Tiebouts (1956) model of migration of voters, and (b) the neighboring
subnational governments as yardsticks for evaluating an incumbents performance.
56
Cruz, Labonne and Querubin (2017) demonstrate the importance of social networks for electoral
outcomes in the Philippines, where family networks facilitate relationships of political exchange and
contribute to higher vote shares.

60
to information on local social and economic services to induce comparison and thereby promote
overall performance.

145. Pierre Salmon (1987; 2006) observes that, within firms, it is often the case that superiors
have no direct information on the absolute level of effort of their subordinates but their relative
performance in terms of rank-order can be assessed. Similarly, each subnational government has
an incentive to do better than governments in other jurisdictions in terms of levels and qualities
of services, of levels of taxes or of more general economic and social indicators. The strength of
this incentive depends on the possibility and willingness of citizens to make assessments of
comparative performance, and rewarding politicians in power (reelecting them) or sanctioning
them (voting for their competitors). As a corollary, the evolution of transformational leadership
may be path-dependent, with relatively higher life expectancies of underperforming incumbents
if the general quality of leadership among incumbents in neighboring jurisdictions is low 57.

6.2 REGULATORY CAPTURE

146. Apart from the conventional view of corruption in which public officials extort or
otherwise exploit the private sector for private ends, there are possibilities of state or regulatory
capture in which private actors collude with public officials or politicians for their mutual, private
benefit (Shah, 2014b). The private sector captures the state legislative, executive, and judicial
apparatus, and works with selected high level government officials to institute or manipulate
policy and legislation in favor of particular interest groups in exchange of rents or side payments
(Shah, 2014b). Regulation can also be subject to political capture in pursuit of political ends
within government or the ruling elite, as distinct from regulatory capture by producer groups
outside the political system (Stiglitz, 1998; Jalilian, Kirkpatrick and Parker, 2006). In addition,
Besley and Prat (2006) posit that each media outlet faces two possible sources of profit
commercial profits (e.g. through sales, subscriptions and advertising) and profits from collusion
with government (e.g. through bribes and favorable government policy). Besley and Prat (2006)
show that media capture affects political outcomes mainly through (a) moral hazard, as elected
politicians are more likely to engage in rent extraction in the knowledge that they are less likely
to get caught, and (b) adverse selection, as bad politicians are less likely to be identified and thus
replaced, and this reduces political turnover.

147. The starting point for discussion of regulatory capture is usually Stigler (1971) who stated
that as a rule, regulation is acquired by the industry and is designed and operated primarily for its
benefit. The literature on regulatory capture biased in favor of particular private interests
includes Posner (1974), Peltzman (1976; 1989), Weingast (1981), Becker (1983), Katzmann (1990),
Laffont and Tirole (1991), Levine and Forrence (1990), Laffont (1994), Grossman and Helpman
(1994), and Martimort (October 1999); while review articles includes Ernesto Dal B (2006),
Estache and Wren-Lewis (2009), and Novak (2013). The literature on regulatory capture
recognizes the existence of a revolving door connecting government regulatory agencies with the
firms that they regulate. Regulatory officials may also work for firms they regulate after they

57
The concept of path dependent political processes emphasizes the enduring impact of choices made
during critical junctures in history that can be almost impossible to reverse, and which may close off
alternative options and thus shape the basic contours of social life see Ruth Berins Collier and David
Collier (1991), Liebowitz and Margolis (1995), Pierson (2000; 2004), Boas (2007), Capoccia and Kelemen
(2007) and Sorensen (2015).

61
leave office (or start/join consulting firms that work with regulated firms), and the need for
specialized knowledge and industry-specific expertise sometimes make it necessary for regulators
to hire human capital from the regulated firms (Che, 1995; Salant, 1995). In a study based on
Australian nursing home inspectors, Makkai and Braithwaite (1992) identified three empirically
distinct forms of capture: identification with the industry, sympathy with the particular problems
that regulated firms confront in meeting standards, and absence of toughness. They observed that
inspectors with prior senior management experience in the industry tend to be less tough in their
attitudes to regulatory enforcement. For the other two types of capture, it is not coming in the
revolving door (from an industry job), but aspirations to go out of the revolving door (to an
industry job) that predicts capture 58.

148. As acknowledged in Estache and Wren-Lewis (2009), Jacques Laffont work on capture in
the context of infrastructures in developing countries shows that the traditional regulatory theory
may not be suitable for the institutional context in developing countries (see, especially, Laffont,
2005). In particular, the traditional theory of regulation needs to be augmented by analysis of
institutional limitations on regulatory outcomes e.g. limited regulatory capacity, limited
accountability, limited commitment, and limited fiscal efficiency (Estache and Wren-Lewis,
2009). The analysis of regulatory capture in the context of developing countries includes
Goldstein and Pires (2006), Jerome (2006) and Minogue and Cario (2006).

6.3 ELITE CAPTURE

149. Bardhan (2002; 2006) argues that the institutional context in developing economies is
quite different from those in advanced industrial economies, and this necessitates the literature on
decentralization to go beyond the traditional fiscal federalism literature. The fiscal federalism
literature focuses on the economic efficiency of intergovernmental competition (Tiebout, 1956),
in which different local governments offer different public tax-expenditure bundles, and mobile
individuals are supposed to allocate themselves according to their preferences 59. The assumptions

58
The term revolving door has also been used in (a) the movement from US government service into the
lobbying industry (i Vidal, Draca and Fons-Rosen, 2012); (b) the existence of a revolving door, in both
directions, between government and business in the United Kingdom, often with reference to wider
concerns about growing corporate influence over public policy (Wilks-Heeg, 2015); and (c) the myriad roles
of prestigious financial academic economists in the US as leaders in their own fields, globally as advisers to
governments, and their advisory positions in international institutions (Hagenbarth and Epstein, 2011;
Hagenbarth and Epstein, 2016). The opening of the revolving door between careers in regulation and
industry can also be applied in careers between the Legislature and the Executive as elected leaders move
from oversight roles in, say, the Senate, to county governorship positions. The dividends from a lax county
oversight regime are in the form of graft-related deferred gratification should the ambition of moving out
through the revolving door into a governorship position materialize.
59
Bish (1987), Musgrave (1997) and Donahue (1997) described the Tiebout (1956) model as a replication of
market analogies to the public sector based on what Albert Hirschman (1970) called the exit option, where
consumers register displeasure with a firms products by simply buying from a different firm. As observed
by Donahue (1997), the conditions hold well enough, for a wide enough range of transactions, to amply
justify popular and scholarly enthusiasm for market competition. But extending the logic to government
competition requires far more intrepid conceptual leaps. Blankart and Borck (2005) also note that there
will typically not be enough jurisdictions for all types of consumers to acquire their preferred bundle of
public goods, and some consumers of different types must therefore live together; while Boadway and
Tremblay (2012) argue that a variable number of communities is critical for optimality in the Tiebout
model, and there are many public goods, each one of which supports a different optimal population.

62
required for the Tiebout (1956) model are, however, much too stringent, particularly for poor
countries. According to Bardhan (2002; 2006), the main criticisms of the conventional wisdom in
the fiscal federalism literature are that (a) the crucial assumption of population mobility fails in
poor countries, (b) information and accounting systems and mechanisms of monitoring public
bureaucrats are much weaker in low-income countries, (c) the institutions of local democracy and
mechanisms of political accountability are often weak, and has to grapple with issues of capture of
governments at different tiers by elite groups, and (d) in some situations, the poor and minorities,
oppressed by the local power groups, may be looking to the central state for protection and relief.
In aggregating community preferences, one is therefore likely to encounter the fallacy of
composition if there is significant elite capture, male (or female) capture, and other boundaries of
political and social identity in heterogeneous communities e.g. language, ethnic, religious or racial
identities.

150. Brown and Oates (1987) establish a role for the central government in assistance to the
poor, and in an epigraph cite Edwin Cannan (1912) who wrote that measures adapted to produce
greater equality are, however, exceedingly unsuitable for local authorities. The smaller the
locality the more capricious and ineffectual are likely to be any efforts it may make to carry out
such a policy. It seems clearly desirable that all such measures should be applied to the largest
possible area, and that subordinate authorities should be left to act, like the individual, from
motives of self-interest. George J. Stigler (1957) had also argued that: Since redistribution is
intrinsically a national policy, it should not be restricted to a community level; a community
consisting only of poor people should receive the desired minimum social services. Hence, in pure
principle, the Federal Government should collect the progressive levies and redistribute them (in
whole or in part) to local units with each unit receiving an amount governed by the number of its
poor and the degree of their poverty. Ladd and Doolittle (1982) also reaffirmed the long-
standing argument of economists that the federal government should take primary responsibility
for assisting poor people.

151. The World Banks World Development Report 2004 (World Bank, 2003) focused on
clientelism and elite capture in national and local development, including gender (men as opposed
to women) in determining who dominates traditional communities and local governments. The
report notes that communities are not homogeneous (and problems of exclusion and elite capture
can be the same as in government systems), and different communities may have differing
abilities to form cohesive groups. For example, a study on ethnic diversity and social sanctions in
the context of public goods in rural western Kenya (Miguel and Gugerty, 2005) showed that
ethnic diversity is associated with sharply lower local school funding through voluntary
fundraisers (harambees), worse school facilities, fewer recorded community social sanctions, and
there is suggestive evidence of worse well maintenance as well. However, a study based on
household survey data from Kampala, Uganda, shows evidence that an increase in ethnic
heterogeneity is associated with an increase in the willingness to contribute where local
communities and groups of individuals are left to themselves to provide public goods privately
(Schndeln, 2013). Schndeln (2013) postulates that more ethnic heterogeneity may lead to
higher aggregate provision of privately provided public goods if ethnic heterogeneity increases
uncertainty about the expected contribution of other individuals. While most of the literature is
concerned with publicly provided goods (e.g. Alesina and La Ferrara, 2000; and Alesina and La
Ferrara, 2005), Miguel and Gugerty (2005) and Schndeln (2013) explore the effect of ethnic
heterogeneity on the private provision of public goods, though the empirical findings differ.

63
152. Similar studies based on United States showed that (a) there is heterogeneity of
preferences across ethnic groups as to the amount and type of public goods (Alesina, Baqir and
Easterly, 1999) which leads to less agreement on public goods choices and thus to lower funding
in diverse areas; and (b) inherent difficulties in group formation and degree of participation when
the population is heterogeneous in terms of income and race or ethnicity, and this drives the poor
collective outcomes in diverse areas (Alesina and La Ferrara, 2000) see also Miguel (2004) on
public goods in Kenya versus Tanzania. Alesina, Baqir and Easterly (1999) concluded that more
ethnically diverse jurisdictions have higher spending and higher deficits/debt per capita, devote
lower shares of spending to core public goods like education and roads, and the higher spending is
financed in part by higher intergovernmental transfers rather than by local taxes.

153. An experiment by Habyarimana, Humphreys, Posner and Weinstein (2007) in Kampala,

Uganda, on the willingness of co-ethnics and nonco-ethnics to cooperate showed that co-ethnics
cooperate more, a finding they attributed to the existence of denser ethnic-based institutions that
allow for monitoring and sanctioning of non-cooperative behavior. However, they found no
evidence for prominent preference mechanisms that emphasize the commonality of tastes within
ethnic groups or a greater degree of altruism toward co-ethnics see also Diaz-Cayeros, Magaloni
and Euler (2014). Alesina, Baqir and Easterly (1999) postulate that, since ethnic fragmentation is
associated with public goods problems, policy makers may be tempted to choose segregation and
decentralization in order to enforce relatively homogeneous communities. It is also likely that
diverse demand patterns for public goods in a heterogeneous community contribute to poor
community organization.

154. The study by Alesina, Baqir and Easterly (1999) identified racial/ethnic diversity and
changes in diversity as prime suspects in determining underprovision of public goods. Trounstine
(2016) adds to the literature by showing that diversity contributes to underprovision of public
goods mainly through segregation along racial lines, where a severely segregated city is one that is
diverse overall and has many homogeneous neighborhoods. According to Trounstine (2016), the
gulf between whites and racial and ethnic minorities in segregated places reduces the odds of
finding common ground in support of a bundle of taxation and expenditures, driving down
collective investment.

155. Lind (2007) model shows that fractionalization in general, and racial divide in particular,
tends to reduce the amount of redistribution since inequality between and within groups have
opposite effects on the support for redistribution, with the former reducing the support and the
latter increasing it. Lind (2007) argues that this may explain the fact that many very unequal
societies have small governments since fractionalized countries tend to have a more uneven
distribution of income than less fractionalized countries, and fractionalization reduces the support
for redistribution. Consequently, countries with heavy fractionalization and intense groups
conflicts usually find it difficult to obtain democratic support for a large welfare state. As
summarized in Hungerman (2007; 2009), research has repeatedly shown that diversity has been
associated with individuals contributing less to educational institutions (Miguel and Gugerty,
2005), becoming less charitably generous, favoring income redistribution less (Luttmer, 2001),
supporting the government less (Macculloch, 2005), and volunteering and participating in
community organizations less (Alesina and La Ferrara, 2000; Okten and Osili, 2004). Alesina and
La Ferrara (2005) provide an excellent summary of the literature on the positive and negative
effects of ethnic diversity on economic policies and outcomes.

64
156. As acknowledged in Bardhan and Mookherjee (2000; 2006c) and Bardhan (2002; 2006),
the literature on capture by special-interest groups goes back in time at least to James Madison
(Hamilton, Madison and Jay, 1787; 1818) in the Federalist Papers (No. 10). James Madison (quoted
at length in Bardhan, 2006) argued that the lower the level of government, the greater is the
extent of capture by vested interests, and the less protected minorities and the poor tend to be 60.
As Nestor M. Davidson (2007) puts it, local governments often give life to the Madisonian fear of
the tyranny of local majorities: they sometimes reinforce racial, ethnic, and economic segregation;
exclude outsiders; and generate significant externalities for neighboring communities. The early
literature on patronage (clientelism) stretches back at least to ancient Greek and Roman societies
(P. J. Rhodes, 1986; and Nicols, 2014), and amplified in the official arena in the spoils system by
the phrase to the victor belong the spoils of the enemy, attributed to William L. Marcy in
reference to the election victory of president Andrew Jackson (White, 1882; Fish, 1905;
Ostrogorski, 1910; and Boller and George, 1989).

157. Research on elite capture flourished about two decades ago but has since waned. A
number of writers, notably Platteau and Gaspart (2003a; 2003b), Platteau and Abraham (2002),
Platteau (2004a; 2004b), Abraham and Platteau (2004), DExelle and Riedl (2008), and Platteau,
Somville and Wahhaj (2014) expressed concern that participatory approaches to development
could be subverted and deflected from its intended purpose because of the risk of creating and
reinforcing an opportunistic rent-seeking elite. The analysis assumed that communities are
heterogeneous and dominated by local elite; and the elite strategically propose a project to the
donor, knowing that the latter has imperfect knowledge of the needs of the target population.
Abraham and Platteau (2004) argue that, in societies where a great deal of socioeconomic
differentiation has taken place, the main obstacle to a participatory approach is elite capture, and
there needs to be an effective state at the helm of the decentralization program so that local
patrons and doubtful intermediaries can be prevented from subverting the participatory logic for
their own benefit. Abraham and Platteau (2004) adds that this is especially so in societies,
typically tribal or lineage-based societies, whose culture is essentially based on a high degree of
personalization of human relationships, on the pervasive presence of other-regarding norms, on
strong beliefs in the role of ancestors and supernatural powers, and on a strict respect of status and
rank differences. If such cultural characteristics are ignored, numerous institutional anomalies are
bound to occur as a result of the superimposition of imported norms, values, and behavior
patterns that are not compatible with erstwhile beliefs, mores, and habits.

158. Some of the literature focused on creating accountability mechanisms in projects funded
by state and nongovernmental agencies (Dongier et al, 2002; Ebrahim, 2003; Fung and Wright,
2003; Khwaja, 2009; and Mansuri and Rao, 2012). For example, in detailed surveys of community-
maintained infrastructure projects in Northern Pakistan, Khwaja (2009) shows that while
community-specific constraints matter, their impact can be mitigated by better project design.

60
The passage by James Madison reads: The smaller the society, the fewer probably will be the distinct
parties and interests composing it; the fewer the distinct parties and interests, the more frequently will a
majority be found of the same party; and the smaller the number of individuals composing a majority, and
the smaller the compass within which they are placed, the more easily will they concert and execute their
plans of oppression. Extend the sphere, and you take in a greater variety of parties and interests; you make
it less probable that a majority of the whole will have a common motive to invade the rights of other
citizens; or if such a common motive exists, it will be more difficult for all who feel it to discover their own
strength, and to act in unison with each other (Hamilton, Madison and Jay, 1818).

65
Khwaja (2009) notes that while previous empirical work has shown the adverse effects of groups
inherent attributes (such as inequality, social fragmentation and lack of leadership in the
community) on collective action, these can be compensated for by better project and institutional
design e.g. lower project complexity, community participation in project decisions, whether the
project is new (investing in simpler and existing projects), ensuring equitable distribution of
project returns, and type of external organization. In their insightful discussion on empowered
participatory governance and countervailing power, Fung and Wright (2003) describe
countervailing power as a variety of mechanisms that reduce, and perhaps even neutralize, the
power-advantages of ordinarily powerful actors. They describe the governance structure as
either Top-Down or Participatory cross-tabulated with character of decision-making process as
either Adversarial or Collaborative, where empowered participatory governance is the
intersection of Participatory governance structure and Collaborative decision-making process.

159. Nallari and Griffith (2011) argue that high rates of elite capture may extend to all or most
of a countrys institutions (such as parliament and political parties) and key individuals, including
public administrators, judges, and bureaucrats e.g. between business firms and political elites, and
failure by politicians to consult their constituents or visit their constituencies once elected. There
were concerns that, in such environments, the voice of women elected as representatives may get
neutralized by political pressure groups; the women representatives may be comparatively less
empowered with little education and basic capabilities; and their decisions on the systems of
public goods and services will not have any major impact on the poor and needy women
(Chakraborty, 2010). Pranab Bardhan and Dilip Mookherjee have accumulated a large body of
knowledge on clientelism and elite capture, especially their influence on economic outcomes
see Bardhan (2000; 2002; 2006) and Bardhan and Mookherjee (2000; 2005; 2006a; 2006b; 2012). In
particular, clientelism and elite capture have consequences for quality and composition of
government expenditures (services), public sector employment, delivery of targeted transfers, and
empirical measurement of government accountability in service delivery. They also show that
determinants of capture include the relative extent of electoral competition, electoral uncertainty,
the value of campaign funds in elections, and heterogeneity among local districts with respect to
intra-district inequality.

160. In an empirical study of local public finances for all Colombian municipalities, Drazen
and Eslava (2010) also show that incumbents try to influence voters by changing the composition
of government spending, rather than overall spending or revenues. Drazen and Eslava (2010) note
that electoral manipulation of the budget takes the form of shifting spending toward those goods
voters as a whole prefer in an attempt to convince voters that the incumbent shares their
spending priorities. These components are infrastructure spending, including road construction
and construction of power and water plants; while interest payments, transfers to retirees, and
payments to temporary workers contract in election years.

161. Platteau and Gaspart (Platteau and Gaspart, 2003a; Platteau and Gaspart, 2003b; and
Platteau, 2004b) applied the Ultimatum Game to elite capture as an analytical device to develop
plausible policy actions for disciplining local development brokers using a three-agent decision
framework. At the top is an altruistically motivated development agency (labeled A) which wants
to disburse a given amount of funds; at the bottom are the grassroots (labeled G) who are the
intended beneficiaries; and between the two is a local leader (labeled L) who tries to organize the
grassroots into a group or association for the sake of securing the funds on offer since it is
mandatory that beneficiaries are organized into a collective to be eligible for funds. Agent A is ill-

66
informed about what is happening at the level of the grassroots and this information gap is
exploited by the local leader for his own benefit. In this one-stage bargaining game, L makes the
first move to G about the way to share the funds offered by A. If G accepts the transfer proposed
by L, they receive that amount; but if they disagree with Ls proposal, they create a situation in
which both L and G have to forsake the money. The prediction of economic theory in the
Ultimatum Game is that the agent with the first move will make a proposal whereby he
appropriates most of the funds, while the agent with the second move will accept it since getting
something, however small, is always better than nothing. However, results from Ultimatum Game
experiments find that on average the proposer offers 40% of the pie to the responder; this share is
smaller for larger pie sizes; and 16% of the offers are rejected, with lower rejection rates for larger
pie sizes (Oosterbeek, Sloof and van de Kuilen, 2004).

162. In order to get out of this quandary, the local leader must be disciplined through an
appropriate mechanism, and for punishment to be feasible, the game must be repeated. In a two-
phase release of funds, a higher relative amount of the second tranche encourages L to use the
first tranche according to As prescriptions (that is, for the benefit of G). During the first period,
Ls choice of the division rule is disciplined by the risk of detection of resource misappropriation
and the ensuing threat of losing access to the second tranche. However, during the second period,
a much lower share of aid money should accrue to G than during the first period since L cannot
be disciplined by the threat of losing access to future tranches. If agent A decides to spread its aid
transfers over several successive periods and to make later disbursements explicitly conditioned
by proper behaviour on the part of the local leader, L will embezzle the last tranche knowing that
he cannot be punished at a later stage and, anticipating such an action, agent A will not disburse
that last tranche. By backward induction, it is evident that even the first tranche will not be
disbursed by agent A with the consequence that the grassroots will not get any financial support
see also Platteau, Somville and Wahhaj (2014) paradoxical result that higher quality of Agent As
information may end up encouraging the local elite to propose a project that better matches Agent
Ls own preference rather than the preference of the grassroots. In backward induction, players
think about every possible subgame that could be reached later in a game tree, guess what
players would do in those subgames, and use the guesses in deciding what to do at the start.
Implementing this process requires players to reason about future events and backward induct

67
to the present (Ochs and Roth, 1989; Camerer, Johnson, Rymon and Sen, 1993; Schotter, Weiss
and Zapater, 1996; Camerer, 1997; and Binmore, 2007) 61.

163. Indonesia has had more than fair share of empirical studies on elite capture. For example,
Alatas, Banerjee, Hanna, Olken and Tobias (2012) report on an experiment in 640 Indonesian
villages on three approaches to target the poor: proxy means tests (PMT) where assets are used to
predict consumption, community targeting where villagers rank everyone from richest to poorest,
and a hybrid (of PMT and community targeting) 62. The study found that although community
targeting and the hybrid perform somewhat worse in identifying the poor than PMT, community
targeting results in higher satisfaction in the community, and this community objective function
does not differ based on elite capture.

164. Olken (2006) examined the degree to which corruption may impair the ability of
governments to redistribute wealth among their citizens, based on a large antipoverty program
that distributed subsidized rice to poor households in Indonesia. The study shows that, on

61
The one-stage Ultimatum Game was first designed and run by Gth, Schmittberger and Schwarze (1982).
However, Binmore, Shaked and Sutton (1985) argued that much should not be read in these results as the
one-stage ultimatum game is a rather special case, from which it is dangerous to draw general conclusions.
In the ultimatum game, the first player might be dissuaded from making an opening demand at, or close to,
the optimum level, because his opponent would then incur a negligible cost in making an irrational
rejection. In the two-stage game, these considerations are postponed to the second stage, and so their
impact is attenuated. According to Heap and Varoufakis (1995), this criticism led to a fresh study by Gth
and Tietz (1988) where the game went to a second round, with the catch that the sum to be divided shrunk
if the bargaining reached the second round (that is if the offer was rejected) see also Neelin, Sonnenschein
and Spiegel (1988). In addition, sufficiently high stakes lead responder behavior to converge almost
perfectly to full acceptance of low offers (Andersen, Erta, Gneezy, Hoffman and List, 2011); while
intoxicated and sober participants were observed to be similarly generous in their offers but intoxicated
participants more often rejected unfair offers than did sober participants (Morewedge, Krishnamurti and
Ariely, 2014). However, empirical studies show that different peoples have different cultural expectations
and norms of fairness (Oosterbeek, Sloof and van de Kuilen, 2004), while a few studies show differences in
behavior of women and men (Eckel and Grossman, 2001; Solnick, 2001; and Razzaque, 2009). In an
Ultimatum Game among the Machiguenga, a group of Peruvian slash-and-burn horticulturists, Henrich
(2000) reported that Machiguenga proposers seem to possess little or no sense of obligation to provide an
equal share to responders, and responders had little or no expectation of receiving an equal share nor any
desire to punish unequal divisions. The modal offer of 15 percent seemed quite fair to most Machiguenga.
A similar study of 15 geographically and economically diverse societies in South America, Africa and Asia
found game play to be considerably more heterogeneous than found in studies in industrialized countries
(Henrich, Boyd, Bowles, Camerer, Fehr, Gintis and McElreath, 2001; Henrich, Albers, Boyd, Gigerenzer,
McCabe, Ockenfels and Young, 2001; and Henrich et al, 2005). The Kenyan chapter of the 15 case studies
was among the Orma of Tana River county (Ensminger, 2004), which showed fairness increasing with
market integration - see also a similar study conducted in Tanzania (Paciotti and Hadley, 2003). In
comparison, modal offers made in the ultimatum game in Israel, Japan, Slovenia and the United States were
40-50% with rejection frequencies of 22-29% (Roth, Prasnikar, Okuno-Fujiwara and Zamir, 1991), modal
offer in Indonesia was 40% (Cameron, 1999), and meta-analysis of 42 articles published during 1983-2012
shows that the weighted average offer was 41.04% (Tisserand, 2016). Gth and Kocher (2014) and Eric van
Damme et al (2014) provide comprehensive summaries of the historical development of the theory and
empirics of ultimatum games, and Chaudhuri (2009) is a simple and straightforward summary for beginners.
62
See Coady, Grosh and Hoddinott (2004) on various ways of targeting antipoverty interventions e.g.
universal allocation, means testing, proxy means testing, geographic targeting, self-selection based on a
work requirement, community-based targeting, and demographic targeting e.g. to children or the elderly.

68
average, at least 18% of the programs rice disappeared between the time it left government
warehouses and the time it reached households. Ethnically heterogeneous and sparsely populated
areas were more likely to be missing rice. Olken (2006) concludes that the welfare losses from this
corruption may have been large enough to offset the potential welfare gains from the
redistributive intent of the program. In a study on corruption in over 600 Indonesian village road
projects, Olken (2007) found that increasing government audits significantly reduced missing
expenditures, while increasing grassroots participation in monitoring had little average impact.
Overall, the results suggest that traditional top-down monitoring can play an important role in
reducing corruption, even in a highly corrupt environment.

165. However, Dasgupta and Beard (2007) analysis of a community-driven poverty alleviation
project in Indonesia did not find significant elite control over project decisions and benefits see
also Beard and Dasgupta (2006) and Beard, Pradhan, Rao, Cartmill and Rivayani (2008). In cases
where the project was controlled by elites, benefits continued to be delivered to the poor; and
communities where both non-elites and elites participated in democratic self-governance
demonstrated an ability to redress elite capture when it occurred. Dasgupta and Beard (2007)
concludes that not all elites who had power were corrupt, a finding that highlights the important
distinction between elite control and elite capture. Although the program was successfully
delivering resources to the poor, it fell short of its potential to empower the poor and socially
excluded, and thus needed to make further efforts to diversify its leadership by including more
women and non-elites (Beard, Pradhan, Rao, Cartmill and Rivayani, 2008).

166. In a study of community-driven development (CDD) projects in 250 Indonesian sub-

districts, Fritzen (2007) found that elite control of project decision-making was pervasive, but the
extent of elite presence on community boards had little effect on board effort or performance, as
accountability mechanisms and pro-accountability norms mattered more. Fritzen (2007), like
Dasgupta and Beard (2007), therefore emphasizes the need to clearly distinguish between elite
control of project funds and elite capture of project benefits. Fritzen (2007) concludes that
greater attention should therefore be paid by analysts and project planners to learning what
mechanisms may raise the likelihood that elites will play a constructive role in community
development (rather than focusing mostly on means for avoiding elite control altogether, an
objective that in many CDD contexts will be unrealistic). Research also needs to focus on the
possibilities of benevolent capture (Mansuri and Rao, 2004). The studies reported that
benevolent capture happens when heterogeneity can be introduced into elite influence,
primarily by ensuring that the representation of elites is sufficiently diversified for a division of
opinions to development among them.

167. A study conducted in Rajasthan and Madhya Pradesh in India showed that villagers had
very little interest in, and a high level of disillusionment with, the promises made following the
73rd Amendment that envisioned the gram panchayat becoming an instrument of local
governance and participatory development (Alsop, Krishna and Sjoblom, 2001). Alsop, Krishna
and Sjoblom (2001) add that gram panchayats were not valued as an organization as they brought
very few benefits to villagers. People felt they had little influence in decisions made over the few
benefits the gram panchayat did have control of and there was no faith in the mechanisms
available for holding representatives accountable to the electorate. A study in the Indian state of
Karnataka by Palaniswamy and Krishnan (2012) also shows that, despite mandated
representation, or reserves seats, in local governments for both historically disadvantaged groups
and politically dominant groups, resource allocation within villages revealed severe targeting

69
failures. Importantly, villages represented by politicians belonging to the historically
disadvantaged groups get fewer fiscal resources, while villages represented by the politically
dominant castes are likely to get more resources. Palaniswamy and Krishnan (2012) conclude that
taken together, these results suggest that the capture of decentralized institutions by the local
elite skews public resource allocation. The results also suggest that the use of a formula might lead
to a more equitable inter-village allocation of public resources. Dunning and Nilekani (2013) also
found that crosscutting relationships between party and caste may mitigate the impact of quotas
on ethnic distribution. According to Dunning and Nilekani (2013), when distribution follows a
partisan logic, yet party and ethnicity are not coterminous, targeted benefits may flow to both
marginalized and dominant groups within an incumbent party organization, regardless of the
ethnic identity of local politicians. The quota-induced election of a politician from a
marginalized caste or tribe may therefore not produce strong shifts in distributive targeting along
ethnic lines.

168. However, Chattopadhyay and Duflo (2004) show that political reservations for women in
head positions in village councils in West Bengal and Rajasthan in India affect the types of public
goods provided. They show that women elected as leaders under the reservation policy invest
more in the public goods more closely linked to womens concerns: drinking water and roads in
West Bengal and drinking water in Rajasthan and invest less in public goods that are more
closely linked to mens concerns: education in West Bengal and roads in Rajasthan.
Chattopadhyay and Duflo (2004) conclude that the Panchayat has effective control over the
policy decisions at the local level, and therefore direct manipulation of the identity of the
policymaker (e.g. through term limits, eligibility conditions, and mandated representation) may
affect policy decisions. Ali Sajjad Khan (2011) lists the factors that constrain participation of
women in politics as (a) structural, that is, the supply side variables e.g. womens literacy rates,
their educational levels and average incomes; (b) cultural, which includes the general perception
in many societies that womens major role is to cook food, take care of the children and the
household, and (c) institutional e.g. quota system and proportional formula for allocating seats in
employment and electoral systems. It is therefore necessary to address the three constitutive
elements of female participation so as to raise their representation in terms of numbers,
effectiveness and impact. However, Batliwala (2007) argues that, at least in the case of India,
women empowerment has been converted into a buzzword lifted out of the political and
historical context in which it evolved, and rendered into formulas (e.g. political quotas and access
to microfinance) that are mainstreamed. Batliwala (2007) adds that the idea has been divested of
its cultural specificity, its political content, and generalizing it into a series of rituals and steps that
simulate its original elements, but lacking the transformative power of the real thing. According
to Rao and Kelleher (2005), gender concerns are falling through the cracks and institutional
change, capacity building, political partnerships, and womens organising are being marginalised
in what is, increasingly, a bean-counting approach to development deliverables.

169. Crook (2003) review of decentralization and poverty reduction in Africa shows that
poverty reduction and the degree of responsiveness to the poor is determined by (a) the politics of
local-central relations and the general regime context particularly the ideological commitment
of central political authorities to poverty reduction, and (b) elite capture of local power
structures, patronage politics, combined with weak accountability mechanisms. Crook (2003)
concludes that any prospect of using decentralised governance to develop more pro-poor policies
must depend upon a real effort being undertaken to strengthen and broaden accountability
mechanisms, both horizontal and vertical, at both local and national levels.

70
170. In case studies of two communities implementing participatory forestry in Tanzania and
India, Lund and Saito-Jensen (2013) illustrate how initial elite capture of participatory initiatives
is circumvented over time through various forms of resistance orchestrated by initially
disadvantaged groups. Initially, existing elites dominated, with the Indian case dominated by
wealthier, higher castes elites, who occupied key leadership positions of the newly established
participatory institution; and with the first committee in the Tanzanian case dominated by elites
created through training, paid labor opportunities, decision-making powers, and attention they
received from consultants, researchers, and government and project employees. In both cases, the
individuals in leadership positions dominated decision-making, and monopolized benefits from
management and project support. However, the initially disadvantaged groups resisted the elite
control and this resistance gradually became more organized and more effective. Lund and Saito-
Jensen (2013) conclude that (a) snapshot evaluations of participatory initiatives at a certain point
of time may gloss over the dynamic nature of social relations and ongoing power struggles among
social groups; (b) the ambiguous conceptualization of elite capture as elites control of decision-
making processes, and their monopolization and misappropriation of public benefits and
malfeasance, does not enable us to distinguish elite capture for whom, with what costs to whom,
and through what means; and (c) the dilemma of whose opinion counts in situations where there
are differences of opinion between the external analyst and the people under study. Lund and
Saito-Jensen (2013) therefore support the proposition of Dasgupta and Beard (2007) and Fritzen
(2007) that analysts should distinguish between elite control of participatory initiatives (decision-
making arenas) and elite capture of benefits (distributional outcomes). They conclude that studies
of elite capture should be based on in-depth and longitudinal empirical investigations that
carefully characterize forms and outcomes of elite capture and consider both the changing
dynamics of social settings and the perceptions held by the people under study.

171. The Tanzanian case study brings out an important point that the elites who dominated the
participatory processes were a creation of development interventions by the project and other
previous and ongoing activities that concentrated their training and exposure on a few
individuals, and elite capture may therefore be endogenous to the project or projects (Lund and
Saito-Jensen, 2013). In repeated interactions with outside development agents, the trained elites
and other development brokers may also manipulate the outcomes of baseline needs assessments
(with the approval of target communities) so as to align reported community needs with a
development agents funding priorities. Such situations make it difficult to separate elite control
of development agents with elite control of beneficiary communities, as it is not uncommon to
find baseline needs assessments supported by different development agents having differing
emphasis about community needs based on the funding priorities of each development agent. The
development brokers could therefore play the role of portfolio managers in allocating the wide
array of community needs among different development agents. The Tanzanian case study also
implies a need for research designs on elite capture to include background characteristics of the
elites capturing development processes, their association with past and present community-level
interventions, and other ongoing development interventions under the control of the same or
other community elites.

172. Prinsen and Titeca (2008) studied elite capture in School Management Committees
(SMCs) in Uganda, and concluded that elite capture does not trickle down to the lowest levels in
the management of public services. The study investigated membership in order to ascertain
whether SMC members belong to the local elite, whether the elites hold on to these positions for

71
as long as they can, whether individuals within the SMCs capture all power for their own benefit
and resist delegation of tasks, and whether groups at a higher level (namely, politicians and
education officials) capture local SMCs see Reinikka and Svensson (2004; 2005; 2006) for
estimates of leakages of the capitation grants and the regressive nature of amounts actually
received by the intended beneficiaries.

173. The personal profiles of SMC members do not prima facie suggest they are the local elite:
most fall in the younger age bracket 30-44 years and a third of them are women. A reported 90%
of SMC members have at least completed primary education and half of them completed
secondary education, and about one-third are active or retired civil servants (Prinsen and Titeca,
2008). Secondly, although SMC members differ from the average parent (giving them a potential
elitist character), the formal rules with regard to term limits prevent them from personally
capturing control over the committees because virtually all of them are replaced in elections after
one or two terms in office. However, at village level, a group of about three or four dozen
individuals control all positions in local public bodies (ranging from church to soccer club)
because almost all SMC members accumulate three or four positions in these various bodies.
Thirdly, the meetings are rarely dominated by one person, and there was therefore no pattern of
concentration of power and control in one single person or function. Fourthly, there were
relatively few local politicians (e.g. councilors) in SMCs, and the few higher-level councilors
elected to the SMCs showed poor attendance at meetings and rarely attract extra resources to the
school. However, district education officers have capacity to influence decisions about additional
resources from Government coffers, and are far more influential than councilors as an
intermediary between schools and NGOs.

174. The academic literature shows that elite capture in Kenya takes place at national, regional
and local scales. For example, the African Development Bank Group (2010) cites the elite capture
of fiscal governance by Members of Parliament (MPs) through the introduction of the
Constituency Development Fund which was under the control of individual MPs ostensibly as an
element of fiscal decentralization. The national-cum-regional scale is illustrated by the limitation
of the role of county governors by the national government to less political and quieter
functions of development (Chome, 2015). In the Kenya coast, local county leaders have to show
that they are able to protect local interests in terms of both immediate assistance and communal
narratives of marginalization. The official de-politicization of devolution has made county leaders
vulnerable within incompatible expectations between the local and national narratives of
devolution, which could be interpreted as elite capture or re-centralization (Chome, 2015).

175. The micropolitical processes of actors existing in a space between state and non-state at
the local level include slum upgrading in Nairobi (Rigon, 2004), a field experiment involving
planning meetings for the Local Authority Service Delivery Action Plan (LASDAP) for funding
through the Local Authority Transfer Fund (Sheely, 2015), communal governance of rangelands
in northern Kenya (Roba, 2014), and community forestry in the context of local empowerment
(Chomba, Nathan, Minang and Sinclair, 2015). As in Sheely (2015), Owolabi (2011) examination
of the LASDAP program shows that program outcomes failed to measure up, as very little of the
development funds were spent on the implementation of projects, local participation rates were
low, and the process did not fare well at promoting greater transparency and accountability
within local governance structures. Owolabi (2011) concludes that as a result of these
shortcomings, residents have developed an attitude of resignation rather than enthusiasm, with
participation see Rose and Omolo (2013) on local participation from Local Authority Service

72
Delivery Action Plan, Constituency Development Fund, and Water Action Groups and the
lessons to follow through in public participation as mandated by the 2010 Constitution. Rigon
(2004) study showed that community elections were merely tools to institutionalize preexisting
power structures by turning landlords into the legitimate representatives of the entire
community. A case study in community forestry investigated what types of powers were
transferred to the local level, how representative the local institution was, and how its formation
and composition affected the empowerment of socially and economically differentiated groups
(Chomba, Nathan, Minang and Sinclair, 2015). The study showed that national forest policies and
actors transferred minimal powers that could enable local communities to execute forest
protection and conservation roles; and representation within the Community Forest Association
was highly skewed in favor of small and already powerful local elites.

176. The World Bank report (2011) had cautioned that county governments may be more
prone to elite capture and less willing to trade off narrow local interests for national greater
good, and Kenyas own experience with decentralized funds has highlighted some of these
challenges. In a review of decentralization in Africa, Smoke (2003) presents the popular myths
and misconceptions about decentralization, which include viewing decentralization as a panacea
(unambiguously desirable phenomenon) or a tragedy (destructive force). Smoke (2003) argues that
many alleged dangers of decentralisation, such as local government budget deficits and local elite
capture are not inherent flaws of decentralization but instead result from poor design,
procedural weaknesses, political immaturity and capacity problems that ought to be targeted by
sensible decentralization and local government reform programmes.

177. The World Bank (2010) research study on Gender and Governance in Rural Services
provides a succinct summary of clientelism and elite capture and their developmental outcomes.
In the context of service provision, the report states that clientelism is the excessive tendency of
political patrons to provide public services to specific clients in exchange for political advantage,
which leads to inequality in service provision, typically to the disadvantage of women and the
poor. It may involve preferential provision of agricultural services such as subsidized inputs or
farm-specific advice, and public infrastructure (such as drinking water facilities) to locations that
are strategically important for politicians, such as their home constituencies. The report adds that
in socially fragmented societies, clientelism often functions along ethnic, religious, or caste
lines. The World Bank (2010) notes that clientelism has an important psychological effect: it
undermines the ability of citizens to demand better services, because they consider services as
gifts provided by political patrons rather than something to which they are entitled. Clientelism
can also undermine collective action, because community-based groups can be co-opted by
clientelistic networks, thereby undermining the empowering role they could play.

6.4 MEASUREMENT OF CLIENTELISM AND ELITE CAPTURE

178. There are difficulties in defining, conceptualizing and measuring clientelism and elite
capture. Some of the studies that have attempted to measure various dimensions of clientelism are
Roniger (2004) using the inflationary character of expectations in patronage-ridden polities
(expanding public expenditures) in relation to ideal structure of demand (city size, density,
poverty, crime); while Remmer (2007) studied changes in spending priorities to discern how
patronage allocations fluctuate with partisanship, electoral cycles, revenue sources, and public
sector investment. Alesina, Baqir and Easterly (2000) and Alesina, Danninger and Rostagno (2001)

73
compared public employment in American cities and Italy with counterfactual ideals to derive
plausible estimates of influence of clientelism on public employment.

179. The Indonesian studies on elite capture have taken the form of large-scale household
surveys that compared administrative data on the amount of rice distributed with survey data on
the amount actually received by households (Olken, 2006), randomized experiments using
household and community data collected by researchers and government departments (Alatas,
Banerjee, Hanna, Olken and Tobias, 2012), purposively selected case studies (Dasgupta and Beard,
2007; and Fritzen, 2007), culling longitudinal data accumulated during implementation of a
project (household data at baseline, midterm, and two further household surveys in treatment
and control villages), and detailed interviews with key project and community leaders (Beard,
Pradhan, Rao, Cartmill and Rivayani, 2008). The studies normally use the analytical framework
provided in Ravallion (2000) and Galasso and Ravallion (2005) that decompose target differentials
into an inter-village component, reflecting the centers efforts at reaching poor communities,
and an intra-village component, that describes the efforts of those communities to reach their
own poor.

180. There are difficulties in measuring elite capture due to definitional problems and in
conceptualizing its essential dimensions. However, Diaz-Cayeros, Magaloni and Euler (2014) cite
leakages of public funds and relief operations through local power structures and corruption. For
example, Reinikka and Svensson (2004) measured an astounding leakage of 87 percent in a
program in Uganda meant to provide grants to schools for non-wage expenditures. According to
Reinikka and Svensson (2004), most schools received nothing, the bulk of the school grant was
captured by local officials (and politicians), and schools in better-off communities managed to
claim a higher share of their entitlements. However, the findings of the public expenditure
tracking survey prompted the central government to publish monthly transfers of public funds to
districts in newspapers, and required primary schools to post public notices on all inflows of
funds, which promoted accountability in the workings of the grant program (Reinikka and
Svensson, 2005; Reinikka and Svensson, 2006). The second example was Olken (2006) who
similarly found that the leakages in a poverty relief program delivering rice in Indonesia were
large enough that they offset the welfare gains from having the program in place at all. It is
therefore important to introduce measures of elite capture that could include leakages of budget
allocations, and the regressive nature of actual spending on intended beneficiaries.

181. Prinsen and Titeca (2008) study on elite capture in School Management Committees in
Uganda investigated whether SMC members belong to the local elite, which included
administering individual questionnaires on committee members that included age, sex,
occupation, and leadership in other local level institutions. However, Prinsen and Titeca (2008)
findings tilted toward capture (cooptation) of elites into SMCs, rather than elite capture of power
and community resources. The empirical studies on clientelism and elite capture are normally
expensive undertakings undertaken ex-post, and therefore derive lessons for future policy and
program actions but do not normally influence the direction of the activities they address since
most of the projects are short-term interventions (e.g. relief food).

74
7. CONCLUSION

182. The paper is intended to suggest a framework for compiling a devolution index for Kenya
as a whole rather than for individual counties. The report highlights variables that have been used
in computing devolution indices in different countries across the world, especially in India where
the government compiles devolution indices on an annual basis.

183. The three core dimensions of decentralization (administrative, political and fiscal) and
their constituent elements are the basis for measuring devolution. Although most of the variables
can only be measured on ordinal scale (except revenue and expenditure), decentralization is still
conceived as a single, continuous dimension ranging from centralization in which the central
government monopolizes decision-making authority, to decentralization in which subnational
governments have extensive decision-making authority. Generally, the measurement of
devolution uses indicators that cut across ordinal and interval scales of measurement, and it is
therefore inherently difficult to compute a meaningful composite index of devolution.

184. The devolution index is an aggregate of functions and funds transferred by the
government to subnational governments. The analysis of the framework for devolution is
country-specific and needs to measure the extent to which constitutional provisions with respect
to devolution have been implemented in practice, and reflected in the enabling legislation. This is
expected to include the institutional setup, transfer of functions and funds, capacity building to
the lower tiers of government, and intergovernmental fiscal relations between the national
government and the county governments and horizontally between the county governments. The
dimensions of administrative and political decentralization that can be included in a national
devolution index are likely to be fairly similar across all counties (other than the relevant aspects
of administrative and political governance and accountability at county and lower levels), and
initial attempts at county devolution index could therefore concentrate on fiscal decentralization.

185. Administrative decentralization has been measured in terms of the degree of autonomy
over executive appointment at different levels, and the share of subnational governments in total
government administration employees (Treisman, 2002); while proxies for political
decentralization consist of some measure of the existence of elections at local level (Treisman,
2002; Schneider, 2003a). Due to the nature of the Constitution of Kenya 2010, administrative and
political decentralization can be analyzed as part of devolution framework and the extent to
which that framework has been conceived through enabling legislation and in actual
implementation. The issues of capacity building and creation of mechanisms to ensure Fair,
Accountable, Incorruptible and Responsive (FAIR) county governance will merit discussion with
relevant stakeholders with a view to generating dimensions of measurement to be tried at a future
date.

186. The elements of fiscal decentralization include (a) intergovernmental fiscal transfers, (b)
the extent to which revenue functions have been transferred to the counties, and (c) the extent to
which the county governments are eager to raise own revenue. The two measures of devolution
of finances are (a) financial autonomy as measured by Total state expenditure on assignments and
grants to local bodies in a given year/Total state expenditure (expenditure and net lending) in the
same year; and (b) functional autonomy as measured by Quantum of untied funds at the disposal
of local bodies in a given year/Total funds available with local bodies in the same year (Mitra and

75
Verma, 1997). Finally, the dimension of functions should only include expenditure assignments,
as stipulated in Fourth Schedule of the Constitution, with the indicative list in the Schedule being
elaborated further into distinct functions.

187. The Constitution states that the Equitable Share of the revenue raised nationally that is
allocated to county governments shall be not less than 15% of all revenue collected by the
national government each year, while the Equalisation Fund was set at one half percent of all the
revenue collected by the national government. Since the equitable share normally exceeds the
minimum, total transfers to each county could be split into a mandatory share based on the
minimum provided for in the constitution, and discretionary non-matching transfers for the
amount over and above the 15%. The National Government Constituencies Development Fund
could also be included in an index or sub-index of fiscal decentralization depending on the
purpose for which the sub-index is computed.

188. Since Kenya is in the transitional phase in the implementation of the Constitution of
Kenya 2010, it is unlikely to have the requisite data for compiling indices of various dimensions of
devolution. Other than indicators of fiscal decentralization, Kenya has sparse data on
functionaries actually shifted down to counties, including those inherited from the defunct
county councils and municipalities. Even if such data was available, the concept of functionaries
in the literature, especially with respect to India, refers to those seconded to local bodies, rather
than those absorbed from other units of government and considered as employees of the local
bodies.

189. The data requirements on measures of fiscal decentralization may also pose challenges,
especially relating to fiscal autonomy due to problems of data on locally-raised revenues. The
immediate concern should be mapping of data requirements needed for computation of indices of
dimensions of devolution, and a more detailed attempt to compile data needed for measures of
fiscal decentralization. The compilation of devolution indices will also generate demand for data,
and the data will raise new policy questions that will in turn bring new visions of change and thus
become the basis upon which the future of devolution will be conceived and constructed. In
addition, Kenya may need to have homegrown measures of devolution that are aligned to the
constitutional provisions, as the indices in other countries are normally aligned to local
constitutional, administrative and political setups that may not necessarily hold for Kenya. It is
important to understand the government architecture (including functional jurisdictions) and the
financial (in)dependence that counties are operating in so that the devolution index is adequately
representative of Kenyas political, administrative and economic environment.

190. Initial effort could focus on (a) agreeing on parameters for measuring achievements in
administrative and political dimensions (based on the constitution and enabling legislation), and
variables that are common across counties be given low weights or reclassified under the
framework for devolution; (b) using participatory processes to generate indices of accountability
and governance (and associated governance deficits); (c) using participatory processes to generate
weights of selected sub-indices and the dimensions they feed into (administrative, political and
financial); (d) ensuring that the goalposts (minimum and maximum attainable values) are fixed
rather than dependent on past or current achievements, so as to allow for measurement of
differences and change across time and space; and (e) initially introducing intended measures as
practices of good governance, and thus put more initial value and effort in conceptual and data
problems rather than in absolute values of the indices.

76
191. The report emphasizes the need for adopting common financial reporting for the entire
government in line with the guidelines provided by the International Monetary Fund and United
Nations on Classification of the Functions of Government (COFOG) and classifications of revenue
and expense. The literature also points to the need for participatory processes in budget drafting,
its discussion, and its execution. The enabling legislation provide for harmonization of reporting
standards via Article 104 of the Public Finance Management Act 2012, which states that the
responsibilities of a County Treasury includes consolidating the annual appropriation accounts
and other financial statements of the county government in a format determined by the
Accounting Standards Board, and ensuring compliance with accounting standards prescribed
and published by the Accounting Standards Board from time to time.

77
ANNEX 1: Fourth Schedule Distribution of Functions between the National Government
and the County Governments

PART 1: NATIONAL GOVERNMENT

1) Foreign affairs, foreign policy and international trade.

2) The use of international waters and water resources.
3) Immigration and citizenship.
4) The relationship between religion and state.
5) Language policy and the promotion of official and local languages.
6) National defence and the use of the national defence services.
7) Police services, including (a) the setting of standards of recruitment, training of police and
use of police services; (b) criminal law; and (c) correctional services.
8) Courts.
9) National economic policy and planning.
10) Monetary policy, currency, banking (including central banking), the incorporation and
regulation of banking, insurance and financial corporations.
11) National statistics and data on population, the economy and society generally.
12) Intellectual property rights.
13) Labour standards.
14) Consumer protection, including standards for social security and professional pension
plans.
15) Education policy, standards, curricula, examinations and the granting of university
charters.
16) Universities, tertiary educational institutions and other institutions of research and higher
learning and primary schools , special education, secondary schools and special education
institutions.
17) Promotion of sports and sports education.
18) Transport and communications, including, in particular (a) road traffic; (b) the
construction and operation of national trunk roads; (c) standards for the construction and
maintenance of other roads by counties; (d) railways; (e) pipelines; (f) marine navigation;
(g) civil aviation; (h) space travel; (i) postal services; (j) telecommunications; and (k) radio
and television broadcasting.
19) National public works.
20) Housing policy.
21) General principles of land planning and the coordination of planning by the counties.
22) Protection of the environment and natural resources with a view to establishing a durable
and sustainable system of development, including, in particular (a) fishing, hunting and
gathering; (b) protection of animals and wildlife; (c) water protection, securing sufficient
residual water, hydraulic engineering and the safety of dams; and (d) energy policy.
23) National referral health facilities.
24) Disaster management.
25) Ancient and historical monuments of national importance.
26) National elections.
27) Health policy.
28) Agricultural policy.

78
 29) Veterinary policy.
30) Energy policy including electricity and gas reticulation and energy regulation.
31) Capacity building and technical assistance to the counties.
32) Public investment.
33) National betting, casinos and other forms of gambling.
34) Tourism policy and development.

PART 2: COUNTY GOVERNMENTS

1) Agriculture, including (a) crop and animal husbandry; (b) livestock sale yards; (c) county
abattoirs; (d) plant and animal disease control; and (e) fisheries.
2) County health services, including, in particular (a) county health facilities and
pharmacies; (b) ambulance services; (c) promotion of primary health care; (d) licensing
and control of undertakings that sell food to the public; (e) veterinary services (excluding
regulation of the profession); (f) cemeteries, funeral parlours and crematoria; and (g)
refuse removal, refuse dumps and solid waste disposal.
3) Control of air pollution, noise pollution, other public nuisances and outdoor advertising.
4) Cultural activities, public entertainment and public amenities, including (a) betting,
casinos and other forms of gambling; (b) racing; (c) liquor licensing; (d) cinemas; (e) video
shows and hiring; (f) libraries; (g) museums; (h) sports and cultural activities and facilities;
and (i) county parks, beaches and recreation facilities.
5) County transport, including (a) county roads; (b) street lighting; (c) traffic and parking; (d)
public road transport; and (e) ferries and harbours, excluding the regulation of
international and national shipping and matters related thereto.
6) Animal control and welfare, including (a) licensing of dogs; and (b) facilities for the
accommodation, care and burial of animals.
7) Trade development and regulation, including (a) markets; (b) trade licences (excluding
regulation of professions); (c) fair trading practices; (d) local tourism; and (e) cooperative
societies.
8) County planning and development, including (a) statistics; (b) land survey and mapping;
(c) boundaries and fencing; (d) housing; and (e) electricity and gas reticulation and energy
regulation.
9) Pre-primary education, village polytechnics, home-craft centres and childcare facilities.
10) Implementation of specific national government policies on natural resources and
environmental conservation, including (a) soil and water conservation; and (b) forestry.
11) County public works and services, including (a) storm water management systems in
built-up areas; and (b) water and sanitation services.
12) Fire fighting services and disaster management.
13) Control of drugs and pornography.
14) Ensuring and coordinating the participation of communities and locations in governance
at the local level and assisting communities and locations to develop the administrative
capacity for the effective exercise of the functions and powers and participation in
governance at the local level.

Source: The Constitution of Kenya, 2010, Fourth Schedule

79
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