The Future of Decentralization and Multilevel Governance in a Rapidly Changing World

International development finance architecture is contracting, dramatically and likely permanently. Major bilateral donors have reduced assistance, and governance programming has been disrupted at scale. At precisely the same moment, subnational governments are being asked to deliver more services, mobilize revenue, and manage intensifying climate risks.

To address this context, approximately 60 scholars, practitioners, and policy leaders convened at New York University (NYU)’s Robert F. Wagner Graduate School of Public Service for a global roundtable on the future of decentralization and multilevel governance (MLG) on February 26–27, 2026. The convening was organized by Penn IUR Scholar Paul Smoke, Professor of Public Finance and Planning at NYU, in partnership with the Local Public Sector Alliance (LPSA), the Forum of Federations, OECD, UNDP, United Cities and Local Governments, the World Bank, and the SDSN Global Commission for Urban SDG Finance, for which Penn IUR serves as Secretariat.

Penn IUR was represented by Eugénie Birch, Co-Director of Penn IUR, as well as postdoctoral researcher Kimberly Noronha. Participating Commissioners included Emilia Saiz, Secretary General, United Cities and Local Governments; David Jackson, NYU Center on International Development; and Isabelle Chatry, Head of Unit - OECD Centre for Entrepreneurship, SMEs, Regions & Cities, OECD.

Across panels, participants agreed that there is no return to the previous aid model. The field must now adapt to:

• The collapse of traditional donor architecture;
• Centralization as a deliberate political strategy in many countries; and
• Geopolitical fragmentation that reduces governance conditionality.

The roundtable examined the structural reforms necessary at a moment when external financing contracts but service demands grow.

Cities at the Center: Governance, Climate, and Institutional Alignment

On Panel 3, Multilevel Governance and Cities: Enabling Climate Resilience in Practice, Dr. Birch joined Lucy Slack (Commonwealth Local Government Forum), Richard Vernon (Mayor of Montego Bay), Andrew Boraine (South African Cities Network), and Sohaib Athar (World Bank) to examine how multilevel systems shape urban outcomes.

In OECD countries, 69% of climate-related public expenditure occurs at the subnational level, yet revenue authority and borrowing capacity rarely align with expenditure responsibility.

The contrast between Cape Town and Johannesburg illustrated that governance culture—including consistent reinvestment, administrative coherence, and fiscal discipline—can determine climate resilience outcomes as much as resource endowment. Institutional alignment across levels of government is a necessary condition for climate adaptation.

The roundtable underscored that while subnational governments account for 22% of global public expenditure and 40% of public investment, most lack access to adequate financing tools. Only three of the 100 largest developing-country cities carry an international investment-grade credit rating. Municipal borrowing averages less than 2% of GDP in countries that permit it, compared to 5–10% in high-income economies.

This structural constraint—what participants described as a “creditworthiness trap”—limits cities’ ability to finance infrastructure and climate adaptation.

Opening the second day, Dr. Noronha reframed the prior discussions around several structural tensions with direct implications for Penn IUR’s work.

1. The Creditworthiness Cycle Is Structural

Cities cannot borrow because they are not creditworthy; they cannot build creditworthiness because they cannot borrow. Institutional experiments, such as the Inter-American Development Bank’s $1 billion pilot, which lends to subnational governments without sovereign guarantees and treats creditworthiness-building as an outcome, signal a possible path forward.

For Penn IUR’s work with the SDSN Commission, this reinforces the need for frameworks that treat fiscal strengthening as a dynamic process rather than a precondition.

2. Climate Finance Is Misaligned

Ninety percent of global climate finance flows to mitigation and only ten percent to adaptation. Yet adaptation, such as flood control, coastal resilience, and drainage, is the urgent need for many developing-country cities. These investments rarely generate revenue streams, making them structurally incompatible with conventional commercial finance.

3. Transfers Can Crowd Out Autonomy

A counterintuitive lesson emerged from Nepal: strong, predictable central transfers can reduce incentives for local revenue mobilization. Intergovernmental finance design shapes long-term fiscal behavior. Without careful structuring, transfer systems can inadvertently weaken fiscal autonomy.

4. The Field Has a Diagnosis Problem

Perhaps the most pointed takeaway: the development community routinely treats political economy constraints as capacity deficits. Capacity building is easier to fund and implement, but when the binding constraint is incentive structure, technical interventions yield limited results.

Distinguishing between capacity and political economy constraints remains an underdeveloped methodological frontier with direct implications for subnational finance diagnostics.

5. Performance Is the Most Persuasive Argument

The roundtable closed on a pragmatic note. International advocacy networks matter, but the most effective argument for decentralization is demonstrable performance. Where cities deliver reliable services and manage finances transparently, they build credibility, both politically and fiscally.

Fiscal system design also carries democratic implications. In South Africa, formula-based transfers constrained discretionary manipulation when cities shifted political control, protecting pluralism through transparency.

The discussions resonated strongly with Penn IUR’s work with the SDSN Global Commission for Urban SDG Finance, including:

• The creditworthiness gap remains a structural constraint on urban SDG implementation.
• Climate finance allocations are insufficient to meet adaptation needs in cities.
• Effective reform requires clearer diagnostics distinguishing institutional weakness from political resistance.
• Intergovernmental finance systems shape fiscal outcomes and democratic resilience.

As we continue the global dialogue confronting the “seismic shift” in the global development funding landscape, the question moves beyond decentralization to whether institutions can adapt quickly enough to meet the moment.