How Do Institutional Arrangements Influence Decentralized ...



Decentralization, Governance, and Delivery of Public Services:

The Impact of Institutional Arrangements

Research Plan

IRIS Center, University of Maryland

September 29, 1999

Background

Much of the world is misgoverned. This is perhaps the central reason why much of its population continues to live in poverty. This mis-governance may surface in the form of covert corruption, outright ethnic predation, or plain inefficiency.

Governance arrangements critically influence the performance of public service delivery. These arrangements refer to the design of jurisdictions: i.e., to the distribution of powers within different levels of government and between different government units to provide services, as well to the social and economic make-up of the population in these jurisdictions. The theory of fiscal federalism suggests certain criteria to determine whether the level and scope of a jurisdiction is appropriate for the provision of a given service, such as rural roads. Theories of governance, collective action, and social capital suggest, in turn, criteria that determine the ability of the public to cooperate in order to sustain good governance and effective provision of services in that jurisdiction. These include formal institutional factors such as the extent of sub-national political and fiscal autonomy, the type of hierarchical intergovernmental oversight exercised, and other political and administrative arrangements that determine public sector incentives and information flows. Also, these include such elements of the social and economic structure as ethno-linguistic and economic diversity, the strength of civil society, and the extent of shared history of the local population, characteristics that may encourage, or block, the development of cooperative traits that make good governance possible.

An increasing number of countries are decentralizing central government administrative, fiscal, and political functions to lower-level governments in the hopes of improving governance and public service delivery. The experience with decentralization has, however, been mixed and suggests that these hopes may be misplaced. For example, the results of Bird, Ebel, and Wallich (1995), who examined decentralization in the Eastern and Central Europe, suggest that public services can suffer as a result of decentralization, at least in the short run. Treisman (1998), in turn, suggests that corruption is greater in decentralized than in centralized countries.

Overall, the existing studies as well as anecdotal evidence and theoretical work indicate that the effect of decentralization on public service delivery depends on the design and institutional arrangements that govern the implementation, of such decentralization. Thus, research and practice point to the priority of understanding under which particular governance arrangements—distribution of fiscal and political powers and social and economic characteristics of local population—decentralization works and under which it does not. Identifying when decentralization works will be the purpose of the planned study. The conjecture of the study is that only certain kinds of decentralization characterized by local democracy, hard budget constraints, real expenditure authority, and where jurisdiction are socially and economically homogeneous, improve performance. The aim will be to argue that good jurisdictional design matches the level and scope of jurisdictions with the service to be delivered and social and economic characteristics of the population.

This paper will proceed as follows. Section 2 outlines a brief conceptual framework to analyze the performance of decentralized public services and discussed several aspects of the institutional design of sub-national governments and social structure that may influence the level of corruption and the quality of public services. Section 3 states the objectives of the study, while Section 4 lists the hypotheses to be tested. Section 5 discusses the research methods to be employed to test the hypotheses, and Section 6 reviews the tentative time schedule of the study.

Conceptual Framework

1 Potential Benefits of Decentralization

The impact of governance arrangements on decentralized public service delivery needs to be considered against the background of the standard arguments for decentralization. The advocates of decentralization argue that decentralizing the delivery of local public goods without substantial inter-jurisdictional spillovers[1] improves the efficiency and responsiveness of the public sector in at least three ways—by promoting allocative efficiency, by fostering accountability and reducing corruption, and by facilitating cost recovery.

1. Promoting allocative efficiency

The most common theoretical argument for decentralization is that it improves the efficiency of resource allocation. It is said to promote allocative efficiency by allowing greater differentiation of resource allocations across jurisdictions according to the demand in each locality. Sub-national governments are argued to be in a better position than the central government to ensure that services delivered match the preferences and circumstances in the jurisdiction. Two reasons are advanced for this.

First, because sub-national governments are closer to the people than the central government, they are considered to have better information about the preferences of local populations than the central government (Hayek 1945, Musgrave 1959). Hence, they are argued to be better informed to respond to variations in local demand for goods and services.

Second, sub-national governments are also considered to be more responsive than national governments to variations in demand for public goods. Decentralization is presumed to increase the likelihood that governments respond to the demand of the local population by promoting competition among sub-national governments (Tiebout 1956). Competition among sub-national governments (and with non-governmental providers) is said to allow for a variety of bundles of local public goods to be produced, and individuals are said to reveal their preferences for those goods by moving to those jurisdictions that satisfy their tastes—that is, by “voting with their feet.” This is seen to pressure sub-national governments to pay attention to the preferences of their constituents and tailor the service delivery accordingly, whilst risking the loss of tax revenues (Oates 1968, 1972; Salmon 1987; Breton 1996; Qian and Weingast 1997). This competition is thus argued to enhance the efficiency of resource allocation by increasing the likelihood that governments satisfy the wishes of citizens.

2. Fostering accountability and reducing corruption

Decentralization is also argued to foster accountability and reduce corruption in the government (Ostrom, Schroeder, and Wynne 1993). Since sub-national governments are closer to the people, citizens are considered to be more aware of sub-national governments’ actions than they are of actions of the central government. Also, the mobility of labor is seen to impose discipline on sub-national governments: they must provide goods and services efficiently, or risk losing their tax base as citizens (both labor and capital) “vote with their feet.” Further, it has been argued that more effective incentive schemes can be designed if local officials are responsible for local outcomes.

Moreover, it has been argued that decentralizing functions to sub-national units closer to the population will increase consensus and legitimacy concerning the choice of public services. This, in turn, can be expected to foster cooperation and vigilance, as well as acceptance of adherence to rules of public sector integrity (“rule-obedience”). This would be especially true where the financing of public services is devolved via the assignment of tax instruments or the collection of user fees.

3. Facilitating cost recovery

Making services more demand-responsive through decentralization is also argued to have the added benefit that it increases households’ willingness to pay for services (Briscoe and Garn 1995, Litvack and Seddon 1999). Households are argued to be more willing to pay for and maintain services that match their demand. Local governments may also exert greater fiscal effort and raise more revenues if they can determine how the revenues are used. Also, the tighter the circuit of public service finance and delivery, and the more transparent the system is, the more obvious the bite of systemic corruption becomes to sub-national governments and communities. This strengthens the incentives of sub-national governments and their constituents to monitor revenue collection, planning, expenditure, and service delivery.

2 When Does Decentralization Have These Benefits in Practice?

As mentioned in the previous section, experience with decentralization is mixed: decentralization does not necessarily promote allocative efficiency, reduce corruption, and facilitate cost recovery. Also, theoretical predictions on decentralization suggest that only certain forms of decentralization work.

Therefore, it is our contention that whether decentralization in practice indeed improves the performance of public service delivery as hypothesized in the literature just summarized depends on institutional arrangements that govern the design and implementation of decentralization. The arrangements that are likely to influence the performance can be divided into four categories: the distribution of powers within government, political and electoral structures, socio-economic characteristics of jurisdictions, and other characteristics of jurisdictions. These institutional factors are summarized in Figure 1.

Figure 1. Institutional Determinants of Performance of Decentralized Service Delivery

Each of these factors and how they are presumed to influence performance of public services is briefly described below. For a detailed discussion on how different institutional arrangements are likely to influence the performance of decentralized service delivery, see the attached literature review paper by Azfar, Kähkönen, Lanyi, Meagher, and Rutherford (1999).

1 Distribution of Powers within Government

The distribution of powers within government refers to the political and fiscal authority, and capacity of sub-national governments, incentive structures, the depth of hierarchy, and transparency of government actions. These can be briefly described as follows:

• Political authority of sub-national governments

An important determinant of whether decentralization produces good outcomes may be whether or not sub-national governments are elected or appointed. If they are appointed, then they may not represent local interests and therefore even if they had real fiscal authority, they might not use this power to benefit local populations.

A second potential determinant of decentralization outcomes is the extent of policy initiative devolved to sub-national governments: the aspects to which regional and local officials have autonomy, and the aspects that are reserved for the central government.

• Fiscal authority of sub-national governments

Whether decentralization promotes allocative efficiency is also likely to depend on the revenue and expenditure powers of sub-national governments—that is, on inter-jurisdictional targeting of resources. For decentralization to improve resource allocation, sub-national governments need to have the financial capacity to respond to the needs and preferences of their constituents.

• Capacity of sub-national governments

Sub-national governments may have the political authority and access to financial resources but unless they have the capacity to do the work, decentralization is unlikely to produce the desired results. Indeed, opponents of decentralization frequently argue that decentralization efforts are likely to be doomed because of lack of capacity at sub-national levels. Capacity refers to the ability, competency, and efficiency of sub-national governments to plan, implement, manage, and evaluate policies, strategies, or programs designed to impact on social conditions in the jurisdiction (Shafritz 1986). Two factors influence government capacity: human capital (skills and knowledge) and physical capital (technology and materials).

• Incentive Structures

Skills and knowledge, and access to equipment and technology alone do not ensure that the work gets done. How policies get implemented—and whether they get implemented as designed—depends also on incentive structures that govern the implementation process and behavior of civil servants. Decentralization is closely related to the ability to provide incentives, because giving authority to a local official over local resource allocation, allows the official to affect outcomes for which she can be rewarded. If a large team of officials at a central ministry is responsible for outcomes, then it may be difficult to design effective incentive schemes. Incentive structures include mechanisms to monitor the actions and performance of civil servants; civil service rules about hiring, sanctioning, and firing staff; and internal mobility of the staff, including rotation procedures and the opportunity for voluntary movement of staff. These factors, as well as investigation and prosecution of abuses, influence whether decentralization reduces corruption, promotes accountability, and improves resource allocation.

• Depth of hierarchy

Whether decentralization promotes accountability and reduces corruption is also likely to depend on the “depth” of powers within a jurisdiction. Depth refers to the number of links in the chain of command, or the levels in the bureaucratic hierarchy, between an elected official making a policy decision and the constituent receiving a service. The greater the depth, the more severe the informational asymmetries are likely to be, hence in theory the higher the possibility of corruption or other abuses.

• Transparency of government actions

Access to information on the actions and performance of government at all levels—that is, transparency of government actions—is likely to be critical for the promotion of government accountability. Unless the public knows what goods and services are provided by the government, how well they are provided, who the beneficiaries are, and how much they cost, it cannot demand effective government. The central government needs to be able to monitor and supervise sub-national governments and thus needs information on their budgets and expenditures on a regular and uniform basis. (At the same time, sub-national governments can play a potentially valuable monitoring role if they have acces to information on central government activities.) Mechanisms to promote fiscal transparency and thereby accountability include, among other things, disclosure of information on government budgets and programs, public audits, and open and competitive procurement procedures.

2 Political and Electoral Structures

Political and electoral structures include rules about citizen participation in public service delivery, access to voice mechanisms by different social and economic groups, and the existence and freedom of the media. These are as follows:

• Citizen participation in service delivery: existence of voice and exit mechanisms

The argument that decentralization improves resource allocation, accountability, and cost recovery relies heavily on the assumption that sub-national governments have better information than the central government about the needs and preferences of the local population, and that the population is more aware of actions of sub-national governments than of the central government. Sub-national governments, however, do not automatically have any better information about user preferences than the central government. The sheer physical proximity to constituents does not ensure that sub-national governments have the needed information unless they make an effort to elicit it. Similarly, the local population is not necessarily aware of the activities of sub-national governments.

Whether sub-national governments have information about the preferences of citizens depends critically on the existence of mechanisms for the local population to participate in service delivery and have their voice heard in decision-making.[2] Citizen participation in service delivery facilitates information flows between the government and local population and thereby reduces asymmetric information. It provides means for demand revelation and helps the government to match the allocation of resources to user preferences. Citizen participation in service delivery also can promote government accountability by increasing citizens’ awareness of the actions of, and their control over, sub-national governments.

The extent to which users have voice about the service depends on the processes of citizen participation in government decision-making. Constitutions, laws, and government policies can establish several mechanisms through which the citizenry can express in a systematic way its preferences and perceived problems with public service delivery. Participation can take many forms: voicing the demand and perceived problems with the delivery; making choices; or being involved in projects and service management. Mechanisms for such participation include elections, user surveys, town meetings, public hearings, hotlines, administrative and legal remedies, ombudsman, local referanda, direct community involvement in service delivery, and demonstrations.

• Access to voice and exit mechanisms by different social and economic groups

The impact of decentralization on service delivery hinges not only on the existence of mechanisms for user participation but, perhaps even more crucially, on who has access to those mechanisms and whose voice eventually influences decisions— that is, the intra-jurisdictional targeting of resources. That determines whose interests government will eventually serve. Unless participation is broad-based—in the sense that all intended beneficiaries of specific services have a voice—groups with narrow interests may capture the resources.

• Existence and freedom of the media

The media—both print and broadcast—can act as an important external promoter of government transparency and accountability by disseminating information about government actions. It can serve the public by monitoring and investigating the actions of public agents. The presumption is that the risk of public exposure and humiliation through the media is likely to curb the temptation of politicians and civil servants to abuse their positions for private gain.

How effectively the media does this job depends on the degree to which it is free and independent from the influence or the temptation of control of the government and other stakeholders. Its independence needs to be reflected both in its ownership and management. In many countries, the government is the largest media owner, which obviously greatly undermines the independence of media. Laws and regulations, such as freedom of information laws, can also influence the independence of the media (Vogl 1999). The effectiveness of the media depends, as well, on the existence of meaningful competition. The monopoly position of a paper is likely to diminish the interest of editors to investigate local politicians and businessmen.

At the local level, however, the greatest problem may be that even in a country where freedom of the press may be enshrined in law and effectively protected, there may simply be no local media. This may be equally true of print and broadcast media, and may therefore suggest that the assumption of citizens knowing more about local politics than national politics may be false.

3 Socio-economic Characteristics of Jurisdictions

The extent and impact of citizen participation on public service delivery, and thus the performance of decentralized service delivery, is in turn likely to depend partly on certain aspects of the social structure and the existence and effectiveness of the civil society in the jurisdiction. Aspects of the social structure that are likely to matter include social and economic heterogeneity of the population, trust among different groups of people, and cultural norms and traditions that affect relations among people and the cohesiveness of the society.[3] Civil society encompasses non-governmental and non-profit organizations such as civic groups and associations, cooperatives, and user groups.

• Social Heterogeneity of Population:

Social heterogeneity of the population with respect to ethnicity, language, and religion has sometimes been argued to reduce the efficiency of resource allocation and public service delivery, for two reasons.

First, it has been argued that social heterogeneity increases rent-seeking and reduces the incentive to spend on productive public services. This argument builds on the assumption that different social groups are exclusive, competing with one another, and primarily interested in furthering the welfare of their own group members. For example, the social group in power might seek to limit the spending on public goods to prevent those from outside the ruling group from also benefiting and getting stronger.

Second, social heterogeneity has been argued to make it more difficult for people to work together and therefore for the political process to arrive at cooperative solutions to problems. People with different ethnic or cultural backgrounds may sometimes have difficulties communicating with one another or acting collectively. As Denzau and North (1993) point out, since people have limited cognitive abilities, they adopt a variety of conceptual orientations to make sense of the world. These include values, norms, and experiences, and perceptions of the world that have been taught and ingrained in a community where one has grown up. This may make collective efforts to enforce government accountability difficult, as well as increase chances that the voice of some sections of the population will not be heard.

Also, the relative importance of social groups may, depending on the nature of the political system, signal a corresponding lack of legitimacy in the state. This can foster narrow status-based organization, rent-seeking, and weak governance.

• Economic Heterogeneity of Population

The economic heterogeneity of the local population may also distort the resource allocation and reduce the efficiency of public service delivery. Different economic groups are likely to have varying bargaining power and thus varying opportunities for participation. The wealthy elites are often better connected and can use their money and influence to steer the public policy and resource allocation. The phenomenon of elite capture is well known in many countries (Schönwalder 1997, Tendler 1997). In addition, it may be the case that social and economic heterogeneity compound the detrimental effect of each other. Ethnic heterogeneity may matter most when one ethnic group is poorer relative to the other.

• Trust between citizens and government and between social and economic groups

The prevalence of trust among the local population, and between citizens and government has also been argued to influence public service delivery. Trust has been argued to affect service delivery by decreasing the cost of acting collectively and, thereby, facilitating cooperation and collective action. Specifically, the existence of trust between strangers has been claimed to be beneficial for economic performance (Fukuyama 1995, Knack 1999). The greater the level of trust between strangers, the greater the likelihood of cooperation within and across different social and economic groups has been said to be. Also, government bureaucrats have to cooperate on a daily basis with a large number of other bureaucrats and citizens. Trust can support this cooperation.

• Cultural Norms and Traditions

Cultural norms and traditions may also affect the public service delivery and participation therein. Citizen participation is likely to be easier to organize, and to be accepted by the government, if it builds on a tradition of civic involvement in public policy. Also, cultural norms are likely to influence the effectiveness of citizen cooperation.

• Civil Society

The existence and effectiveness of the civil society is likely to matter because NGOs, user associations, and other civic groups may not only help to coordinate citizens’ actions and get their voice heard in the government, but they may also act as checks on government actions and enforce leaders’ compliance with the wishes of citizens. Active civil society can influence electoral processes and outcomes directly, or complement local administration in the search for more responsive and effective governance. It may thus guide the direction of resource allocation and help push for the accountability by creating external pressure on the government.

Active civil society can, however, be a mixed blessing. Olson (1982), for example, emphasizes that the existence of a large number of civic groups can also have a negative impact on the economy, because these groups often have a tendency to engage in growth-impairing rent-seeking. These groups are seen to have an incentive to engage in costly and inefficient rent-seeking—that is, lobbying for tax breaks, colluding to restrain competition, etc—that benefits the group, but not to have much incentive to provide productive public services that would benefit everybody in the jurisdiction.

4 Other Characteristics of Jurisdictions

Other characteristics of jurisdictions that are likely to influence the performance of decentralized service delivery include factors such as the mobility of labor within and across jurisdictions.

• Mobility of the population and capital within and across jurisdictions

The argument that decentralization improves resource allocation assumes that people vote with their feet and the mobility of labor and capital is not too costly and responsive to fiscal conditions. Hence it assumes away a number of frictions such as imperfect information, moving costs, and land-use restrictions.

In practice, there may be restrictions to the mobility of labor within and across jurisdictions. In addition to fiscal considerations, other factors such as the location of employment and family status typically influence the decision to move (Oates 1968). Moving has a cost and people may also feel mobile only within their communal group.

Due to both linguistic barriers and anxieties about living in the midst of other ethnic groups, people may only feel mobile within the boundary of their ethnic group. Thus if any of the gains from competitive pressures are to be realized, then jurisdictions should be smaller than communal boundaries. Preferences for local public goods may also vary within communal groups. If this is the case, then the argument that “local governments can tailor public good provision to local tastes” would also provide a rationale for sub-communal jurisdictions. Thus, the ideal form of devolution in ethnically fractionalized countries may be to create truly local government so citizens can “vote with their feet” within communal boundaries.

The completeness of labor and land markets is likely to influence migration within and across jurisdictions. In some countries there are restrictions on labor movements. Further, land markets are imperfect in many countries. There are zoning restrictions and other regulations that hinder mobility (White 1975, Mills 1979, Epple and Zelenitz 1981). The land market imperfections are particularly relevant in economies dominated by agriculture.

• Other factors

A number of other factors are likely to influence the performance of service delivery, and thus need to be controlled in the analysis. These include the share of rural and urban population; the number of years government has been decentralized; political stability; average level of education of the local population; and initial natural resource endowments.

3 In Summary

In sum, a number of institutional arrangements are likely to influence the performance of decentralized public service delivery. However, whether all these factors play an important role and what is the relative importance of these factors in determining the performance of services is not known. The study will attempt to answer these questions.

Objectives of Study

The overall objective of the study is to analyze how selected institutional arrangements influence governance in a decentralized system, and specifically the performance and impact of decentralized service delivery. The study has three specific aims:

First, the study will assess whether the above-mentioned arguments for decentralization hold in practice by answering the following questions about the performance of public service delivery:

• Have decentralized governments provided services that respond to the local demand and, if so, to whose demand?

• Is corruption prevalent in a decentralized government system?

• Are people paying for services government provides, through either taxes or user fees? Do people use government services or rely on alternative providers?

The performance of decentralized public service delivery will thus be measured in the study by demand-responsiveness of services provided, prevalence of corruption, and cost recovery. In addition, other indicators will be used to assess the performance of service delivery, such as the quantity, quality, and access to public services provided (for example, school enrollment, share of population with access to piped water, access to judicial recourse), and user satisfaction with public services.

Second, the study will analyze how selected institutional arrangements influence the performance of service delivery. In other words, the study will attempt to examine under what institutional arrangements the benefits of decentralization are likely to materialize.

Third, the study will analyze how the governance, which is reflected in the performance of selected public service sectors, influences the impact these services have on the local population. One might expect that public services that perform well also have a strong impact on the population. The impact of services delivered will be measured by the level of welfare of the local population, such as life expectancy, infant mortality, literacy, and incidence of specific diseases.

In other words, the study will attempt to study the chain of causality from selected institutional arrangements to the performance of public service delivery, and from the performance to the impact public services have on local populations. Figure 2 illustrates this proposed chain of influence.

Figure 2. Institutional Determinants on Performance and Impact of Decentralization

Hypotheses to be Tested

The main hypothesis to be tested in the study is as follows: fiscal and policy autonomy of sub-national governments, strong transparency mechanisms, democratic political systems at sub-national levels, and social and economic homogeneity of the local populations will lead to better public service delivery.

In addition, several sub-hypotheses will be tested based on the discussion in Section 2. These will tentatively include the following:

• Sub-national governments provide high quality services, and services that respond to the local demand, when characterized by the following:

- political and fiscal authority

- skilled and knowledgeable staff, equipment and technology, and internal monitoring mechanisms

- citizen participation in service delivery

- socially and economically homogeneous jurisdictions

- active civil society

- mobile citizens

- a free and independent press

- high levels of inter-communal trust

• Corruption is less common in sub-national governments, when the latter are characterized by the following:

- internal mechanisms to monitor the actions of civil servants

- relatively shallow bureaucratic hierarchy

- disclosure of information to the public on their budgets and expenditure programs

- regular, independent and effective government audits

- open and competitive procurement procedures

- citizen participation in service delivery

- a free and independent press

- socially and economically homogenous jurisdictions

- trust of citizens in the government and members of other social groups

- active civil society whose membership cuts across social groups

- mobile citizens

• Cost recovery is high in sub-national governments

- where services provided match the demand of the local population.

- where there is less corruption.

- where citizens trust the government and members of other social groups

It is important to recognize that this list of hypotheses and variables and indicators is only tentative. The final set of hypotheses to be tested is likely to be narrower for two reasons. First, a subset of explanatory variables may turn out to be highly correlated. Second, appropriate instruments may not be available to carry out regressions.

Research Methods

To analyze the decentralized service delivery and to test the hypotheses spelled out in the previous section, three different research methods will be employed:

• empirical data collection and analysis

• country case studies

• theoretical analysis

Three different research methods will be employed for two reasons. First, most persuasive arguments in economics have both theoretical and empirical backing, and are supported as well by case-study evidence. Second, some of the issues to be studied are difficult to measure and study quantitatively. Also, econometric analysis using instrumental variables often struggles with establishing the direction of causality between variables (largely because researchers typically can not agree on what variables are valid instruments). Therefore, the plan is to analyze some of the questions by conducting a detailed case-study analysis.

These different methods will be employed as follows:

1 Empirical Data Collection and Analysis

To test the hypothesis listed in Section 4—that is, to analyze the effect of different institutional arrangements on the performance and impact of decentralized public service delivery—both primary and secondary data will be collected and statistically analyzed.

1 Secondary Data Collection: Cross-country Data Set

Since some institutional arrangements, such as the political system, do not vary across jurisdictions within a country, hypotheses regarding these types of institutions can only be tested with a cross-country data set. Therefore, a cross-country data set focusing on these variables will be compiled. This data set will include, among other things, measures of the degree of local democracy, fiscal authority, and modes of selection of government officials.

Data will be collected from countries that have a population exceeding 1 million since countries smaller than that are unlikely to decentralize government operations. Data on some countries may already exist, but for other countries will be collected from a combination of various statistical institutes, Bank officials with country-specific knowledge, and country embassies. This data set will help fill the conspicuous gap in cross-country studies of federalism that rely on expenditure and revenue decentralization ratios.

2 Primary Data Collection: National Data Sets

To test hypotheses regarding institutions that vary intra-nationally—such as the capacity of sub-national governments, depth of hierarchy, policy authority, citizen participation in service delivery, the existence of a local media, social and economic heterogeneity of the local populations—primary data will be collected from three countries. Some of these institutions, such as policy authority, can be compared vertically across different levels of government, while some can be compared horizontally across jurisdictions, such as citizen participation in service delivery. Some institutions vary both vertically and horizontally, such as social and economic heterogeneity of the population. These national data sets will be used to examine, among other things, the impact of selected aspects of jurisdictional design—such as social and economic heterogeneity of the local population—on the performance of public services.

A. Countries

Primary data will be collected from three countries: the Philippines, Uganda, and Sri Lanka. Of these, the Philippines and Uganda will be the main countries of study. In these countries primary data will be collected as described in this section. Sri Lanka will be a secondary country of study. For budgetary reasons, data collection in Sri Lanka will be less extensive, the analysis will rely primarily on secondary data and other qualitative information.

B. Sectors

In each country, the study will focus on service delivery in up to three sectors. These sectors are health, education, and/or potable water.

C. Data Collection Methods

In each country, a sample of sub-national districts will be selected for the study. The size of the sample—that is, the number of sub-national districts—will be determined later.

In each selected district, both quantitative and qualitative primary data will be collected. The following methods will be used to collect these primary data:

• Surveys of government officials:

In each selected district, a sample of service sites (that is, local health clinics, schools, water utilities) will be randomly selected for the survey. The size of each district sample will be determined later.

In addition to government officials responsible for the delivery of health, education, and/or water services at these service sites, government officials in the vertical chain of command from the service site up to the local, district, and central governments will be surveyed. The size of the survey sample at each level will be determined later.

These surveys will provide information about institutional arrangements within government units, capacity of sub-national governments, and coordination of activities, flow of information, authority, and funds between different units and the constituents. They will also shed light on attitudes and accountability of government officials.

• Household surveys:

In each selected district, a sample of randomly selected households will be surveyed. These households will be selected from those jurisdictions where the service sites are surveyed. The size of each district sample will be determined later, but 1000-2000 households in total will be surveyed in each country of study.

Household surveys provide user assessments of demand-responsiveness, quantity and quality, and access to services by different social and economic groups, prevalence of corruption, and perceptions of government legitimacy and trust. They will also provide information about the use of various voice and exit mechanisms by different social and economic groups, as well as access to information about governmental actions.

• Randomized field trials:

To assess government responsiveness to service requests, randomized field trials will be conducted in each selected district. For example, letters requesting specific information will be sent to offices responsible for the delivery of health, education, and/or water services. Replies received, if any, will be then evaluated and rated for their promptness, clarity, and comprehensiveness.

• Other interviews and reviews:

In each country, a series of other interviews with stakeholders—such as NGOs, journalists, academicians, retired government officials, and donor representatives—will be conducted to collect qualitative data not captured by surveys. In addition, reviews of government structures, practices, policies, political systems will be carried out.

The Tables in the Appendix list which data collection methods will be used in the collection of different sets of data.

2 Country Case Studies

In all three countries—Uganda, the Philippines, and Sri Lanka—detailed case studies of the decentralization process and its results will be carried out. These case studies will complement the quantitative analysis described above as means of coping with many influences at play in this area and their interaction. On the basis of surveys, and especially of interviews, document review, and other tests, case studies of the decentralized systems in selected sector in the three countries will be compiled. Each case study will also present a nuanced analysis of the history, process, incentive structures, and outcomes of these decentralizations. It will supply the main elements that the empirical and theoretical analysis cannot: a presentation of the context, an analysis of the incentives and motivations at play, a close reading of the policy and legal texts, and a review of current trends and pressures in this area. The case studies will be structured in such a way as to highlight the problems presented and the lessons derivable from these decentralization experiences.

3 Theoretical Analysis

To further refine and to support some of the hypotheses listed in Section 4, a theoretical analysis will be carried out. This analysis will attempt to answer the following question: what forms of decentralization improve the quality of government? Specifically, the analysis will focus on the impact of local democracy and social and economic heterogeneity of the local population on the performance of decentralized government. Welfare implications will be studied when fiscal authority is devolved to:

1. democratic sub-national governments in socially homogenous sub-national jurisdictions;

2. democratic local governments in jurisdictions that are socially heterogeneous; or

3. autocratic sub-national government.

The model assumes two levels of government, which can be either democratic or autocratic. Democratic governments try and maximize the welfare of the majorities that elect them and autocratic governments try and maximize revenues. If revenue authority is decentralized, then both levels of government compete for the tax base, and, as an outcome of the game they are playing, can set taxes above the top of the Laffer curve. Thus, decentralization may worsen outcomes, especially if jurisdictions are not socially homogeneous.

This model also can be used to analyze the effect of jurisdictional design on welfare outcomes. When jurisdictions are socially homogenous, then the sub-national government acts as a consensual democracy, and it appears that decentralization along ethnic lines may produce better outcomes than jurisdictions that are not designed following ethnic lines. In the latter case, the sub-national government may only want to maximize the welfare of the ethnic majority that elected it, which results in poor local governance, and, combined with majoritarian behavior by the central government, to worse outcomes than a unified state. The preliminary version of the model also suggests that even authoritarian central governments may prefer local democracies, as their concern for local welfare induces them to set lower local tax rates allowing the central government to increase its tax receipts.

Tentative Time Schedule

Tentative time schedule for the study will be as follows:

• Finalization of research plans based on the comments from the World Bank

October 1999

• Identification and contracting of local collaborators (survey teams)

October-November 1999

• Development of draft survey instruments for Uganda and other preparation for field work

October-November 1999

• Development of draft survey instruments for Philippines and other preparation for field work

November-December 1999

• Data collection:

Field work in Uganda:

- IRIS field visit (final selection of survey samples, testing of survey instruments, finalization and translation of survey instruments, training of the survey team, launching of survey implementation, design and implementation of random field experiments, other data collection)

November-December 1999

- Survey implementation and data entry

December 1999-March 2000

Field work in the Philippines:

- IRIS field visit (final selection of survey samples, testing of survey instruments, finalization and translation of survey instruments, training of the survey team, launching of survey implementation, design and implementation of random field experiments, other data collection)

January-February 2000

- Survey implementation and data entry

February-May 2000

Field work in Sri Lanka:

- Fieldwork (interviews, review of legal and policy documents, analysis of secondary data)

January-May 2000

• Cross-country data collected and analyzed

December 1999-August 2000

• Theoretical analysis and first draft of theory paper written

January-May 2000

• Data cleaning and analysis

March-August 2000

• Documentation of results (preparation of papers):

- Preparation of draft papers

May-September 2000

- Finalization of papers

October-December 2000

References

Bird, Richard, Robert Ebel, and Christine Wallich. 1995. “Decentralization of the Socialist State: Intergovernmental Finance in Transition Economies.” Washington, DC: The World Bank.

Breton. 1996. Competitive Governments: An Economic Theory of Politics and Public Finance. Cambridge University Press.

Briscoe, John and Harvey Garn. 1995. “Financing Water Supply and Sanitation Under Agenda 21.” Natural Resources Forum, 19(1): 59-70.

Coleman, J. 1988. “Social Capital in the Creation of Human Capital.” American Journal of Sociology, 94 (supplement): S95-S120.

Denzau, Arthur and Douglass North. 1993. “Shared Mental Models: Ideologies and Institutions.” Working paper, Center for the Study of Political Economy, Washington University, St. Louis.

Fukuyama, Francis. 1995. Trust: The Social Virtues and the Creation of Prosperity. New York: The Free Press.

Grootaert, Christiaan. 1998. “Social Capital: The Missing Link?” Social Capital Initiative Working Paper No.3, The World Bank.

Hayek, Friedrich. 1945. “The Use of Knowledge in Society.” American Economic Review, 35: 519-30.

Knack, Stephen. 1999. “Social Capital, Growth and Poverty: A Survey and Extensions.” Mimeo, University of Maryland.

Litvack, Jennie and Jessica Seddon. 1999. “Decentralization Briefing Notes.” World Bank Institute Working Papers, The World Bank.

Mills, E.S. 1979. “Economic Analysis of Urban Land-use Controls.” In P. Mieszkowski and M. Straszheim, eds., Current Issues in Urban Economics, Baltimore: The Johns Hopkins University Press.

Musgrave, R. A. 1959. The Theory of Public Finance. McGraw-Hill: New York.

Oates, Wallace. 1968. “The Theory of Public Finance in a Federal System.” Canadian Journal of Economics, I, No.1.

Oates, Wallace. 1972. Fiscal Federalism. New York: Harcourt Brace Jovanovich.

Olson, Mancur. 1982. The Rise and Decline of Nations. New Haven: Yale University Press.

Ostrom, Elinor, Larry Schroeder, and Susan Wynne. 1993. Institutional Incentives and Sustainable Development: Infrastructure Policies in Perspective. Westview Press.

Putnam, Robert. 1993b. Making Democracy Work: Civic Traditions in Modern Italy. Princeton, New Jersey: Princeton University Press.

Qian, Yingyi and Barry Weingast. 1997. “Federalism as a Commitment to Preserving Market Incentives.” Journal of Economic Perspectives, Vol. 11, No 4: 83-92.

Salmon, Pierre. 1987. “Decentralization as an Incentive Scheme.” Oxford Review of Economic Policy, Vol. 3, No 2: 24-43.

Schönwalder, Gerd. 1997. “New Democratic Spaces at the Grassroots? Popular Participation in Latin American Local Governments.” Development and Change, Vol. 28: 753-770.

Shafritz, J.M. 1986. Dictionary of Public Administration. New York: Oxford University Press.

Tendler, Judith. 1997. Good Government in Tropics. Baltimore and London: The Johns Hopkins University Press.

Tiebout, C. 1956. “A Pure Theory of Local Expenditures.” Journal of Political Economy, 64: 416-424.

Vogl, Frank. 1999. “Curbing Corruption: The Media’s Work.” Transparency International Working Paper.

White, M.J. 1975. “Fiscal Zoning in Fragmented Metropolitan Areas.” In E. Mills and W. Oates, eds., Fiscal Zoning and Land Use Control, Lexington, Mass.: Lexington Books, D.C. Heath Company.

APPENDIX

I. Impact

| | |

|Indicators of impact |Data collection methods |

| | |

|Level of welfare (for example, child mortality, incidence of water borne diseases, life |Secondary data (government and other statistics): |

|expectancy, literacy) |Assessment of welfare. |

| | |

| |Household surveys |

| | |

II. Performance

| | |

|Indicators of government performance |Data collection methods |

| | |

|Demand-responsiveness of public goods and services (whether goods and services match the |Secondary data (government and other statistics): |

|preferences of population) |Assessment of quantity of public goods and services, equality of access, cost recovery. |

|Extent of corruption (for example, bribery, illicit redistribution of public expenditure) | |

|Cost recovery (for example, tax and user fee collection rates) |Household surveys: |

|Quantity of public goods (for example, share of population with access to piped water, |Provide user assessment of demand-responsiveness, quantity and quality, and access to goods and |

|availability of water from the piped system every day) |services by different groups, and prevalence of corruption. |

|Quality of public goods (for example, water quality) | |

|User satisfaction with public goods and services |Randomized field trials of government responsiveness: |

|Equality of access to public goods and services (for example, the share of poor population having|Assessment of government responsiveness to service requests. For example, letters requesting |

|access to potable piped water or primary health care) |specific information will be sent to sub-national governments and the replies received, if any, |

| |will be evaluated for their promptness, clarity, and comprehensiveness. |

III. Institutional Arrangements

| | |

|Distribution of government powers |Data collection methods |

|Constitutional status (for example, rules governing intergovernmental relations, unitary or a | |

|federal system, discretion of the central government to dissolve the unit or replace its |Surveys of government officials |

|government) |Assessment of institutional arrangements within different sub-national government units, capacity|

|Policymaking authority (for example, over a specified range of functions or over the delivery of |of sub-national governments, coordination of activities between units and the constituents, |

|public goods and services, right to join other jurisdictions for other special purposes, breadth |attitudes of civil servants. |

|of issues) | |

|Fiscal authority (for example, authority to impose and set taxes, collect and keep revenues, |Secondary data and documents |

|raise debt finance, the share of central transfers in total local government expenditure, the | |

|nature of central transfers) |Reviews of government structure and operations |

|Central government and sub-national governments’ reciprocal oversight and control over functions| |

|and finances (for example, procedural or substantive review, ex ante/ex post/no central |Interviews with NGOs, journalists, donors, and other stakeholders |

|government approval of budgets, advisory or binding budgets) | |

|Selection of leadership (for example, governed by elected or appointed officials) | |

|Accountability (for example, existence end enforcement of rules such as monitoring and | |

|sanctioning mechanisms to promote accountability, rules about hiring and firing of staff, | |

|division of responsibilities, staff mobility) | |

|Transparency (for example, disclosure of government budgets and expenditure programs, publication| |

|of procurement proposals, bids, and selection) | |

|Annual audits of sub-national governments | |

|Size of the government unit (for example, size of the area governed, population, staff, depth – | |

|for example, links in chain of command) | |

|Capacity of sub-national governments (skills and knowledge of staff, existence of equipment and | |

|technology, incentives structures) | |

| | |

|Political and electoral structures |Data collection methods |

|Socio-economic characteristics of jurisdictions | |

| | |

|Political/electoral system |Household surveys: |

|Civic participation in good and service delivery, access to different voice and exit mechanisms |Provide information about social and economic homogeneity of the population, and civic activity. |

|Existence and freedom of the press | |

|Attitudes of civil servants |Surveys of government officials |

|Social and economic heterogeneity of population (for example, with respect to ethnicity, | |

|language, religion, income) |Secondary data and documents: |

|Ethnicity, religion, and language of district leadership and government in general |Provide information about press, electoral system, audits, and other external mechanisms to |

|Existence and involvement of user associations (for example, water user associations) and other |promote governmental accountability. |

|civic associations in good and service delivery | |

|Social and economic heterogeneity of membership of user and civic associations |Reviews |

|Trust (between different social and economic groups, between citizens and government) | |

|Cultural norms and traditions | |

| | |

| | |

| | |

| | |

| | |

| | |

| | |

|Other characteristics of jurisdictions |Data collection methods |

| | |

| | |

|Mobility of the population (for example, willingness to move within and across communal |Household surveys |

|boundaries) | |

|Quality of labor and land markets |Surveys of government officials |

|Existence of alternative service providers | |

|Political stability |Secondary data |

|GDP per capita | |

|Average level of education of households served | |

|Initial endowments | |

|Number of years government decentralized | |

-----------------------

[1] If local public goods or services have substantial inter-jurisdictional spillovers, they may be under-supplied by local governments and, thus, their decentralization is typically not recommended.

[2] It is important to recognize that decentralization can itself increase the opportunities for citizen participation (Litvack and Seddon 1999).

[3] This is also commonly referred to as social capital. There are several definitions and interpretations of social capital in the literature. See for example, Putnam (1993b), Coleman (1988), and Grootaert (1998).

-----------------------

Institutional Arrangements

• Distribution of powers within government

• Political and electoral structures

• Socioeconomic characteristics of jurisdictions

• Other characteristics of jurisdictions

Performance

• Allocative efficiency

• Prevalence of corruption

• Cost Recovery

• Etc.

Impact of Decentralization

• Level of welfare

Performance of Public Service Delivery

• Allocative Efficiency

• Prevalence of Corruption

• Cost Recovery

Distribution of Powers within Government

• Political Authority

• Fiscal Authority

• Capacity

• Incentive Structures

• Depth of Hierarchy

• Transparency

Other Characteristics of Jurisdictions

• Mobility of Population

Socioeconomic Characteristics of Jurisdictions

• Social Heterogeneity of Population

• Economic Heterogeneity of Population

• Trust

• Cultural Norms & Traditions

• Civil Society

Political & Electoral Structures

• Citizen Participation in Service Delivery

• Access to Voice & Exit Mechanisms

• Existence & Freedom of Media

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