Logically, four types of situation are conceivable based on the variations along the two dimensions of the national government’s incentive to improve subnational service delivery and its stewardship capabilities. In practice, however, a strong desire to improve performance without sufficient stewardship capabilities would be moot and the end result would be the same: that the central government’s influence is low and subnational governments cannot be induced into more effective service delivery. Similarly, possession of stewardship capabilities in the absence of a sufficient political desire to use them for the purpose of improved service delivery would mean low central government influence. Therefore, we can collapse the four logical possibilities into two practical scenarios of high versus low central government influence over local service delivery, wherein high capacity demands both stewardship capabilities and the necessary political desire.

Figure 8.4 depicts the spectrum (from high to low) of central government’s influence over subnational service delivery along the vertical axis and local government’s electoral accountability along the horizontal axis. It shows four ideal type situations: strong local electoral accountability combined with strong central government influence (strong/strong); weak local electoral accountability



Central government influence versus local electoral accountability

Figure 8.4. Central government influence versus local electoral accountability.

with strong central government influence (weak/strong); strong local electoral accountability with weak central government influence (strong/weak); and weak local accountability and weak central government influence (weak/weak). In reality, it is more appropriate to treat these variations as a continuum rather than discrete categories, but for the sake of clarity, the following discussion illustrates each scenario as a distinct ideal type with selected country examples.

Strong /Strong. When both the central government’s influence and local government’s electoral accountability are high, the central government’s role would be best focused on setting a clear and efficient policy such as clear expenditure assignments under hard budget constraints, transparent and predictable funding arrangements, and, possibly, explicit service or performance standards. Local governments would be given relatively wide latitude to provide a range of services with minimum central government interventions (through a wide range of viable institutional options, from direct provision to contracting arrangements with or without competition) and be held accountable by their own electorate. For certain services with high externalities, these local governments could engage in efficient coproduction with the central government following a variety of schemes such as matching grants and outcome-based intergovernmental compacts.

A real-life example might include the relationship between Brazil’s Federal Government and some of the country’s reformist states such as Minas Gerais, which have embarked on ambitious public management reforms, including in the areas of public service delivery. There, the State Governor signs explicit results agreements with each cabinet secretary in charge of a sector. The reform started in 2003 under then-Governor Aecio Neves, who faced a state administration heavily in debt and suffering limited effectiveness in service delivery. Because the Federal Government had imposed tight control over subnational fiscal behavior through the Fiscal Responsibility Law and detailed regulatory control by the powerful Federal Treasury, reform-minded states such as Minas Gerais had few options but to initiate a rigorous program of fiscal adjustment and efficiency improvements. The latter incentive was part of the motivation for the state government’s concerted efforts to implement results-based management reforms across a range of sectors including education and health.

Politically, Minas Gerais is one of the largest states in Brazil and has historically yielded a high level of influence in the national political scene. When elected, Governor Neves broke with the traditional style of politics that heavily relied on patronage (Hagopian 1996) and “sold” his government as one focused on results and delivery of public goods and services within existing financial constraints. A dominant motivation for this choice appears to be his presidential ambition, for which a successful record of governing his own state and strong electoral support from the local voters would be valuable political assets.

In terms of the central (i.e., federal) government’s influence over subnational governments in Brazil, the most salient aspect is fiscal. Brazil boasts a rigorous Fiscal Responsibility Law, which requires subnational governments to abide by certain limits in their fiscal management, especially in the area of public borrowing. The law is jealously and effectively enforced by the National Treasury and has been credited with the turnaround in Brazil’s overall fiscal performance, especially among its subnational governments. Prior to the introduction of the fiscal responsibility framework, lax management of financial resources, often fueled by populist impulses, typified public administration among Brazil’s subnational governments. Unconstrained by the discipline of financial constraints, subnational governments cared little about efficiency and quality of public services. In contrast, tight fiscal discipline forces those local governments intent on addressing citizen demands for more public goods and services to resort to measures to improve efficiency rather than an easier option of “throwing money at problems.” Of course, not all Brazilian states and municipalities have adopted as serious reforms as Minas Gerais has. This, in our view, is a function (at least partly) of the extent of local electoral accountability, which still varies from one subnational jurisdiction to another.

Weak/Strong. When local governments’ electoral accountability is limited but the central government’s influence is high (both in terms of its capacity for stewardship and incentives to focus on service delivery performance), the top-down control from the central government has to compensate for the citizens’ inability to hold their local governments accountable. This may be a case where local governments are either unelected (as in decentralized authoritarian regimes) or where political market failures render elections an ineffective means of holding the elected local governments accountable (e.g., many States in

Mexico, Brazilian municipalities in general). In these situations, the application of the subsidiarity principle (subsidiarity is an organizing principle stating that a matter ought to be handled by the smallest, lowest, or least centralized authority capable of addressing that matter effectively) would suggest that, when electoral accountability of local governments is low the central government must “step in” on behalf of local residents to hold local governments accountable for service delivery performance. The “strong” central government could inject tight control of local governments through means such as earmarked transfers, or input- or output-based intergovernmental compacts, whereby funding of local governments is conditioned to the achievement of centrally determined goals and targets (and performance closely monitored). These may be seen as second best responses (with centralized provision being the first best). Often, the theoretical first best options are not available due to constitutional or political constraints. As indicated earlier, in this paper we are working from the assumption that some level of decentralization is a factual reality.

The central government also could allow entry of nonstate service providers, either for- or not-for-profit, within a well-regulated market (in the case of for- profit entities) or with well-crafted performance contracts (in the case of not-for- profit entities). These options could help improve service delivery performance either because the dysfunctional local government is fully bypassed or because of competitive pressures it may experience from nonstate providers.

Real-life examples of this pattern include use of earmarked federal transfers to improve access to (better quality) health and education services in countries where many of the local governments suffer from political market failures and thus exhibit weak electoral accountability. Such countries include Argentina and Mexico, where the federal government introduced a top-down program to increase access to health care at the subnational level (Plan Nacer, Seguro Popular), and Brazil, where a federal program offered fiscal incentives for states and municipalities to increase school enrollment (FUNDEF). In all these cases, a Federal government seeks to influence the performance of subnational governments through the use of financial incentives and a strong monitoring of results, typically around a specific sector outcome.

The Brazilian State of Ceara—as an example of a “central” government visa-vis the municipal governments within the state territory—has taken this approach a step further. Ceara is a relatively poor state in the Northeast of Brazil and has traditionally been dominated by patronage politics. With the transition from military rule in the late 1980s, however, a group of local entrepreneurs with a modernizing perspective captured state politics (Borges 2006). For more than two decades since then, the state government has pursued a range of innovative service delivery reforms that involved using its leverage to influence actions and decisions by (relatively weak) municipal governments (Tendler 1997).

In 2008, the State Government of Ceara introduced a new, performance- linked fiscal transfer to the municipalities within its territory, linking the amounts to be transferred to a set of service outcome indicators in education (student test scores in Math and Portuguese, student grade completion rates), health (infant mortality), and environmental management (presence of an appropriate waste disposal system) in each municipality. In Brazil, the central government influence over resource allocation is relatively strong in many instances because the federal constitution and other legislation prescribe distribution formulae of a number of revenue sources and also mandate that subnational governments allocate certain proportions of their revenues to specific sectors such as education.

One such example is the federal law that requires states to transfer 25 percent of the state value-added tax collection to municipalities. (Municipalities finance their operations with a combination of municipal taxes over which they have virtually full autonomy and a myriad of fiscal transfers from the federal and state governments. The innovative formula described here applies to one of these transfers.) The federal law defines the distribution formula for 75 percent of the total transfer and allows each state to decide how to distribute the remaining 25 percent based on a state law. Furthermore, the federal constitution requires each municipality to allocate 15 percent of its net current revenues to education. A weakness of these formula-based transfers has been that the formulae are not linked to actual service performance but instead to inputs (e.g., a share of resources spent on education). What the State Government of Ceara has done is to build on these existing legal requirements, which merely focus on fund allocation (as inputs for education service delivery), and incorporate quality dimensions in the distribution formula, hence introducing an outcome orientation into the financial incentives for the municipalities (Holanda 2011).

Strong/Weak. When the central government is “weak” in the way defined here, the options become more limited. If electoral accountability is reasonably effective at the local level, one option would be to introduce “radical devolution” or “quasiindependence” to allow maximum freedom for the local governments to provide services and to allow the local electorate to hold them directly accountable with a minimum of central government involvement. These “local islands of excellence” exist in most countries where decentralization has created a minimum level of local autonomy to allow reform-minded local governments to pursue innovative governance reforms (e.g., Naga City in the Philippines during 1989-1998 and 2001-2010, and Chacao District in Caracas, Venezuela, during the 1990s). They are not always sustainable or replicable, however, because their successes tend to depend on idiosyncratic factors, such as the quality of the mayor’s leadership or other highly context-specific enabling factors.

But to the extent local governments (even strong ones) cannot operate completely free of central government influence, there will be inevitable efficiency losses in this arrangement. For example, inchoate central governments, through various agencies that do not coordinate with one another, often require of local governments duplicative or even contradictory reporting procedures, or provide inconsistent policy directives. If the expenditure assignment is relatively unclear, arbitrary interventions by the central government could obscure the responsibility for specific services and dilute accountability.

From a policy perspective, a sensible option a reformer at the central level faces in these situations is to limit, or if possible reduce, the extent of constraints imposed by the central government and by the overall architecture of the country’s intergovernmental relations. A secondary option would be to facilitate dissemination of local innovations and promote replication of successful local governance experiences among other local governments with strong enough motivations to improve their performance.

Weak/Weak. Finally, when both the central government influence is “weak” and local governments are not accountable to their local electorate, the choices are even more limited. One option would be to rely heavily on a community- driven approach as in many fragile and postconflict situations (e.g., the early days of EDUCO in El Salvador), on nonstate providers, especially NGOs, which operate under relatively simple contracts (e.g., as in Guatemala’s health sector), or on organizational enclaves (e.g., FONCODES in Peru in the early 2000s).

Where the private sector is active, it is also possible to see unregulated growth in private provision, with little to no quality control (e.g., education in Pakistan, health in India). In such situations, the average quality of services rendered is likely to be suboptimal even though there may be a limited number of private providers that offer good-quality services at reasonable cost. In social services that are characterized by high levels of information asymmetry between the providers and the clients (such as education and health), market competition alone is unlikely to result in high-quality services.

A well-known example of a weak/weak situation is Cambodia. Until the peace accord in 1991, the central state in Cambodia was significantly weakened by war and internal conflict. Even after the peace accord, Cambodia remains one of the poorest countries in Asia and the Cambodian state suffers from limited technical and fiscal capacity to influence service delivery at the subnational level.

Local governments are even weaker. Elections of commune officials took place for the first time only in 2007. Genuinely competitive elections might contribute to improved local accountability. But the country’s poverty combined with the strong patronage orientation of the national politics and the relatively strong control of the national political party could dampen the effectiveness of elections as a means for holding commune officials accountable for performance. Finally and perhaps most importantly, communes are given only limited service delivery responsibilities, and therefore, their improved accountability would at best have only indirect effects on service delivery at the local level (Smoke 2008).

Against this institutional backdrop, Cambodia has become famous for a number of innovative approaches to service delivery, especially in health, where NGO contracting has been used extensively with positive results. Several international NGOs were hired by the government (with donor assistance) to oversee delivery of primary health care and management of provincial hospitals. The selected health operational districts and provincial hospitals would sign a performance contract with the NGO and the latter would hold the providers accountable with a combination of regular performance monitoring and payment incentives (Schwartz and Bhushan 2005). Similar approaches have been attempted successfully in Central America following civil war, as in the case of EDUCO mentioned above.

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