Discussions around decentralization usually involve three levels of government: a national level, a regional/provincial/state level, and a local level. The first step in deciding the design of decentralization is deciding how many of these levels there will be.

Once the number of levels has been decided, the next step is to establish the criteria that will be used to define the borders of the subunits within the regional/provincial/state and/or local levels of government. These can either be determined based on economic or administrative capability or on ethnic, religious, cultural or regional identity.

Identity based subunits might create new minorities, since it is rarely possible to create territorial subunits with no ethnic, religious or cultural diversity. If the local government ignores the interests and concerns of these minorities, this can create conflict.

If ethno-political conflicts and marginalization are created at the level of the subunit because its borders create new minorities, this will not resolve the conflicts but only shift them to lower levels.

On the other hand, creating subunits based purely on criteria such as infrastructure, geography, resources and capacities, does not necessarily guarantee effective and efficient governance. In most cases, a mix of the two approaches is necessary to create economically viable units that are accepted by the communities who live in them.

The continuing discussions in Nepal concerning the criteria for delimiting internal boundaries illustrate the challenges associated with resolving such issues. In Nepal, the Committee on State Restructuring and Distribution of State Power has debated the number, names and boundaries of states under the future decentralized/federal structure, a discussion that has included the delineation of subunits on the basis of identity, economic and administrative viability, resource distribution and other factors. Two alternative maps were prepared under these parameters—one with 14 provinces, the other with six provinces.

Another important issue is the kinds of laws that exist to allow boundaries to be created or changed. In strongly centralized systems, both aspects will belong exclusively to a national institution—for example, the national legislature by initiating and passing an ordinary law (e.g., Benin) by majority vote. Other constitutions require not only a majority in the national legislature but also a two thirds majority of those representatives belonging to the affected groups (e.g., Belgium). Other countries require the legislatures of the affected regions to agree to the changes (e.g., Malaysia). In addition to a legislative vote at the national and sub-national level, a constitution also may require referendum support from the citizens in the subunits (e.g., Switzerland).

Administrative, Political and Fiscal Dimensions of Decentralization

In addition to the formal structure of decentralization, another important factor is the depth of decentralization. The depth of decentralization is determined by the actual powers that are transferred from the center to lower levels of government.

To measure the amount of decentralization, we need to consider its three core elements:

1. Administrative decentralization: the amount of autonomy that is given to subnational governments relative to the central government

2. Political decentralization: the degree to which central governments allow sub-governmental units to undertake the political functions of governance such as representation and decision-making

3. Fiscal decentralization: the extent to which central governments surrender fiscal responsibility to sub-national units)