If you have strongly local government that is accountable to the citizens and represents a small constituency, this also tends to not be a big issue either. Small governments representing relatively few people can be impacted by the opinions of just a few people and can get things done.
Strongly local government is what we have in Switzerland. The cantons and towns have a high degree of autonomy. Towns can even set their own income tax. Government in Switzerland seems to do a much better job of providing public services than any other country I have lived in. There is some degree of competition between town governements wooing wealthy migrants, so this gives them an incentive to keep taxes low and quality of services high.
Like you say, there are dark sides to this system too. In some more traditional towns you are basically a second class citizen if you weren't born there, but if you don't like that you can move to Zurich which is full of foreigners. Of course, Zurich will tax you twice as much because they know they can get away with it.