The decentralization of government can improve governance by fostering accountability, participation, and transparency. Throughout the world, governments of developing nations have turned to local government to build their administrative and institutional capacity. Out of the 75 developing countries with over five million people, all but 12 have undertaken some form of decentralization in the past two decades. But local government in itself does not guarantee better governance. Indeed, it may create more problems than it solves if it is not carefully crafted to be effective in meeting local needs.

The concept of decentralization refers to the general process of transferring political authority and operations to sub-national government bodies. Local government has three primary benefits. First, local administrators may offer better access and convenience, placing government institutions directly within the population they serve. Second, local government creates more opportunities for public participation and input. And finally, local governments can be more responsive and adaptable to local conditions, resulting in higher efficiency.

Theorists view devolution, delegation, and deconcentration as three possible ways of developing local government from above in centralized systems. Devolution is the transfer of power to autonomous or semi-autonomous local governments. Delegation is the transfer of responsibilities for services and administration to local governments and institutions. Deconcentration is the assigning of implementation of national programs to lower branches of government. Most decentralization in the Arab region has been in the form deconcentration. Few Arab governments have considered or implemented any forms of devolution.

Decentralization is not appropriate in some circumstances and can actually reduce the quality of governance. In very small states the central government may be able to achieve greater efficiency through streamlining the national government than by creating autonomous local entities. Decentralization can lead to losses of economies of scale and macroeconomic stability. Additionally, fiscal decentralization can drain central revenues when the national government is unable regulate public spending. Local governments may lack the capacity and the expertise found in national institutions. These challenges reinforce the importance of effective planning and design in undertaking decentralization.

Decentralization without careful attention fiscal decentralization can seriously compromise reform efforts. Without control over their own revenues and budgets, local governments cannot operate autonomously. Local revenues create capital capacity that can be redistributed back into the public infrastructure and the general economy. The political transaction of collecting the local taxes, which are then translated into building the local economic system, is critical to creating effective local political economies. But implementing effective taxation and revenue schemes presupposes a lengthy historical process of state building. Most local governments in the Arab region lack an effective taxation bureaucracy or the capital capacity to initiate local development. Arab local governments also trail in their share of public expenditures, averaging only 5% compared to the Organization for Economic Cooperation and Development (OECD) average of 20%.

Governments alone cannot achieve decentralization. The United Nations Development Programme emphasizes that good governance requires participation by the state, civil society, and private businesses. Without participation from the ground up, local governments will not be able to accurately structure or administer public services. Popular participation is necessary to create accountability within local institutions and responsiveness to the community's needs. Dialogue and debate between private business and local government officials increases transparency and coordination between the public and private sectors.