This paper aims to inform future policy by providing a critical analysis of grassroots finance models. It argues for more locally centred and driven sustainable development but also considers the limitations: What are the critical challenges of participation, scale and the translation of savings into development resources? By concentrating on activities with a high degree of community leadership, this paper looks at the challenges of shaping localised arrangements to fit with structured development programming.

In the IMFG Perspectives Paper (No. 16), Reducing Urban Greenhouse Gas Emissions: Effective Steering Strategies for City Governments, Sara Hughes reviews the unique strategies of three cities leading the charge: Toronto, New York City, and Los Angeles. The paper identifies three strategies that have proven effective: Building and maintaining a broad-based coalition of governmental and non-governmental actors working toward a common goal; Investing in capacity-building, data collection, and education; and Embedding new ideas, financial tools, and standards into local formal and informal decision-making institutions. “Cities are critical climate change actors, and will be for the foreseeable future,” says Hughes. “Given the jurisdictional and financial constraints local governments face, their climate change goals will demand creative partnerships, new tools and systems, and innovative institutional cultures.” This paper is part of a series of IMFG publications and events focusing on cities and climate change.

The report that follows begins with a background chapter, contributed by our expert looking at
the political economy of revenue raising in line ministries. Working with the GIZ, we engaged
four countries to contribute case studies, using user fees and charges as the revenue source for
examination. The purpose of fees and charges varies from cost recovery to attempts at changing
behavior. For example, the Serbian chapter deals with charges that are aimed at implementing the
‘polluter pays’ principle to reduce types of commercial waste and increase recycling. The political
economy of charges suggests that the public in formerly planned economies may be suspicious
of their imposition, fearing that they will not be matched by any reduction in overall taxation levels.
As well as making it difficult to increase charges as circumstances change, this suspicion
requires politicians to be transparent about how tariffs are set if reasonable collection rates are to
be achieved. Much may depend on the nature of the good or service being provided and how the
public perceives it. Case studies are compareed from Albania, Serbia, Moldova and Germany.

2015 the global community committed itself to an ambitious programme of reform. Achieving the Sustainable Development Goals and implementing the resolutions of the Paris climate conference require that great efforts are made – including those of a financial nature. Many states will have to ensure that untapped or barely used sources of income are developed. Sub-national units such as provinces, departments, districts, and cities will play an increasing role in the mobilisation of public revenues. They are also in the forefront with regard to realisation of the global reform agenda, as many of the objectives concern classic areas of activity of local government: schools, basic medical care, local road construction, public transport, construction of social housing, the supply of drinking water and disposal of waste water, refuse collection etc. These services are already the responsibility or co-responsibility of subnational units. The mobilisation of revenues at sub-national level is therefore not only a financial necessity, it is also prudent from a development policy perspective: if the users and funders of a good match, there is a greater likelihood that the preferences of citizens will be observed and the use of funds monitored. In addition, local taxes and levies are often paid by a broad circle of citizens and companies. This serves to strengthen the relationship between governments and the governed. One thing should be clear in this: although many countries will exploit the scope for collecting local taxes and levies in the future, this potential is nevertheless limited. Many sub-national units will remain dependent on transfer payments from the central state. Cities, districts and the middle tier cannot solve the funding problem of the states on their own. However, they can help to place the provision of public services on a broader foundation of legitimacy and, in co-operation with the national level – for example via the exchange of information – improve fiscal policy as a whole. Consequently, they also contribute to overcoming problems of fragile statehood.

We review recent evidence regarding decentralization and state strength and argue that decentralization can deepen democracy without compromising state strength if adequately designed. We examine how decentralization affects five key aspects of state strength: 1) Authority over territory and people, 2) Conflict prevention, 3) Policy autonomy and the ability to uphold the law, 4) Responsive, accountable service provision, and 5) Social learning. We provide specific reform paths that should lead to strengthening in each. Decentralizing below the level of social cleavages should drain secessionist pressure by peeling away moderate citizens from radical leaders. The regional specificity of elite interests is key. If regional elites have more to lose than gain from national schism, they will not invest in politicians and conflicts that promote secession. Strong accountability mechanisms and national safeguards of minority rights can align local leaders’ incentives with citizens’, so promoting power-sharing and discouraging local capture or oppression. “Fragmentation of authority” is a mistaken inference; what decentralization really does is transform politics from top-down to bottom-up, embracing many localities and their concerns. The state moves from a simpler, brittler command structure to one based on overlapping authority and complex complementarity, where government is more robust to failure in any of its parts. Well-designed reform, focusing on services with low economies of scale, with devolved taxation and bail-outs prohibited, should increase public accountability. Lastly, we advance a novel way that decentralization can strengthen democracy: by allowing citizens to become political actors in their own right, the small scale of local politics should promote social learning-by-doing, so strengthening political legitimacy, state-building, and ‘democratic suppleness’ from the grassroots upwards.