Social funds and decentralised government are two distinct phenomena which are spreading rapidly throughout the developing world. The burning question is: can social funds, which have emerged in most countries as a highly centralised model, adapt to decentralised environments?

This is possible, according to research from the Development Studies Institute at the London School of Economics in the UK. Social funds aim to empower the poor by financing small community-managed projects. Normally funded through grants, they operate autonomously with regard to civil service regulations. Decentralisation involves the handing over the responsibility of specific functions by national government to local governments. The rationale is that local governments are better informed about local needs and can offer citizens greater control.

The authors acknowledge that, in their earliest years, social funds were often obstacles to decentralisation. Analysis of the Jamaican Social Investment Fund, for example, shows that its projects were driven by local elites and coordinated poorly with local government. But they describe new styles of social fund (such as those in Honduras, Albania and Armenia) that are being designed to support decentralisation. They also argue that social funds, designed to respond to local demand, can easily adapt to decentralised environments. The Bolivian Social Fund, for example, facilitated a national decentralisation law, by demonstrating that demand-driven investment planning was possible.

The research follows the implications of decentralisation for social fund design, step-by-step through the project cycle, noting that:

• Social funds can boost decentralisation by assigning capital budgets to eligible municipalities according to a prescribed formula.
• Competitive project selection can be beneficial. In Indonesia this has led local governments to propose projects that benefit neighbouring municipalities too.
• Project design processes must aim for a careful balance between a social fund’s technical expertise and a community’s knowledge of its needs and local context.
• Simple infrastructure projects can often be more effectively implemented by communities than by contractors.
• If communities and local governments participate at each stage of the project cycle, local enthusiasm will make long-term operation and maintenance more likely.

It is that clear social funds are compatible with decentralisation, can work closely and well with decentralised institutions and can even spearhead decentralisation through innovations in the project cycle. As large-scale organisations, however, social funds do face trade-offs between how much support they can offer local governments and the number of projects they must complete. The research suggests a series of reforms to tackle this:

• Staff performance should be managed by incentives not organisational directives.
• Staff should be assessed on the medium- and long-term success of their projects, not just the number of projects they manage.
• Project quality and longer-term outcomes should be assessed regularly and results fed into implementation procedures.
• Social funds should create performance and sustainability indices to rank the results of local governments and communities – to increase transparency and incentives for success.

Source(s):
‘Social Funds and Decentralisation: Optimal Institutional Design’, Public Administration and Development 26, pages 303-315, by Jean-Paul Faguet and Frank-Borge Wietzke, 2006

Funded by: World Bank

id21 Research Highlight: 13 July 2007

Further Information:
Jean-Paul Faguet and Frank-Borge Wietzke
Development Studies Institute
London School of Economics
Houghton Street
London WC2A 2AE
UK

Tel: +44 (0)20 79556435
Contact the contributor: f.b.wietzke@lse.ac.uk

Development Studies Institute (DESTIN), London School of Economics, UK

Other related links:
"Jamaican Social Investment Fund: elite-driven, but pleasing the majority"

"Social funds contribute to poverty reduction in Malawi"

World Bank portal on Social Funds

Why Are Social Funds So Popular? Working Paper from the Social Perspective on Development Branch, UN (PDF)

A Debate on Social Funds: empowering communities for development or charity relief in disguise? Publication of the World Bank Administrative and Civil Service Reform Thematic Group (PDF)