Complex Interplay of Factors in Institutional Model of Decentralization: Theory and Application

The Institutional Model of Decentralization (IMD) is elaborated and used to explain two things: first, how the hypothesized improvements in efficiency and growth after decentralization may fail to materialize; second, how the interplay among economic, administrative and institutional factors affect the welfare outcome of decentralization, given the widespread local capture following political decentralization. Rather than exerting direct effects, however, the mechanism is complex, involving intangibles and feedback effects. When applied to actual cases in some regions, a particular method capable of capturing complex inter-relations and quantifying intangibles is therefore used. It is revealed that people’s participation plays the most critical role in reducing capture while simultaneously maximizing welfare. As the quality of local leaders is found to be decisive in influencing the outcome, a typology of leaders is subsequently constructed.