• Local governance

Local governance

This paper analyses the desirability of a loan from the World Bank (WB) for strengthening local governments in Kerala under two scenarios.

First, the paper examines the spending ability and effectiveness of the local governments where the loan supplements the resources of the local governments in addition to the funds they are entitled to from the State government. The paper finds that:

• even if additional resources are provided (through external assistance such as a WB loan), significant rethinking and procedural changes are needed to improve the effectiveness of local governments
• disenchantment with the decentralisation experiment in Kerala is widespread and this has been aggravated by some of the grave failures of local governments
• democratic mechanisms advocated globally have already been put in place in Kerala and most have been found ‘inadequate’ to improve the efficiency, effectiveness and service delivery of local governments
• it may be necessary to analyse the incentives systems to different stakeholders in the whole process to see how these incentives (not only monetary) mechanisms could be improved to ensure that elected representatives and officials perform their expected functions effectively, and that citizens participate democratically in discharging their functions of oversight and pressure-building

The second scenario examines the cost of borrowing of the State government where it directly or indirectly substitutes a part of the resources that it has committed to give to the local governments, with the proposed loan. The paper finds that:

• the State government would benefit from a WB loan in strengthening local governments only under certain conditions, such as, the government should be able to reduce the allocation of plan funds to local governments when this loan becomes available
• if the planned allocation of State’s resources to local governments, comes down and if a loan from the WB could (at least partially) be used to meet their requirements, the cost of borrowing would be low for the State government
• in order to use the WB loan for local government purposes and as a route to reduce the cost of borrowing for the State government, considerable changes are required in the planned pattern of allocation as well as deft bargaining with the Bank.

The paper concludes that though additional resources are needed for local governments in Kerala, extreme caution is required to ensure that they would be spent in socially beneficial ways.

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