Can decentralization lower poverty? Cambodia’s Commune and Sangkat Fund

Abstract We study a policy, mandated by Cambodia’s decentralization laws, that provides central funding to the lowest tier of subnational administration, the 2002 Commune Sangkat Fund (or CSF). A large interdisciplinary literature points to the difficult path from decentralization to poverty reduction. For example, fiscal capacity - the ability to raise taxes locally – is deemed necessary for local public goods to be reliably provided. But in poor countries local fiscal capacity simply cannot be built unless there is an income base to tax, which, in turn, requires poverty to be eradicated. Using three separate data sets we find three distinct pieces of evidence about the program’s impact. First, the program reduced poverty at the initial as well as subsequent stages. Second, we find evidence that investment into rural infrastructure can be pro-poor. Third, the program, which amounted to a mere 3% of the national budget, created substantial capital stock over the years in communes and villages and delivered large returns measured in poverty reduction. A message from this study is that when the choice and design of projects are informed by local knowledge and local representation, investment can reduce poverty.