Fiscal decentralization and the quality of public services in Russian Regions.

Author:Freinkman, Lev
Position:Report
 
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  1. INTRODUCTION

    Empirical evidence in support of the theoretical advantages of decentralization has been generally inconclusive, as highlighted by Treisman (2007). This may be partly explained by the difficulties of measuring the extent of decentralization or its relevant aspects such as the degree of voter accountability or decision making autonomy (Treisman, 2002; Stegarescu, 2005). In fact, correlation between different measures of decentralization proves to be astonishingly low (Voigt and Blume, 2008).

    Inconclusive empirical evidence may also reflect theoretical ambiguities of the impact of decentralization. There has been growing consensus in the literature that the results of decentralization depend critically on the local conditions, in particular on comparative intensity of distortions in the incentive structure at different tiers of government (Bardhan and Mookherjee, 2005; Blanchard and Shleifer, 2001). The extent of capture at different levels of government, and hence the potential benefits of decentralization, may accordingly depend on the quality of institutions and a number of other factors, including the extent of political centralization, i.e. presence of strong nation-wide parties (Enikolopov and Zhuravskaya, 2007)

    Finally, measuring performance under decentralization is itself a significant challenge, since the quality of public services tends to be benchmarked through observable input indicators or process-oriented measures, such as pupil enrolment ratios, student-teacher ratios, or teacher absenteeism in education, rather than output indicators (such as quality of instruction), which is often much more difficult to assess.

    In the light of these complications, more empirical analysis is needed to strengthen the case for further decentralization. Of particular interest would be a direct comparative study of the quality of public service delivery in more and less decentralized regions, to complement cross-country studies of decentralization and studies of the impact of country-wide reforms. Crosscountry studies, for instance those based on performance in standardized PISA examinations conducted by the OECD (Programme for International Student Assessment), face the difficulty of meaningfully comparing outcome or input indicators across countries given vast differences in objectives, priorities, curricula, and sampling. In addition, production functions that transform various inputs in public service provision into outputs may differ substantially across countries complicating estimation and interpretation (see Nabeshima (2003) on education in South-East Asia). In the case of studies of system-wide reform initiatives, it is often difficult to credibly establish a counterfactual, i.e. the quality of public services in the absence of reforms.

    Cross-regional studies, by contrast, combine reasonably comparable data on inputs and outcomes with substantial heterogeneity in some institutional arrangements, including the extent of fiscal decentralization--the role of municipal governments in public service provision relative to that of central regional governments. The latter approach was adopted by Galiani and Schargrodsky (2002) and Barankay and Lockwood (2007), and is followed below. (2)

    This paper looks at the public service provision in Russian regions in the first half of the 2000s. Russian data could be of considerable interest for advancing our understanding of the effects of decentralization since, on the one hand, Russian regions show a considerable variation in the degree of expenditure decentralization (Freinkman and Plekhanov, 2009), and they differ considerably in their choices of expenditure and sectoral policies. On the other hand, there is a major crossregional variation in efficiency of regional public spending in core sectors (Hauner, 2008). Thus, the question is whether there is a link between regional fiscal decentralization and the quality of public services in the regions. Importantly, regions share common history, common legal framework, and common expected standards of public services such as education, health or municipal utilities, substantially reducing heterogeneity of sample with respect to factors that cannot be explicitly controlled for.

    We consider primarily fiscal aspects of decentralization, i.e. allocation of control over budget revenues and expenditures across government levels. We do not have sufficient information to measure and study political dimension of decentralization. Moreover, it is unclear if such variation remains significant in today's Russia.

    The paper looks at two different sectors: secondary education and municipal utilities (water, waste water (sewerage), and district (central) heating). In Russia both sectors are the responsibility of subnational governments, but they are characterized by very different production functions. In particular, education performance is arguably determined by long-term factors in effect over the school cycle (of up to 11 years if primary education is included). In municipal utilities successful restructuring or improved maintenance can be expected to affect performance within months.

    The analysis makes a distinction between observable inputs in public service provision and indicators of performance, incorporating both in the following framework: the level of government spending affects the quantity and quality of the main observable inputs in each sector (such as schools, teachers, or computers in education) and then these observable inputs and spending both affect regional performance in the sector. The decentralization variable can, in principle, influence the relationship between government spending and outcomes directly, through observable inputs, or both.

    As a performance indicator in education the analysis uses the first wave of the results of the standardized final examinations in mathematics and language, which were rolled out country-wide from 2003 onwards. These exams results are particularly valuable due to the "surprise" element of exam introduction, which rules out the possibility that spending on education or provision of basic inputs had been affected by examination performance. The performance indicator in the utilities sector is the average number of network breakdowns per unit of network length, which measures quality and reliability of service delivery but to the best of our knowledge is not a common determinant of funding allocation in the sector. (3) Importantly, this is a result-based rather than process-based measure of performance.

    The analysis suggests that fiscal decentralization has no significant effect on the key inputs into secondary education, such as schools, computers, or availability of pre-schooling, but at the same time has a significant positive effect on average examination results, controlling for the key observable inputs and per capita regional government spending on education. Likewise, the degree of decentralization appears to have no discernible impact on the quality of inputs into utilities provision, such as depreciation of assets or network coverage, but an increase in the degree of fiscal decentralization has a significant positive effect on the performance in the sector.

    The paper also contrasts two measures of fiscal decentralization: one based on expenditure shares in particular sectors, and one based on the share of municipal revenues over which municipalities have some control in terms of how these revenues are raised. The fact that only the latter measure appears to have an impact on public service outcomes suggests that improvements in public service delivery associated with fiscal decentralization in the Russian regions are brought about by improved incentive structure and accountability rather than by gains in productive (allocative) efficiency of public spending.

    The rest of the paper is structured as follows. Section II discusses the link between fiscal decentralization and the quality of public services, with particular reference to decentralization and provision of education and municipal utilities in the Russian regions. Section III presents the results of a cross-regional empirical study of the determinants of the quality of public services. Section IV concludes.

  2. FISCAL DECENTRALIZATION AND THE QUALITY OF PUBLIC SERVICES

    2.1. FISCAL DECENTRALIZATION AND PROVISION OF PUBLIC SERVICES

    The impact of decentralization on the quality of public services depends on a large number of factors, but in general terms decentralized provision of public services could have four main advantages.

    Firstly, local governments may have superior knowledge of local preferences and needs and thus can be able to target public spending better (Oates, 1972). Faguet (2004) provides empirical evidence in support of this hypothesis by showing that decentralization in Bolivia significantly altered public investment spending patterns in a way that is consistent with local governments being more responsive to perceived local needs. If expenditure targeting is the key issue, the relevant measure of decentralization would be the share of sectoral spending administered "closer to people", for instance at the municipal, sub-municipal, or school level in the case of education spending, as argued by Barankay and Lockwood (2007). Empirical evidence on the effects of decentralized education spending has been mixed, with positive results reported by Barankay and Lockwood (2007) for Switzerland and Skoufias and Shapiro (2006) for Mexico, but negative results obtained by Di Gropello (2002) for Chile, and more broadly for Latin American countries (Glewwe, 2002).

    Secondly, decentralization may affect public services provision through its impact on incentive structure and accountability of governments and public services providers (World Bank, 2004). Local governments may invest in policies that with time increase their revenue base and the value of their office, but they will lack...

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