Roles%20and%20Expenditure%20across%20Levels%20of%20Government

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Roles and Expenditure across Levels of Government
PREM/HD/INF Network Course on PUBLIC EXPENDITURE
ANALYSIS AND MANAGEMENT Monday, March 21st, 2005,
100-230 pm Kai KaiserEconomist, PREM Public
Sector Group (PRMPS)kkaiser_at_worldbank.org
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Overview

• Intergovernmental Fiscal Systems
• Levels of Government
• Sub-National Expenditure Assignments
• Principles Issues
• Empirical Evidence
• Intergovernmental Transfer Systems
• Vertical Imbalances and Own Source Revenue
  Mobilization
• Decentralization Challenges
• Design, Implementation, Diagnosis
• PEM versus Sectoral Lenses
• Top-down versus Bottom Up Accountabilities

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Decentralization A World-Wide Phenomenon

• Underway in over 85 countries
• Political and economic rationales
• Varieties
• Deconcentration
• Delegation
• Devolution
• Privatization
• Spans political/legal, fiscal, administrative

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Four Pillars of Intergovernmental Fiscal System

• Expenditures
• Revenues
• Intergovernmental transfers
• Subnational borrowing/debt

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Expenditure Assignments

• Macroeconomic stability
• Public Service Delivery
• Effectiveness/Efficiency
• Public Management Innovation
• Poverty Reduction
• Responsiveness
• Equalization

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State Architectures

• Federal versus Unitary
• Legal/Constitutional Status of Sub-Nationals?
• Tiers of Government
• Levels
• Scale
• Devolved versus Deconcentrated Structures
• Territorial Organization
• Functional Agencies

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Expenditure Assignment Issues

• Design
• Public goods, externalities, economies of scale,
  public sector competition
• Ideally, services should be provided at lowest
  level of government where benefits lie
  (subsidiarity)
• Revenue Expenditure Assignment Design Will
  Differ
• Practice
• Ultimately, no single best assignment
• Provision Technologies May Change Over Time
• Preferences/Needs May Evolve
• Clarity in expenditure assignment often lacking
• dejure versus defacto
• Significant expenditure responsibility needed for
  autonomy
• Public provision doesnt imply public production
• Contracting Out

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Macroeconomic Stability

• Key factor is hard budget constraint
• Hierarchical versus Market Based
• Creates incentives for subnational fiscal
  discipline
• Limits risk of central government
• Can be softened through several channels
  (intergovernmental fiscal system, financial
  system, SOEs, borrowing, etc.)

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Allocative Efficiency (Subsidiarity)

• Matching local needs and preferences with local
  public expenditure patterns
• Assumes
• Substantial fiscal autonomy/budgeting
• Political decentralization
• Are elections held?
• How are candidates selected?
• Intra-party hierarchical control mechanisms?
• What do elections mean?
• Bottom-up Accountability

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Decentralized Assignments
Amount Which Level of Government Decides
Amount? Structure Which Level of Government
Defines Structure? Recurrent/Capital? Execution
Which Level of Government Executes the
Expenditure? Supervision Which Level of
Government Supervises and Sets Standards? Country
and Sectoral Contexts Provide for Significant
Diversity in Arrangements
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Decentralization Trends
Subnational Expenditure Shares Subnational Tax Shares
Developing Countries
1970s 13.0 (48) 10.4 (43)
1980s 13.2 (43) 7.7 (35)
1990s 13.8 (54) 9.3 (28)
Transition Countries
1990s 26.1 (23) 16.6 (14)
OECD Countries
1970s 33.8 (22) 18.7 (22)
1980s 32.3 (23) 18.7 (22)
1990s 32.4 (23) 19.1 (23)
Source International Monetary Fund. Government
Finance Statistics Year Book , various years,
Country Tables
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Differences Across Regions
Subnational Share of Expenditures
Subnational Share of Revenues
Note Simple average of most recent observations
in available countries. Numbers in parenthesis
indicate number of countries represented. Figure
do not typically include deconcentrated
spending. Source International Monetary Fund.
Government Finance Statistics Year Book 1998,
Country Tables.
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International Diversity
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Decentralized Social Sector Expenditures
Source IMF GFS
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Comparative Assignments
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Rationales for Intergovernmental Transfers

• Vertical imbalances
• Horizontal imbalances
• Inter-jurisdictional spillovers (externalities)
• Enhancing national objectives at the subnational
  level
• Paying for national programs implemented by
  subnational governments

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Local Revenue Issues

• Own resources typically inadequate to carry out
  assigned functions
• Striking variations in size and capacity one
  size doesnt fit all
• Local revenues often inelastic, and not
  adequately responsive to changing needs
• Local revenue mobilization strengthens
  accountability
• Link taxes with benefits derived from local
  government services
• Simplest and most effective form of tax autonomy
  discretion to set tax rates

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A Good Transfer System

• Transfers should be transparent and predictable
  (formula-based)
• Equalization transfers should include
• A measure of need
• A measure of capacity
• Adequate sub-national revenue autonomy
• Stable but flexible financing
• Avoid a proliferation of conditional grants

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Equity

• Extent of fiscal equalization
• Expenditure Needs
• Fiscal Capacity
• Ways and means for targeting poor places and poor
  people

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Decentralization Challenges

• Balance responsibilities with resources, capacity
  and accountability
• Subsidiarity
• Finance follows function
• Responsibility with capacity (learn by doing)
• Accountability through political channels, own
  source revenues, participation and transparency
• Create incentives for implementation to match
  formal arrangements

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Positive or Negative Outcomes?

• If designed well, decentralization can
• Move decision making closer to people
  (subsidiarity principle)
• Enhance efficiency and responsiveness of service
  delivery
• Enhance State Legitimacy/Accountability
• Improve economic growth
• Potentially alleviate poverty

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But, good design is complicated

• Decentralization spans
• Political/Legal
• Fiscal
• Administrative
• policies and institutions

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Overarching Considerations

• Strategies
• Objectives?
• Champions
• Early design has long-run implications
• Sequencing/Priorities (esp. w/ low starting
  capacity)
• Monitoring Evaluation / Base-lining
• Managing Change/Long Run Process
• New modes of operating
• Expectations
• Credibility that LGs can deliver services?
• Capacity, Accountability, Resources?
• Post-Conflict Context
• Phasing

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Common Dangers

• Elite capture (by ethnic/racial/social groups)
• Opaque or arbitrary decision-making
• Constituents, villagers, communities unable to
  hold representatives accountable due to
  incomplete information
• Corruption
• Patronage politics
• Excessive discretion to reward friends, punish
  rivals
• Central civil servants over-rule local
  representatives

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Public Expenditure Management Lens

• Clarity in expenditure assignment?
• Adequacy of resources?
• Formula-based transfer system?
• Hard budget constraint?
• Budgeting and reporting systems
• Uniformity vs. flexibility
• Carrots vs. sticks
• Procurement
• E.g., Contracting Out

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Service Delivery Lens

• Decentralization
• Allocative efficiency effects
• Intergovernmental fiscal framework
• Sufficient capacity
• Technology
• School autonomy/community participation
• Purchaser/provider split in health
• Incentives for service providers
• Institutional structures
• Civil service, budgeting and financial management
  processes, performance incentives
• Resources reach front-line service providers
  (PETs)
• Accountability

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Decentralized Accountability Mechanisms

• Top Down
• Central Supervision
• Reporting
• Minimum Standards
• Bottom Up Accountabilities
• Electoral Insufficient
• Proximity versus Scale/Capacity

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Leveraging Transparency

• Sectoral Differences
• Health versus Education
• Public LG meetings, citizen fora
• Participatory Budgeting
• Publicize voting records
• Mobilize own source revenues
• Financial disclosure (improved budgeting)
• E.g., Annual Review Reports
• Freedom of Information Acts and/or other public
  disclosure laws (assets, affiliations)
• Monitoring by vigilance committees, NGOs, CBOs,
  media
• Media

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Further Resources

• Decentralization Thematic Group Website
• Sign-up for Decentralization TG
• Decentralization Local Financial Management
  Course
• March 29-30, 2005
• AskGov