MORNING DISCUSSION
Friday 23rd July, 2021.
Question:
What is Decentralization? What are its merits and demerits?
Decentralization or decentralization is the process by which the activities of an
organization, particularly those regarding planning and decision making, are
distributed or delegated away from a central, authoritative location or group.
(Wikipedia).
Decentralization is the delegation of planning and decision-making authority to
lower-level individuals or organizational units. This concept applies to various
organizations, including in the business sector and the government sector.
A key difference.
Under centralization, planning and decision-making authority rests with top-level
officials. An example of centralization is an organization within the military.
Military leaders design strategy, planning, and decision-making, while subordinates
only carry out orders.
In contrast, under decentralization, individuals or organizational subunits have some
power to do the planning and make decisions. The franchise chain is an example of
decentralization. Franchisees are responsible for their own operations, including
attracting customers, paying staff, and making a profit.
Two Broad types: Corporate and Government
Corporate decentralization
Company executives assign more decision-making authority and responsibility to
subordinates or subunits. It is to encourage flexibility and help with faster decision
making, which, in turn, can speed up the response. Also, it is to increase
empowerment. Decentralization gives frontline staff the power, authority, and
responsibility to make decisions immediately.
Government decentralization
Government decentralization is one of the important processes in building
democracy in a country. Suppose the central government has had a monopoly on
public decisions and policies. In that case, some of the powers will then shift to local
governments.
Types of Government Decentralization;
1. Fiscal decentralization
2. Political decentralization
3. Market decentralization
4. Administrative decentralization
Fiscal Decentralization
Financial responsibility is a core component of decentralization. If local
governments and private organizations are to carry out decentralized functions
effectively, they must have an adequate level of revenues –either raised locally or
transferred from the central government– as well as the authority to make decisions
about expenditures. Fiscal decentralization can take many forms, including a) selffinancing or cost recovery through user charges, b) co-financing or co-production
arrangements through which the users participate in providing services and
infrastructure through monetary or labor contributions; c) expansion of local
revenues through property or sales taxes, or indirect charges; d) intergovernmental
transfers that shift general revenues from taxes collected by the central government
to local governments for general or specific uses; and e) authorization of municipal
borrowing and the mobilization of either national or local government resources
through loan guarantees. In many developing countries local governments or
administrative units possess the legal authority to impose taxes, but the tax base is
so weak and the dependence on central government subsidies so ingrained that no
attempt is made to exercise that authority.
Political Decentralization
Political decentralization aims to give citizens or their elected representatives more
power in public decision-making. It is often associated with pluralistic politics and
representative government, but it can also support democratization by giving
citizens, or their representatives, more influence in the formulation and
implementation of policies. Advocates of political decentralization assume that
decisions made with greater participation will be better informed and more relevant
to diverse interests in society than those made only by national political authorities.
The concept implies that the selection of representatives from local electoral
jurisdictions allows citizens to know better their political representatives and allows
elected officials to know better the needs and desires of their constituents.
Political decentralization often requires constitutional or statutory reforms, the
development of pluralistic political parties, the strengthening of legislatures, creation
of local political units, and the encouragement of effective public interest groups.
Economic or Market Decentralization
The most complete forms of decentralization from a government's perspective are
privatization and deregulation because they shift responsibility for functions from
the public to the private sector. Privatization and deregulation are usually, but not
always, accompanied by economic liberalization and market development policies.
They allow functions that had been primarily or exclusively the responsibility of
government to be carried out by businesses, community groups, cooperatives,
private voluntary associations, and other non-government organizations.
 Privatization. Privatization can range in scope from leaving the provision of
goods and services entirely to the free operation of the market to "publicprivate partnerships" in which government and the private sector cooperate to
provide services or infrastructure. Privatization can include: 1) allowing
private enterprises to perform functions that had previously been monopolized
by government; 2) contracting out the provision or management of public
services or facilities to commercial enterprises indeed, there is a wide range
of possible ways in which function can be organized and many examples of
within public sector and public-private institutional forms, particularly
in infrastructure; 3) financing public sector programs through the capital
market (with adequate regulation or measures to prevent situations where the
central government bears the risk for this borrowing) and allowing private
organizations to participate; and 4) transferring responsibility for providing
services from the public to the private sector through the divestiture of stateowned enterprises.
 Deregulation. Deregulation reduces the legal constraints on private
participation in service provision or allows competition among private
suppliers for services that in the past had been provided by the government or
by regulated monopolies. In recent years privatization and deregulation have
become more attractive alternatives to governments in developing countries.
Local governments are also privatizing by contracting out service provision
or administration.
Administrative Decentralization
Administrative decentralization seeks to redistribute authority, responsibility and
financial resources for providing public services among different levels of
government. It is the transfer of responsibility for the planning, financing and
management of certain public functions from the central government and its
agencies to field units of government agencies, subordinate units or levels of
government, semi-autonomous public authorities or corporations, or area-wide,
regional or functional authorities.
The three major forms of administrative decentralization -- deconcentration,
delegation, and devolution -- each have different characteristics.

Deconcentration transfers decision-making authority and financial and
management responsibilities to various central government agencies. If
previously, the central government officials in the capital city decided, it
shifted to those working in the regions, provinces, or districts after
decentralization.

Delegation distributes responsibility for various public functions to semiautonomous organizations such as regional hospital companies, regional
development companies, or transportation authorities. They may not be under
the control of the central government.

Devolution delegates power from the central government to subnational
governments. It may involve the transfer of decision-making, financial, and
management powers.
MERITS OF DECENTRALIZATION.
1. Diversification of activities
Decentralization reduces the burden of the chief executives with making
routine decisions. They can easily devote the time available for important
activities
such
as
diversification
of
products,
raising
necessary
finance, obtaining licenses and starting new lines of production and solving
crucial problems of the business concern, while less important and routine
may be left to the middle and supervisory levels.
2. Development of the Managerial Personnel
As the business grows in size, it requires the services of a large number of
managers and here decentralization provides a training ground for the would-
be managers. The managers learn by experience within the organization
concerned.
3. Effective Control and Supervision
Decentralization leads to effective control and supervision. Since concerned
managers enjoy full authority to make changes in work assignment, to take
disciplinary actions, to change production schedules or to recommend
promotions, they are in a position to supervise the subordinates’ activities.
4. Improvement of morale
Decentralization helps improvement of managerial ability which leads to an
increase in their morale and this results in a higher productivity.
5. Satisfaction of human needs
Decentralization is an important tool for satisfying human needs of power,
independence, status and prestige. This satisfaction helps in building a cadre
of satisfied managers, who feel their responsibility towards company’s work.
6. Quick and wise decision possible
Since decision-making authority is as near as possible to the place where
action takes place, those having this authority can make reasonably accurate,
wiser and timely decisions because they are well aware of the realities of the
situation. Decentralization also minimizes the delay in communicating
information.
7. Better utilization of Management
Other economies may be achieved through the better utilization of lower and
middle management, greater incentive, more and improved training
opportunities, insurance that some products will not be pushed at the expense
of others.
8. Employee Management
Closer and better employee management and community relations are
possible in small administrative units for business as a whole, where
decentralization may mean a more widespread distribution of roles and
purchases, which may reduce proportionately the unfavorable impact of sales
decline.
9. Increase Social Net Product
Decentralization may result in an increase in the managerial social net
product, i.e., benefits to the community as distinct from benefits to the
company. These general benefits may include more freedom of action for
individuals, more widespread opportunity for constructive individual
participation, less social stratification within the business.
10.Reduces the Burden of Top Executives
It frees the top managers from the burden of taking too many operating
decisions. This enables specialization and also permits the top managers to
think for the future and make plans accordingly.
11.Facilitates Diversification
Diversification
of
products
or
departmentalization.
Without
decentralization,
meaningless and practically impossible.
12. Improves Motivation
markets
is
possible
only
by
departmentalization is
Decentralization provides more chances for the executives to exercise
initiative without any undue interference from the top executive. This
improves the improves the morale of the employees and motivate them for
peak performance.
13.Secures Better Co-ordination
As self-sufficient departments are established with necessary service
functions, all the activities are coordinated at the departmental level.
14.Ensures Effective Control
It is comparatively easy to measure the performance of the operations at the
department level. This will lead to effective control.
15.Develops the Quality of Managers
The executives will get training and also opportunities to develop their talents.
16.Flexibility
It permits the enterprise to move quickly and there will be more flexibility in
meeting competition because prompt and spot decisions are possible.
Disadvantages of Decentralization
Notwithstanding the merits of decentralization, there are certain difficulties in its
application to all cases and in all circumstances The serious limitations of
decentralization are as follows:
1. Decentralization makes the utilization of the services of exceptionally talented
people. Because of weak financial resources, appointment of such persons may not
be possible.
2. Decentralization increases the problems of coordination among the various
units.
3. In some cases, decentralization may not be possible at all. External factors make
this difficult, such as companywide strikes.
4. It increases the administrative expenses because highly-paid managers have to
be appointed.
5. High Cost of Operation: Establishing of various departments and employment
of specialists in each department will result in a higher cost of operation.
6. Lack of Uniformity: There shall not be uniformity in policies and actions, since
each manager will form his own genius in designing them.
7. Unsuitable for Small Firms: Departmentalization is completely unsuitable for
small firms as it involves high operating costs.
8. Reliance on the Manager: Decentralized organization has to place undue
reliance on the efficiency of the divisional managers. If they do not have enough
skill or competence to take appropriate decisions, the enterprise has to incur heavy
losses due to their faulty decisions.
9. Self Centered Attitude: Each department will tend to be self centered ignoring
the broader interests of other departments and that of the entire firm.