At the turn of the 21st century, there is widespread agreement on the basic principles that lead to successful decentralization. Honoring fiscal responsibility, delineating functions across levels clearly, and transferring responsibilities and resources jointly, will allow countries to reap the benefits of decentralization. Yet in practice many of these principles cannot be applied consistently given the political and institutional constraints prevailing in many countries.The case of Bolivia - with the recent election of regional governments by the end of 2005 constituting one of the most explicitly decentralizing countries in Latin America - shows how the principles and standard technical advice can be adjusted to a given country context so that "best fit" is given prevalence over "best practice."The paper discusses how and to what extent it is possible to strike a balance between the normative ideals and political pragmatism. These constraints are discussed in five areas of decentralization: expenditure responsibilities; intergovernmental transfers; regional taxation; subnational debt and fiscal responsibility; and the creation of institutional capacities. Only an incremental path of sequenced measures will increase the room and possibilities to adopt efficiency-enhancing reforms in these areas. On this path, reformers will have to negotiate a series of trade-offs among different institutional designs.Decision-makers will often be forced to make decisions, for instance, between higher efficiency in the use of resources, on the one hand, and more accountability on the other. For all countries and Bolivia in particular, these trade-offs are higher at the regional level compared to the municipal level, and they increase the risk of dysfunctional types of decentralization.

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