Roles and Expenditures across Levels of Government

1. Roles and Expenditures across Levels of Government Presentation for: Public Expenditure Analysis and Management Course Monday, May 21st, 2006 4-5:00 pm Presented by: Kai Kaiser, Economist Public Sector Group Poverty Reduction and Economic Management Network (PRMPS) kkaiser@worldbank.org

2. 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

3. 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…

4. Four Pillars of Intergovernmental Fiscal System • Expenditures • Revenues • Intergovernmental transfers • Subnational borrowing/debt

5. Expenditure Assignments • Macroeconomic stability • Public Service Delivery • Effectiveness/Efficiency • Public Management Innovation • Poverty Reduction • Responsiveness • Equalization

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

7. 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

8. 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.)

9. 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 Allocative Efficiency (Subsidiarity)

10. 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

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

12. 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.

13. International Diversity

14. Decentralized Social Sector Expenditures Source: IMF GFS

15. Unbundling Expenditure Assignments

16. Comparative Assignments

17. 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)

18. 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!

19. 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

20. 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

21. 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

22. 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

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

24. 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

25. 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

26. But, good design is complicated Decentralization spans • Political/Legal • Fiscal • Administrative policies and institutions…

27. 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

28. 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 Common Dangers

29. Decentralized Accountability Mechanisms • Top Down • Central Supervision • Reporting • “Minimum Standards” • Bottom Up Accountabilities • Electoral Insufficient • Proximity versus Scale/Capacity

30. 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

31. Q & A + Further Resources • Decentralization & Sub-National Economics Thematic Group Website • Sign-up for Decentralization & Sub-National Economics TG • AskGov