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5 DECENTRALIZATION, DEMOCRACY, AND GRAFT If I’m not paid, I won’t sign papers for anyone. —Former deputy mayor of Marbella, Spain, Isabel García Marcos Did the mayor of Lyon and minister of foreign commerce steal his daughter’s diary ? Would the information therein implicate his son-in-law in a bribery and kickback scheme hatched not long after decentralization in France? Are illegal kickbacks from local public works projects actually income subject to alimony considerations? Do living in a home given to one’s mistress by a property developer and then altering the local zoning plan for that developer constitute corruption? Such are the questions European judges have had to address in investigating and prosecuting corruption in local and regional politics.1 Decentralization has become an accepted remedy for the perceived and real ills of centralized government. Its advocates, from the European Commission to the OECD to the World Bank, suggest that putting governance in the hands of local authorities creates competition between authorities of adjacent communities, with the expectation that government or administrative competition will lead to better services and economic growth.2 Local government is also expected to respond better, that is, more efficiently and effectively, to specific local needs. Decentralization is also hailed as a way of bringing transparency to government activities, since local citizens are supposedly best placed to act as watchdogs over their local authorities, as opposed to their trying to keep track of distant central government authorities. There are countervailing pressures, however. Precisely because local governments can be held directly accountable by citizens for the state of their communities , local governments have a strong incentive to favor local businesses in awarding contracts, thereby foregoing the benefits of forcing price competition 107 among contractors for government services. Hence, any gains from accountability are lost in local preference. Although in the long run these inefficiencies may force the government to increase taxes to pay for increased expenses,elections occur in the short run, and there are few hard budget constraints—central governments tend to bail out local debt. In turn, the elections, including the much-touted reforms in Italy and France that provide for the direct election of mayors, substantially increase demands for campaign and party financing. If that financing is not forthcoming through legal means, then kickbacks from local public works contracts become a desirable means of supply. These new decentralized arrangements, even when they are inserted into uncorrupt areas, coincide in democracies with new, local elections, which bring with them the demands for financing. Combining devolution of authority with privatization of service delivery, but not with privatization of the authority to decide who delivers what services, creates opportunities for corruption. Auctioning or awarding public works and service contracts to private firms or licensing private firms as qualified to deliver certain services actually creates incentives for corruption on two sides—by those who supply or contract for the work, and by public authorities or members of a commission who award the contract. These incentives dovetail with the incentive to favor local businesses over outof -area firms in awarding contracts. Giving local governments the authority to manage the social and economic development of a territory gives them discretion over whether to deliver services themselves, to privatize (contract out) the delivery , or to not deliver services at all. The third option is electorally untenable, and the first two leave considerable scope for favoritism and corruption. If there are oversight and monitoring commissions, these can be co-opted by the local agencies they monitor. Decentralization’s goal of reducing the size and scope of government bureaucracy may facilitate corruption because trust and cooperation, essential elements in any transaction, corrupt or honest, are easier to create in smaller groups.In addition,“the organisation of institutionalised corruption also requires networks,”3 and networks are more likely to exist at the local level. An additional countervailing force is that the processes of devolution tend to obfuscate the delineation of public authority, as in which agencies and institutions have“property rights” over the exercise of what aspects of public authority. In the business community,wining and dining potential clients is an accepted way of doing business; providing material incentives to potential clients is as well. What are automobile cash rebates but kickbacks from the manufacturer to the purchaser for having“awarded”the contract to the manufacturer (that is, buying the car from the company)? When taking out a mortgage from a bank,home buyers...

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