Exploring the Measurement and Effectiveness of the Local Public Sector

Exploring the Measurement and Effectiveness of the Local Public Sector: Toward a classification of local public sector finances and a comparison of devolved and deconcentrated finances Jamie Boex IDG Working Paper No. 2011-05 December 2011 IDG Working Paper No. 2011-05 Exploring the Measurement and Effectiveness of the Local Public Sector: Toward a classification of local public sector finances and a comparison of devolved and deconcentrated finances Jamie Boex December 2011 Abstract Fiscal decentralization and local government finance reform have traditionally been treated as important themes in international development and in the design of country assistance strategies. However, over the past 10 years, the international development community has often narrowly focused on the devolution of financial resources within the context of elected local governments. Indeed, the only type of local public financial data that are collected as part of the International Monetary Fund’s Government Finance Statistics is for devolved local governments. The exclusive focus on devolved local government finances ignores the broad array of subnational finance practices engaged in by deconcentrated countries, where the local public sector is typically formed by subnational departments or territorial units of the state administration that report upward but are tasked to deliver public services at the local level. This paper seeks to define a more detailed metric of (local) public sector finances, which recognizes that the central authorities in each country interact with residents, civil society, and the private sector in three ways: through the direct or delegated delivery of public services (by central government entities); through deconcentrated departments or jurisdictions; or through devolved local governments. Formulating a detailed methodology for measuring local public sector finances and collecting data in accordance with this methodology will serve as a foundation to better understanding of the production function of public sector outputs and outcomes. In particular, the more detailed measurement of local public sector finances would allow us to estimate whether centralized, deconcentrated, or devolved expenditures have a differential impact on local public service delivery outputs and outcomes. _____________ * Jamie Boex is a Senior Research Associate at the Urban Institute Center on International Development and Governance in Washington, D.C. This version of the paper has benefited from comments reviewed from a number of reviewers, including Roy Bahl, Harvey Galper, Paul Smoke, and François Vaillancourt. IDG Working Paper No. 2011-05 1 Exploring the Measurement and Effectiveness of the Local Public Sector: Toward a classification of local public sector finances and a comparison of devolved and deconcentrated finances Jamie Boex December 2011 1. Introduction Many developing countries have deficiencies in their ability to manage their government expenditures in an efficient and accountable manner, so as to effectively deliver critical, pro-poor public services such as basic education, health, and other public services that are essential to economic development and poverty reduction. An important—but often overlooked—element in sound public financial management is to make sure that resources flow down within the public sector to the local (subcentral) level where public services are actually delivered and where economic development takes place. Instead, public financial resources often remain stuck at the central government level, where these resources are either diverted or fund bloated and inefficient bureaucracies. While fiscal decentralization and local government finance reform have been treated as important themes in international development and in the design of country assistance strategies for developing economies, the system of intergovernmental finance is seldom treated as a cross-cutting policy issue. In their focus on fiscal decentralization and subnational public finances, international financial institutions, international development agencies, and the related research community have focused to a considerable extent on the distribution of financial resources within the context of countries that largely rely on devolved, elected local government for the delivery of key public services. The (near) exclusive focus on devolved expenditures in practice and in research ignores the fact that in about half the developing countries around the world, key public services are delivered in a deconcentrated manner, where the local public