What is the impact of local governance on the effectiveness of the public sector?

 LPSI Blog by Jamie Boex
 January 25, 2014

 Graph showing the correlation between government effectiveness and the size of the local public sector.

Last year, with research support from USAID, the Local Public Sector Initiative prepared an overview and analysis of the vertical allocation of local public sector expenditures in ten countries based on the first ten LPS Country Profiles prepared by LPSI.

These LPS Expenditure Profiles distinguish between different types of expenditures made at the local level in each country, including 'devolved' expenditures made by elected local governments; expenditures made by deconcentrated administrative entities (with their own deconcentrated budgets); and local services directly funded by central government ministries (i.e., not through devolved or deconcentrated entities).

Given that virtually all previous research on this topic exclusively focuses on devolved local expenditures, the LPS Expenditure Profiles provide a unique opportunity to compare the effectiveness of different subnational funding flows and governance arrangements. Although our sample is small, we want to answer an important question: do different types of local spending result in different levels of government effectiveness (as measured by the Worldwide Governance Indicators)? Of course, proponents of democratic local government believe that devolved local government spending is likely to be more effective than other types of local spending. Rather than accepting this as an article of faith, it is important to answer this question based on empirical evidence.

The graph above clearly highlights the general conclusion that greater local public spending tends to be positively—and quite strongly—correlated with government effectiveness (with Nigeria being an obvious outlier). However, the degree of correlation varies depending on how local public sector expenditures are defined.

When only local government expenditures are considered, devolved local public sector expenditures achieve a strong correlation (r=0.397) with government effectiveness. When local public expenditures are considered to include both devolved and deconcentrated expenditures, the correlation coefficient increases to 0.452, suggesting that deconcentrated expenditures contribute positively to the effectiveness of the public sector. However, when we further expand the definition of local public sector expenditures to include all other types of 'local' spending (in particular, local spending controlled by central government officials), the correlation coefficient tumbles to 0.154, raising the suspicion that centrally-controlled local public sector expenditures are less effective than public spending budgeted and controlled at the local level (either by devolved local governments or deconcentrated administrations).

Although this finding has important policy implications, this initial analysis comes with three main caveats. First, of course, it would be desirable to have a larger sample size. Second, correlation does not necessarily imply causality in the relationship between local public sector size and government effectiveness. And, third, the measure of government effectiveness used here is perception-based, rather than being on objective (outcome based) indicator of public sector effectiveness. In response to this last point, the study on The Local Public Sector's Role in Achieving Development Goals is exploring the impact of different levels and types of local public sector expenditures on specific health and education outcomes.

Follow these link here to the study's main page, or download and read the complete LPSI study report (July 2013) - (PDF; 917 KB).