Decentralization is a popular component of public sector reform in many developing countries. Local governments are thought to be able to adapt more quickly to local conditions and to respond more appropriately to the needs of their citizens. However, decentralization also has drawbacks. Foremost is the efficiency advantage of the central government in providing public services because of economies of scale and better access to resources. The empirical literature on the effect of decentralization on development shows mixed results depending on the decentralization measure, outcome variables, and countries covered. This study looked at the relationship between decentralization and poverty using data from Philippine cities and municipalities. Results suggest that decentralization, as represented by fiscal autonomy and measured by the share of locally-sourced revenues to total local government revenues, is indeed associated with lower poverty. However, this relationship is not linear – the marginal effect of decentralization on poverty diminishes as decentralization increases. Moreover, decentralization moderates the positive effect of good governance on poverty reduction; and the magnitude of the relationship between poverty and decentralization is stronger in poorer municipalities than in richer ones.
