The World Bank1

Roles and Expenditures across Levels of Government

Presentation for:Presentation for: Public Expenditure Analysis and Management CourseMonday, May 21st, 20064-5:00 pm

Presented by:Presented by:Kai Kaiser, EconomistPublic Sector GroupPoverty Reduction and Economic

Management Network (PRMPS)kkaiser@worldbank.org

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Overview

• A. Intergovernmental Fiscal Systems– Levels of Government– Roles & Responsibilities

• B. Sub-National Expenditure Assignments– Principles & Issues– Empirical Evidence

• C. Doing PERs in Decentralized/Sub-National Contexts– Diverse Approaches– Public Expenditure Management versus Sectoral Lenses– Special Issues to Consider

• D. Intergovernmental Transfer Systems– Vertical Imbalances and Own Source Revenue Mobilization

• E. Assessing Fiscal Decentralization• Design, Implementation, Diagnosis• Top-down versus Bottom Up Accountabilities

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Decentralization A World-Wide Phenomenon

• Underway in over 85 countries– Often evolving process

• Political and economic rationales• Varieties

– Deconcentration– Delegation– Devolution– Privatization

• Spans political/legal, fiscal, administrative…

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

Four Pillars of Intergovernmental Fiscal System

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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 doesn’t 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

Social Services Transportation Other Services Utility ServicesHousing

Nutrition Programs

Primary and Preschool Education

Secondary Education

Universities

Public Health

Hospitals

Social Welfare

Interurban Highways

Urban Highways

Ports and Navigable Waterways

Airports

Railroads

Urban Transportation

Oil and gas Pipelines

Public Order and Safety

Police

Irrigation

Heating

Fire Protection

Drinking Water and Sewerage

Waste Collection

Electric Power Supply

Telecomm

unications

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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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)

Decentralization Trends

Source: International Monetary Fund. Government Finance Statistics Year Book , various years, Country Tables

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Differences Across Regions

0%

10%

20%

30%

40%

50%

60%

Sub-SaharanAfrica (4)

East Asia and thePacific (4)

Latin Americaand the

Caribbean (9)

Europe andCentral Asia (13)

High Income,OECD (18)

South Asia (1)0%

5%

10%

15%

20%

25%

30%

35%

Sub-Saharan

Africa (5)

East Asia and

the Pacific (7)

Latin America

and the

Caribbean (13)

Europe and

Central Asia

(15)

High Income,

OECD (21)

South Asia (1) Middle East

and Northern

Africa (1)

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

Figure 1: Sub-National Expenditures (% Total)

0

10

20

30

40

50

60

70

80

90

% T

ota

l (Cen

tral+

Su

bn

atio

na

l)

Local

State/Province

Country (year)

OECD* Developing Countries

Source: IMF GFS

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Decentralized Social Sector Expenditures

DECENT5: SN Education (% Total Education)

0 20 40 60 80 100

AFR (2)

EAP (2)

ECA (20)

LAC (5)

MNA (0)

OECD (10)

SAR (1)

Region

% Regional Average

DECENT7: SN Health (% Total Health)

0 20 40 60 80

AFR (1)

EAP (3)

ECA (20)

LAC (5)

MNA (0)

OECD (9)

SAR (1)

Region

% Regional Average

Source: IMF GFS

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Unbundling Expenditure Assignments

Policy Making Who sets the main policy guidelines for a service (e.g., free primary education as a national policy)?

Standards Setting Who sets the standards (e.g., national tests versus local building standards)?

Administration/contracting Who is the primary government authority that administers services on a day to day basis?

Financing Who provides the financing for services? Capital investments, wages, O&M?

Service deliveryWho actually produces/delivers the service (e.g., this can often

be private)?

Regulation Who regulates a service (e.g., professional accreditation in health)?

Monitoring & Evaluation Who monitors and evaluate a service (e.g., how can local citizens provide feedback)?

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Comparative Assignments

F = federal/national, S = state/province, L = local, C = concurrent, .. = negligible. 1 = responsibility, 2 = provision

Defense Foreign affairs

Environ- ment and

natural resources

Unemployment

Insurance

Industry and

agriculture

Education Health Social welfare

Police High- ways

EA5 countries: China F F F,S,L L F,S,L L L L L F,S,L Indonesia (2001) F F .. .. L L L L F F,S,L Phillippines (1) F F .. .. .. F F F .. .. Phillippines (2) F F .. .. .. F,S,L F,S,L S,L S,L .. Thailand (1) F F .. .. .. L L .. L L Thailand (2) F F .. .. .. L L .. L L Vietnam (2004)

F F F, S, L .. F, S, L S, L S, L F, S, L F F, S, L

Comparison countries: India (1) F F F,S F,S F,S F,S S F,S S F India (2) F F F,S F,S F,S F,S,L S,L F,S S F Japan (1) F F .. .. L F,L F,L F,L L .. Japan (2) F F .. .. .. L F,L F,L F,L L Malaysia (1) F F L .. F,S F F,S F,S F F Malaysia (2) F F L .. F,S F F,S F,S F F

Source: Source: World Bank, Decentralizing Indonesia, annex 4, 2003; other World Bank info rmation, EASPR Draft Decentralization Flagship (2005).

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Designing PERs in Contexts with Significant Sub-Nationals

• National PERs to Get at Consolidated Fiscal Picture– How large is sub-national sector?

• Estimates of Own source revenues

• PERs Focusing on Sub-National Diversity– Decentralizing Indonesia (2003)– Nigeria State Finances Study (2003)

• State-Level PERs– E.g., South Asia: India & Pakistan

• Local Government Finance/PFM Assessments– India Fiscal Decentralization to Rural Governments (2004)– Uganda Integrated Fiduciary Assessments (2005)

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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

• Sub-National Fiscal/PFM Diagnostics– Adopting the PEFA Framework to Special Context of Sub-Nationals– Diversity Across Sub-Nationals– Data and Effort Challenges!

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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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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 doesn’t 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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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

– Spatial Allocation of Public Resources– 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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Q & A + Further Resources

• Decentralization & Sub-National Economics Thematic Group Website

• Sign-up for Decentralization & Sub-National Economics TG• AskGov