Constraining the Leviathan:
By Peter Grubenmann,
Devolution of political-administrative powers to localities is thought to create a more conducive environment for local economic development. A policy and planning simulation model was developed to investigate this. The study compares two decentralizing Asian localities with two politico-administratively decentralized European localities. The lack of hard data on the local level suggested a non-orthodox use of System Dynamics as analysis and simulation methodology. Social Network Analysis was used to develop the systems' power structure. Time simulations of empowerment policy changes revealed that these matter and that fully empowered villagers are beneficial for the development of a locality.
II. Some Evidence Of The Leviathan's Effects
III. Questions, Assumptions And Methodology
IV. The Dynamic Narrative Of The Local Politico-economic Process
V. Local Government Policy Simulations
"...government is a monolithic entity trying to maximize size and revenue..."(Brennan and Buchanan, 1980)
Brennan and Buchanan (1980) model government as a Leviathan, a monolithic monster, trying to maximize size and revenue. They believe that, ceteris paribus, the overall size of the public sector should inversely vary with the extent of simultaneous decentralization of the national government's taxing and spending power, and, therefore, argue that decentralized taxing and spending authority serves as a powerful constraint on the government Leviathan. They support their hypothesis with the Tiebout (1956) model on fiscal decentralization resulting in the notorious phrase "voting with ones feet." In this model inhabitants move to the community where the utility of their tax contribution is maximized. For the Tiebout hypothesis to hold, a decentralized, ideally federalist, political organization with decentralized taxing and spending authority is necessary. This creates competing jurisdictions, which are forced to make use of available scale economies to achieve cost-efficient production and supply of public goods and services.
Jaber (1994) supports the Leviathan hypothesis and postulates that a growing population encourages the expansion of the public sector at increasing rates. Moreover, because most sub-national governments are financed largely by grants from upper governmental levels, and only to a small degree by the local people, they probably prefer the grants to be as large as possible. Upper government grants or transfers are therefore thought to be the main cause of a growing local government quota.
Oates (1985) postulates that "the more urbanized or populated a state, the smaller should be its public sector, reflecting some economies in providing services." Oates thus does not agree with the Leviathan hypothesis. These opposite positions ask for empirical verification.
Jaber (1994) therefore empirically researched the above hypotheses in an econometric study in which 30 countries were included (10 developing, 3 transition, and 17 industrialized countries). He concluded that sub-national governments try to circumvent competitive pressures through colluding among themselves or with national government, trying to cede taxing powers to the central government to establish a revenue-maximizing, uniform tax system across all jurisdictions. This results in a tax sharing system with central government transfers in the form of grants. Jaber concludes that his "findings suggest that the countries pursuing the objective of a smaller public sector, but just decentralizing their spending powers, should decentralize their taxing decisions as well."
Lijeron (1996) shows in his time series study of 8 countries that as a consequence of the limited capacity of local governments to rely on their own tax-base, intergovernmental transfers play a critical role in local finance. Central government transfers account for about 60 percent and 35 percent of local government revenues in industrialized and developing countries, respectively. He found that "on average there is, however, a tendency to reduce the local government dependency on central grants, both in industrialized and in developing countries. Countries with a relatively high degree of local financial autonomy show a greater independence in decision-making and can be more sensitive to both costs and local priorities..." He also found that industrialized countries have a higher decentralization ratio than developing ones. The reason for this situation is that the level of economic development of a country determines the aggregate resources that are available for the growth of the governmental sector.
According to Lijeorn's (1996) statistical findings, the degree of decentralization of expenditures is generally higher than the degree of decentralization of revenues and, therefore, local governments are always financially dependent on central government transfers. Although local governments are supposed to be more efficient and effective in providing social services, evidence shows that social spending is still very centralized and evidence reveals a situation of imbalanced decentralization where local governments are forced to take over more spending responsibilities but are not given more taxing autonomy.
Theory suggests that decentralization of taxing and spending powers to local governments should produce positive welfare effects and lead to smaller government, as transaction costs are lower if both powers are in the hands of the same governmental level. Local governments (LG) are believed to spend more rationally if public goods and services must be primarily paid through local taxes, levies, and charges as taxpayers demand value for their money; and, if frustrated, might retaliate during the next elections or vote with their feet, i.e., move on to another jurisdiction.
If Brennan and Buchanan's (1980), Jaber's (1994) and Lijeron's (1996) results possess general validity, it should be possible to find evidence indicating that more decentralized government revenues and expenditures lead to a smaller government sector and then to higher growth rates, as suggested by the Barro and Sala-i-Martin (1999, pp.38-39) cross-section and panel results.
Localization of government, and also partial localization of public finances, are major issues, particularly in developing countries. It will be interesting to compare developing countries with industrialized countries to determine what the impact of differing qualities of public financial decentralization on local government size and local growth might be. To analyze these questions, a comparative study was undertaken in two industrialized and two developing countries: Thailand and the Philippines and, Switzerland and Spain. To further stress the poverty angle, a relatively poor local community with a homogenous prevalent culture and little inequity was selected in each country: Tambon Huay Yai in Cholburi Province in Thailand; Barangay Labac in Cavite Province in Philippines; Zorita in the Province of Caceres, Region of Extremadura in Spain; and Schwende in Canton Appenzell Innerrhoden in Switzerland.
The four countries can be summarily characterized as follows:
Table 1 below gives some evidence of the four countries' degree of decentralization of their public financial systems and of their GDP growth data.
TABLE 1: Public finance data for some selected countries
Source: World Development Report 2000, World Bank, Washington D.C., 2000 and Bundesamt fuer Statistik, Neuchatel, 2000
With regard to the above data one can make the following observations:
Table 1 does not indicate an obvious relation between sub-national fiscal behavior and GDP growth rates. Therefore, a more extensive correlation analysis of 21 industrialized and 18 developing countries for which complete comparable data could be found in the World Bank's World Development Report 1999/2000 was carried out. Results are shown in Table 2, below. The two-country classifications are necessary as growth rates in developing countries are generally higher than those of industrialized countries due to the base effect of low initial GDP. This would bias the correlation results.
Tables 2 and 3 below show the correlation results between GDP growth rates and fiscal decentralization. The analysis of the industrialized countries shown in Table 2 below reveals a statistically significant negative correlation at the 99% confidence level between sub-national expenditure ratios (-0.593), sub-national revenue ratios (-0.672) and central government expenditures.
The correlation between central government expenditures and GDP growth rates is weakly negative, but statistically not significant.
TABLE 2: 21 Industrialized Countries: Correlation of Average GDP Growth Rates 1990 -1998 and Fiscal Decentralization
Source: World Development Report 1999/2000, Word Bank, Tables A1, 11, 14
TABLE 3: 18 Developing Countries: Correlation of Average GDP Growth Rates 1990 -1998 Fiscal Decentralization
Source: World Development Report 1999/2000, Word Bank, Tables A1, 11, 14
The analysis of the 18 developing countries reveals the same correlation pattern, though the coefficients are statistically not significant. With some caution one could therefore make the prediction that, more decentralized public expenditures and revenues lead to lower central government expenditures and thus to higher growth rates.
Barro and Sala-I-Martin (1995), in what follows called BSM, and of Barro (1999, pp. 38-39) both found that the level of government consumption has a negative (-12.9%, BSM; -11.0%, Barro) effect on the per capita growth rate. Assuming that their findings, which relate to the national level, are also valid for the local level, the above sub-national fiscal data become important local growth determinants.
These findings lead to the empirical question of whether decentralizing taxing and spending powers to the local level is indeed enough to contain the local Leviathan, and whether this can positively influence growth rates and development. It is assumed here that the sum of the local government policies in a country influences to a large extent the outcome of the national economy, and that therefore extensive research on these issues on the local level are both timely and important for answers to growth and development questions.
The present research deals with the devolution of powers to villagers versus the exclusive or partial concentration of these powers in the hands of the local government council. When the talk is of decentralization of government, it is always understood to ultimately mean granting direct democratic powers to the villagers themselves, with the local government being the executioners of the peoples' will only. This is more or less the local democratic system in Switzerland, which is used as a benchmark in this research.
Adequate educational standards of the population and adequate tax bases for the financing of the local government are considered a prerequisite for a decentralized state with self-administering, empowered political units. Inadequacy with respect to these two factors is most often cited by central government as the basic hindrance to a decentralization process. The above suggests, that decentralization is often thought to be a concept more suitable for advanced, wealthier economies than for poor ones. The four localities mentioned above have been chosen to address this assertion. The four localities' basic structural data are in Table 4 below.
TABLE 4: Overview of the Localities
Analyses at the local level generally have to cope with poor data, both in quality and quantity. The research methodologies to be employed therefore had to allow the use of soft data and still produce valuable results. The objectives of the research are of the "what if" type, which means that answers must be found through simulations. A simulation methodology allowing the use of soft data is System Dynamics (SD), and this methodology was chosen for this research.
Although, the structure of political-administrative systems is generally considered to be static, the behavior of the systems is not. The state apparatus behaves dynamically within the "information/action/consequences" paradigm (R.G. Coyle, 1996). To analyze the dynamic behavior of highly complex systems such as politico-administrative systems, the research methodology to be applied must also enable dynamic modeling and simulation of systems with a large number of related sub-systems containing a great number of "non-observable variables" such as tastes, preferences and values. Due to the lack of hard data describing the very important non-observable variables in politico-administrative systems, econometric techniques become questionable as a major instrument of analysis, though a number of the non-observable variables could reasonably be treated as dummy variables.
We deal here with managed, self-steering, intentional systems of the "multiple-loop nonlinear feedback" type (Aulin, 1982, p. 68/69), as encountered in governmental reality. A system dynamic approach seems best suited for the simulation of decentralizing governments. Only in an iterative time simulation process can the many and highly complicated forces of influence be brought to work and made to reveal the long-term dynamic behavior of the system. This is exactly what can be accomplished in a system dynamic analysis (Forrester, 1971, Senge, 1990).
Unfortunately, a fruitless academic divide has developed between econometricians and system dynamicists. The econometricians rejected the system dynamic approach by claiming it to be unscientific, speculative, lacking factual analysis and missing a clearly defined methodological apparatus. The system dynamicists on the other hand rejected the purist econometric approach, arguing that econometric analysis is basically a static approach, as the past is merely and mostly linearly extrapolated into the future, whereas the system dynamic approach embodies multiple feedback learning systems in which everything changes and adapts over time to create a new future, different from the past status (Sommer, 1981).
Forrester (1971), the founder of system dynamics, argued that in analyzing socio-political systems, the very important "non-observable" variables mostly have to be excluded from econometric models due to the absolute need for hard statistical data. System dynamic analysis is based on the profound knowledge and experience of the researcher in the topic she analyzes. Rough estimates of necessary values are sufficient. The aim of system dynamics is not, as in econometrics, to determine functional relations based on theories and statistical data, nor to numerically predict short to medium range outcomes. Rather, the aim is to show in a strategic fashion development paths of complicated managed systems over the long to very long term. In system dynamics, actual or theoretical structures and processes are fundamentally important, and these can be derived only through expert knowledge of the problems and situations under review. Sommer (1981) declares that it is, therefore, futile to claim superiority for one or the other methodology, as they serve totally different aims. During the past twenty years, there have however, been developments, mainly in the field of policy consulting, to econometrically estimate parameters for system dynamic models, and to include them in the analysis. SD in this non-orthodox sense is used here.
One of the more fundamental critiques of econometricians was that system dynamics treated all realities as closed systems, thus not allowing exogenous or policy variables. The closed system approach was introduced because Forrester and most of his students had an engineering or natural science background. They, therefore, treated all systems as physical or biological systems that follow the mass conservation law of physics. This meant that no new mass can be created, or in more general terms, nothing can be created which was not already there. They thus followed closed systems. This is obviously wrong, particularly in the socio-political sphere where human inventiveness creates new structures, processes, products, and services. System dynamicists have, therefore, begun to work with open systems using exogenous variables and policy parameters, implying that there are things that penetrate and enrich existing systems from the outside. It is this non-purist system dynamic approach; also employed here, in which econometric tools are used together with system dynamic tools, that make this methodology interesting and rewarding.
One major problem in econometric analysis is the determination of causality. Through a system dynamics approach, this problem can be solved to a great extent: Total causality can be detected by departing from the smallest cause effect chain, and developing it into an ever larger interrelated system.
The basic system dynamics model elements are the stock and flow variables called levels and auxiliaries, respectively. Levels describe the status of the system, whereas auxiliaries cause change in the levels over time.
Though system dynamics simulations can be carried out based solely on assumed structures, processes and data, the present research was intended to be more empirical. To be able to fill the system models with empirical behavioral data, two questionnaire surveys on a confidence level of 90 percent were carried through in each locality, one with the local leaders and one with the general public. The questionnaires were a mixture of quantitative and semi-open qualitative questions. The objective of the surveys was to gain data on people's needs, perceptions and relations. The data were also used to estimate household incomes and expenditure patterns, because official data proved to be too contradictory to be confidently used. Relational data on the village leaders were collected to serve as the basis for a Social Network Analysis (SNA). The SNA was carried through to be able to include into the models bargaining powers of the relevant political village groups.
[The SD software used was Vensim PLE version 4.1 and the SNA software was Structure 4.2 (Burt, R., 1991). Table functions for the SD models were estimated statistically with SPSS software.]
Riggs' Sala Model (Riggs, 1966) is assumed to represent reality to some extent for developing countries or for small localities in industrialized countries. The Sala model deals with the full range of social phenomena and behavior, subsuming political and administrative aspects. It thus is a model pertaining to the ecology of administration in a society. Heady (1962, p.81) proclaims that "...the Sala is associated with unequal distribution of services, institutionalized corruption, inefficiency in rule application, nepotism in recruitment, bureaucratic enclaves dominated by motives of self-protection, and, in general, a pronounced gap between formal expectations and actual behavior. ..." It is assumed that the Sala behavior will be less prevalent, the more politically empowered the villagers are.
Structure and relations of social systems as outlined in the Sala Model can be described and analyzed with the tools of SNA. The intensity of relations, which resulted from the questionnaire surveys, and which were measured in terms of how often an individual meets with other individuals within a year, are the basis of the social network analysis. Cliques are the focal groups in SNA. Clique building depends very much on the researchers choice of relation measurement. Operationally, a clique is defined as an aggregate of actors clustered on a criterion of cohesion. Burt's (1998) Maximum Strength Relation measure is used in this research. This relation measures proximity of actors according to their strongest Euclidean Distances measured in terms of contacts per year.
In the clustering algorithm, the first step merges two most proximate or cohesive actors. See Figure 1 below. Proximity of an actor to this cluster is defined as the maximum cohesion between the actor and the actors in the cluster. The second step again merges the former cluster with the next most proximate actors and so on until the whole system is one cluster. This clustering algorithm ignores weak or absent ties. The higher up in the cluster hierarchy actors are, the more closely tied they are, and thus can be identified as a group entertaining more intensive relations among each other than with other actors of the system. Such a cluster can then be identified as a relation or interest clique.
FIGURE 1: Stucture 4.2 Output of Positional Equivalence Analysis for the Zorita Municipal Council
One can identify two cliques in Figure 1 above. This grouping actually coincides with reality where, with the exception of Isidoro, that is the Municipal Secretary, the councilors Francisc(o) to Tomasa are all members of the Socialist Party. The group Diego to JuanFran(cisco) are from right-wing parties or independents. Pilar is the representative of the Provincial Government. The positional equivalence identified here are the socialist homogenous bloc and the heterogeneous, less powerful bloc of the other councilors. The heterogeneous bloc forms the opposition in the Municipal Council, who is equivalent in this function only.
Figure 1 also reveals that the socialist group is positionally less equivalent than the opposition. It appears that there is a female dominated group (Herminia, Tomasa; Juan Carlos), and a male group (Francisco, Isidoro, Juan Jose) within the socialist clique. Francisco is the least equivalent person within the municipal council. From this, one could infer that he is either the weakest or strongest or positionally most unequal person within the council. As he is the Municipal Mayor, this position clearly suggests that he is the most powerful person within the council, a fact that is confirmed through a subsequent power analysis, and acts as a bridge between the two political blocs. It can therefore be claimed that the methodology can identify cliques quite well.
Within the cliques, the question of which actor is most powerful, and who is most likely to be a follower, is of premier interest. It is assumed that personal influence patterns and power in the localities develops according to Burt's (1998) Power and Structural Hole models. Network power is defined as the relative connectedness of an actor that is reciprocated. The most powerful actor is the person with the highest relative score. In the context of the Sala model, the Structural Hole model describes opportunities for the trading of advantages within the local political context where persons at the crossroads of information flows gain information and connections across governmental levels and local social groups, enabling them to influence plans and budgets to their and their clientele's advantage through the trading of such information. The analysis of the Zorita Municipal Council indeed reveals Francisco as the most powerful person within the council, as was already suggested in the positional equivalence analysis in Figure 1.
To identify power and bargaining positions, cliques within the local government were identified, and the power of each village councilor in the four localities was thus calculated. The councilors were grouped in cliques on the basis of their answers to relevant survey questions, which allowed assigning them to one of two groups. Social concerns prevailed in one, and infrastructure and building concerns prevailed in the other.
On the basis of the relevant laws in each country, the survey, and the SNA results; a template "Politico-Economic System" was constructed where the ultimate drivers of the system are the "Development Frustrations" defined as the difference between the expected and actual development status of politically empowered villagers, and the local government "Self Interest" defined as project preferences as revealed by the field survey results.
Due to their large size, the full versions of the systems cannot be shown in this paper. Figure 2 below shows a simplified version only. The sytem process steps are numbered from 1 to 18.
FIGURE 2: Simplified Dynamic Politico-Economic System of a Locality
Some important sub-processes will be explained below. The models in this research contain one ultimate Level, the "Perceived Development Status", and four intermediary Levels: Education Status, Household Population, Total Local Government Debt and Total Village Income. These Levels are driven by all the auxiliaries in the system, which themselves are determined and driven by parameters, lookups, and time. Lookups are arbitrarily specified nonlinear relationships describing assumed or empirically derived relations between system variables. Lookups thus force variables to behave according to a theoretical or empirical model.
The system dynamic process is based on a system of first-order difference equations that drive the auxiliaries and levels from time step to time step.
It is important to note that the models of the four localities differ in two respects:
The full systems are very complicated and detailed representations of the villages' politico-economic reality. Their structure consist of the following elements:
The local planning and policy process devolved as shown in Figure 2 above when following the numbered steps. To illustrate some of the more important processes, detailed views of the complete model are shown.
Development Frustration as a result of steps 1 and 2 is defined as the discrepancy between actual and expected Development Status, and gains in strength with increasing organizational power of the villagers. Organizational Power is defined as the organization memberships per villager as determined through the field research. Rueland and Ladavalya (1993) show the importance of peoples' organizational intensity in Thailand in the local political power play, and that in a first step towards devolution of political and administrative powers, local organizations and community life have to be built and strengthened. Iddagoda, K.S., and Dale, R, (1997 p. 28) declare with respect to Sri Lanka, "Organization is, ..., closely linked to empowerment." According to the field research results, the organizational intensity of the villagers changes with changing household incomes. It first increases directly with household income, and then from a middle income decreases slightly to increase again from an above average income onwards. For each locality, organization intensity lookup functions were developed by means of a regression analysis. These changing values power the Development Frustration (steps 1 and 2).
Part of the regression output from SPSS and its translation into the SD model for Zorita is shown below as an example for the other three villages. See Table 5.
TABLE 5: Zorita SPSS Regression Output of Organization Frequency as Function of Household Income
The OLS R2 result for questions 2, 5, and 77 of the survey ("Are you a member of a political party?," "Are you a member of any local organization, association or club?," "Please assign yourself to one of the following groups: how large is your total monthly household income approximately?") in Zorita is only 0.35347, and suggests a cubic relationship between organization membership and income. It is assumed that this relationship describes reality to some extent. The regression graph is translated into a lookup function in the system dynamic model. The horizontal axis shows income group, the vertical axis average organization membership per person.
The relationship suggests that villagers first become members of local labor unions, farmer and housewife organizations, and local political parties; and then with increasing income refrain from engaging themselves further. Beyond a medium income, they become members in regional organizations and political parties or service clubs.
Translating the cubic regression into the system dynamic lookup function, the following values are found. Membership increases first from its original 0.566 value, i.e., every person in the village is on average member in 0.566 organizations, to 0.9, then decreases to a value of 0.2 and increases again to a value of 1. The estimated values entered are as follows: household income $10'000 = 0.566 is set equal to 1, $20'000 = 0.9 = 1.6 X 0.566, $40'000 = 0.2 = 0.35 X 0.566, $60'000 = 1= 1.77 X 0.566. This lookup function drives the membership frequency variable in time as household income changes.
Depending on the local legal framework, villagers are either given no direct fiscal nor project power, meaning the locality is ruled through a complete representative democratic system; or they are given power to directly participate in project and/or fiscal policy decisions, i.e., giving the villagers total power thus activating taxing and project power simultaneously. This means that the locality is ruled by a complete direct democratic system (steps 3, 4, 5).
Figure 3 shows the education and culture project bargaining structure, which is one of the three project planning processes. The three project planning processes are: education and culture, welfare and, infrastructure. It shows how powers and needs, which are empirical parameters, drive the planning processes to eventually reach a compromise plan decision. However, villagers' needs and powers become effective in the planning process only if villagers are project empowered.
The group sums of the councilors' individual SNA power measures were added to represent the total bargaining power of the Social and Infrastructure Groups within the village council. A villagers' project pressure factor based on unfulfilled development expectations was added to this. The sum of these three factors represents the total village political power and the group's percentage in the total their relative bargaining strength within the village. These powers were then entered into the dynamic systems' planning module. The outcome is a compromise allocation in percent of the total regular Local Government (LG) income (step 6 in Figure 2).
FIGURE 3: Sukhapiban Huay Yai: The Education and Culture Project Bargaining Process
Note: In the following model details the names of the local Thai administrative units are used; Sukhapiban = Sanitary District, is the lowest political administrative unit with some legislative and taxing powers of its own, since completion of the research, Sukhapiban have been upgraded to" Tessaban Tambon" which is to a status of lowest Municipality.
Project plans are tallied against available finances in steps 7 through 10 of Figure 2. If planned expenditures exceed available finances, and if irregular financing is possible; then the councilors seek irregular finances from private sponsors or upper government sources. Irregular finances are mostly granted against promises to satisfy vested interests. If irregular finacing is constrained or not possible, the LG seeks credit financing if allowed by law. The total finances available to the LG are then divided according to agreed plan allocations.
Figure 4 shows the regular financing process of a locality where villagers want to push down taxes and levies and local government is forced to increase them due to decentralization of public services to the localities. Upper government is assumed to reduce contributions to the locality to a level of 25 percent of regular LG income.
The conditional equation of adjusted local tax, charges and levy rate is shown below as an example of how equations must be entered in Vensim PLE.
Equation 1 above shows that the variable "adjusted local tax, chargers and levy rate" is simply the "decentralization adjusted longterm overall local tax and levy rate" if public finance bargaining power and project bargaining power is set to 0, i.e., if villagers cannot decisively participate in the financing nor in the projects decisions. Villagers' influences become active only if they are empowered as revealed from the results of questions 22 and 48 of the field survey, and the respective powers are set to 1; then the tax rate lookup function becomes active.
FIGURE 4: Sukhapiban Huay Yai: The Regular Local Government Financing Process
Figure 5 shows the irregular financing process of Sukhapiban Huay Yai as an example of an irregular financing process. There are two parallel governmental setups in the Thai localities: the Central Governmental Setup with Village Headmen (Phuyai Baan), Subdistrict Head (Kamnan) and Distirict Authority (Amphur) and the local government setup, which was the case at the time of the research, the Sukhapiban (now Tessaban Tambon). The structure also shows the connections of these local entities to the upper governmental levels, the Province (Changwat) and the Provincial Parliament Representative (Sor Chor) and to the Central Government Ministries and National Parliament Representatives (Sor Sor). The link via outside "sponsors", here called "Chao Po" (in English: "Godfather"), is also shown.
On top of Figure 5 is the accountability pressure (Steps 13 through 16 in Figure 2). This shows the development of accountability pressure, which is thought to increase with increasing education status, defined as accumulated private and public education expenditures. The higher the education status in a locality, the more constraints are imposed on irregular financing and public finance leaks. Though Figure 5 shows the reality of Huay Yai only, the process is similar in the Philippines according to field information.
FIGURE 13: Huay Yai Development Status: Policy Changes from No Empowerment to Full Empowerment with Tax Rate Reduced by Half, and Education Budget Doubled
FIGURE 5: Irregular Financing Process Sukhapiban Huay Yai
Steps 11 through 14 of Figure 2 show the links between expenditures, growth and disposable household income. Growth is modeled according to the empirical cross-country growth model of Barro and Sala-I-Martin (1995) and Barro (1999), which is based on the neoclassical growth model a la Solow (1956), Swan (1965) and Ramsey (1928), enriched by government policies, human capital, and the diffusion of technology. Barro and Sala-I-Martin (1995, p. 421) define their function of a country's per capita growth rate in period t, Dy as
Where yt-1 is initial per capita GDP and ht-1 is initial human capital per person (based on measures of educational attainment and health). The omitted variables comprise a number of variables such as government policies, market distortions and others. Dyt is assumed to decrease with increasing yt-1 and ht-1. This is the standard observation that countries with higher GDP grow slower than countries with lower GDP or health status. This function specification represents the growth rate convergence hypothesis of Barro and Sala-I-Martin (1991).
For the present research, it is assumed that the Barro and Sala-I-Martin regression parameters can also be applied to the local level, and that it is admissible to superimpose the local growth rates on the national growth rate. This would explain why the development status in all countries differ form region to region or even from locality to locality. It is assumed that the local growth rate is enhanced by those public policies the local government can control independently, and by the private investments made in the locality. Each local influence factor is multiplied by the respective regression factors of the Barro and Sala-I-Martin empirical growth function. It is assumed that these local growth factors enhance local growth in addition to the national growth factors.
The model's growth function, in Vensim PLE language, is specified as follows:
Thus the local income growth rate is determined by the following five main factors:
The rule of law is expressed as the sum of public finance leaks and irregular finances expressed in percent of total regular LG income, and is called rule of law index. The effect is based on the Knack and Keefer (1995) country index prepared for the International Country Risk Guide, which is the basis of the Barro and Sala-i-Martin rule of law coefficient. Knack and Keefer use a 1 to 6 scale with 6 indicating the most favorable and 1 indicating the worst state of the rule of law present in a country. BSM have adjusted this scale to a range of 0 to 1, with 0 indicating the worst maintenance of the rule of law, and 1 the best. Here the scale is transposed and divided by 10, thus 0.1 indicates the worst and 0 indicates the best maintenance of the rule of law. This was necessary because here the coefficient enters negatively into equation 3, with more irregular finance decreasing the longterm average growth rate, as Barro and Sala-i-Martin use it as a positive effect. It is assumed that the worst state is reached when the irregular public finances in a locality reach 10 percent of total local village income. Figure 6 shows the local growth process.
FIGURE 6: Income Growth Process
In step 17 of Figure 2, disposable household income, public expenditures reduced by the villagers valuation of the tax costs incurred and, private investment determine the perceived development status attained through the villagers' development perception process. In this process, the villagers' valuation of their infrastructure and non-infrastructure needs are expressed as percentage of all needs cited in the field survey, and are entered as utility values into valuation lookup functions that drive the villagers' valuation of the local infrastructure and non-infrastructure expenditures according to the law of diminishing marginal utility. Table 6 below reports the needs and tax cost coefficients of the four localities.
TABLE 6: Villagers' Tax Burden and Needs as Percent of all Needs Cited in Question 30 of the Field Research
As is to be expected, there are large differences in needs between the localities. A striking result is the low value of Huay Yai, and the high value of Zorita with respect to non-infrastructure needs. These values represent the local culture quite well. The Thais are used to being independent and to helping themselves, a fact which greatly helped in softening the effects of the recent economic crash in Thailand. The Spaniards, however, clearly assign the social safety net function to the state. The tax burden values are also a clear reflection of the two countries' tax levels. Thailand and Spain each charge higher taxes in their country category, and thus the villagers also give the perceived burden a higher value.
The tax burden valuation is integrated into each SD Model as described hereafter for Huay Yai. According to Q57 of the field research in Huay Yai, respondents assessed the value received from their tax, levies and fees payments on average as 2.34 (standard deviation 0.94) on a scale of 1 = practically no value to 4 = very good value. This scale and the average value was transformed to a scale ranging from 0 - 1 to match the metrics of villagers' development perception. The difference between the average value 2.34/4 = 0.585 and 1 (1 - 0.585 = 0.415) was then entered in the development perception as (negative) cost value, symbolizing the cost incurred with the local governments' efforts. This cost value is entered in the tax burden function at the initial tax rate of 5.81 percent, and increases with increasing tax rates.
The period-by-period aggregation of these perceived development and cost values establish the perceived development status. If the villagers' development expectations, defined as the previous period's development status grown at the converged economic growth rate, are not met, perceived development status leads to "Development Frustration," and thus a new process of bargaining and planning begins.
The system simulations presented here are limited to changes in people empowerment, tax rate changes and changes in public education expenditures. As the title of this paper states, the objective is to keep the government sector as small as possible under the constraint of the highest possible disposable household income and development status. For space reasons, the simulations of policy changes are shown for the Thai locality only. This should provide sufficient evidence, as the policy simulation results vary in degree only but appear to point in the same direction for all localities.
The simulations have a time horizon of 50 years, with a time step of 0.125 years. First, the real actual local systems will be time simulated with changing people empowerment status. The empowerment status is determined by the local laws and whether the villagers make use of their legal rights as revealed in the field research. The status found through the field research in each locality is called real system. The real systems' empowerment policy status is as follows.
TABLE 7: The real local empowerment status:
Figure 7 below shows the growth of disposable household incomes in the localities when the real systems empowerment parameters are not changed. The values given on the vertical axis are real values in 1998 US$. Curve 1 represents Huay Yai, curve 2 Labac, curve 3 Schwende, and curve 4 Zorita.
FIGURE 7: Disposable Household Incomes in The Real Systems
From the above simulations it becomes clear that without massive economic and political changes Zorita, Labac and Huay Yai will not be able to catch up Schwende due to Schwende's very high starting value. The same applies to the development status as shown in Figure 8. Development Status is measured on the vertical axis relative to the initial level of Schwende, which had a value of 1. The development measurements are to be interpreted as indicators of direction and position, and not as absolute or relative changes in development status.
FIGURE 8: Perceived Development Status in the Real Systems
Figure 9 below shows that the locality with the least empowered villagers, Huay Yai, eventually achieves the highest level of local government consumption. The place with the most empowered villagers, Schwende, has the lowest local government consumption ratio. The following analysis therefore concentrates on the differences in the transition from total absence of villagers' power to full empowerment in Huay Yai.
FIGURE 9: Local Government Consumption as Percent of Migration Adjusted Village Income in the Real Systems
Figure 10 below shows that only full empowerment can reduce the local government consumption ratio in Huay Yai, and as Figures 11 and 12 show, a policy of full empowerment would also be accompanied by the highest disposable income and development status.
FIGURE 10: Local Government Consumption Huay Yai: Change in Peoples' Empowerment
FIGURE 11: Disposable Household Income Huay Yai: Change in Peoples' Empowerment
FIGURE 12: Perceived Development Status Huay Yai: Change in Peoples' Empowerment
Figures 10 through 12 also show that if villagers are financially empowered (as shown in curve 3) that they will hold government consumption down, resulting in low taxes in the locality, attracting investors. Their investments increase disposable household income and development status to a practically identical level as achieved with full empowerment. Full empowerment, however, achieves a somewhat lower government consumption ratio. Finances are the key factors in the local development process. A policy where villagers are given full financial empowerment without project empowerment would also be an efficient policy alternative to control the local government, but this kind of setup in which the keys to power are given away will probably not be found anywhere in reality if citizens are not fully empowered already.
In a second simulation, the local government of Huay Yai halves the initial local tax rate from 5.81 percent to 2.9 percent, and doubles education allocation from 7 percent of the local budget to 14 percent. Increased education spending produces a higher education status. This increases accountability pressure, which reduces irregular financing and finance leaks. This enhances private investments and local incomes, which gives local government more regular income, enabling lower tax rates. Thus the government consumption ratio should also be pushed down.
FIGURE 14: Huay Yai Disposable Household Income: Policy Changes from No Empowerment to Full Empowerment with Tax Rate Reduced by Half, and Education Budget Doubled
Figures 13 and 14 show that the most powerful driver for disposable income and development status is lower tax rates. Increased education spending has only a minimal effect on these aggregates. Figure 15 below again demonstrates that full empowerment and tax rate reductions keep the local Leviathan at bay, and that increases in education spending is less powerful in this respect.
FIGURE 15: Huay Yai Local Government Consumption Ratio: Policy Changes from No Empowerment to Full Empowerment with Tax Rate Reduced by Half, and Education Budget Doubled
Table 8 below shows the rankings of the simulation results. The target variables appear in the table head. The policy variations are found in the rows. Full power means that the villagers are given and make use of fiscal and project power, and no power means that they do not have these powers at all, or do not make use of them. The policy end-results are ranked from 1 to 4, with 1 standing for the policy with the highest end-value and 4 for the policy with lowest end-value.
A conspicuous result is that "project empowerment" never ranks first; and, in fact, ranks last seven times. The reason is that project pressure without villagers' finance control increases LG spending either through more irregular financing, or through higher taxes, or both. Higher taxes and more irregular financing both have negative effects on villagers' development status perception and on private investment and growth.
TABLE 8: The Simulation Results of the Local Government Policy Changes
The question, "what policy controls the size of the LG?," can best be answered with, "any policy mix with fully empowered villagers." These are ranked 6 times with 4, which means smallest LG consumption in percent of total village income. Financial empowerment is four times ranked with grade four and project empowerment two times. "No power, " produces the largest local government everywhere.
Finally the question, "Which overall policy or policy mix scores highest in terms of lowest government consumption, highest income, and highest development status?, " can be answered as follows:
The simulations clearly demonstrate that policy variations matter very much "on" the local level. Are there significant differences between the Asian and European localities? From the point of view of cause and effect of the policy variations, the answer is "no;" but from the perspective of structural and process settings, "yes".
This is particularly obvious where irregular finance practices are more prevalent. The Asian localities are clearly more centralized than the European ones. Credit financing is also less restricted in the European localities. Major differences are also found in peoples' project priorities and valuation. In the Asian localities, villagers generally want more infrastructure and protective services; whereas in the European localities, villagers prefer more welfare and economic activity.
Another conspicuous difference between the European localities and the Asian localities is that in the Asian localities "Finance Power only" is ranked first nine times, whereas in the European countries this policy never occupies the first rank. The reason for this is that financially empowered villagers exert pressure to enforce accountability of the LGs, and this reduces their irregular financing practices, thereby also reducing the negative effect on private investments and growth. There is practically no irregular financing in the European localities. Fully empowered villagers create a quasi-market between government and villagers' interest groups. These cost minimizing, utility maximizing agents are beneficial for the development of a locality with a small LG.
Aulin, Arvid. 1982. The Cybernetic Laws of Social Progress, Towards a Critical Social Philosophy and a Criticism of Marxism. New York: Pergamon Press.
Bahl, Roy and Linn, Johannes. 1987. Intergovernmental Fiscal Relations in Developing Countries, in G.S. Tolley and Vinod Thomas, The Economics of Urbanization and Urban Policies in Developing Countries, Washington D.C.: World Bank.
Barro, Robert J. 1999. Determinants of Economic Growth, A Cross Country Empirical Study. Cambridge, Mass.: MIT Press.
Barro, Robert J. and Sala-I-Martin, Xavier. 1995. Economic Growth. New York: McGraw-Hill International Editions.
Brennan, G. and Buchanan J.M. 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge: Cambridge University Press.
Buchanan, James M. 1975. "A Contractarian Paradigm for Applying Economic Theory," American Economic Review, 65/2.
Burt, Ronald S. 1991. STRUCTURE, A General Purpose Network Analysis Program, Reference Manual, Version 4.2. New York: Columbia University.
Burt, Ronald S. 1998, Spring. Brokerage, Models of Inequality in the Social Structure of Competition, Lecture Script for "Network Analyses of Social Structure", BUS560-SOC409. Chicago: University of Chicago.
Coyle, R.G. 1996. System Dynamics Modeling: A practical approach, London: Chapman & Hall.
Heady, Ferrel et al., eds.1962. "An Ecological Approach: The Sala Model," Ann Arbor: Papers in Comparative Public Administration.
Forrester, Jay W. 1971."Counterintuitive Behavior of Social Systems," Technology Review, p. 1-16.
Iddagoda, K.S. and Dale, R. 1997. Empowerment through Organization: The Social Mobilization Programme in Hambantota, Sri Lanka. Pathumthani, Thailand: Asian Institute of Technology: Studies in Rural-Regional Development Planning in Asia.
Jaber, Ehdaie 1994, December. "Fiscal Decentralization and the Size of Government, An Extension with Evidence From Cross-Country Data," Policy Research Working Paper 1387,The World Bank.
Knack, St. and Keefer, Ph. 1995. "Institutions and Economic Performance: Cross Country Tests Using Alternative Institutional Measures," Economics and Politics, 7.
Lijeron, Javier Huascar Eguino 1996, May. Decentralization, "Local Government and Markets: A comparative Study of Recent Trends in Selected Countries," Working Paper Series, No. 218, Institute of Social Studies, The Hague.
Oates, W. 1985. "Searching for Leviathan: An Empirical Study," American Economic Review, 75, 748 -757.
Okuno, Nobuhiro and Yagi, Tadashi.1990, November. "Public Investment and Interregional Output-Income Inequalities," Regional Science & Urban Economics, Vol. 20, No. 3.
Riggs, Fred W. 1966. Thailand: The Modernization of a Bureaucratic Polity, East-West Center Press, Honolulu.
Rueland, Juergen, Ladavalya, Bhanson. 1993. Local Associations and Municipal Government in Thailand, Freiburg i.B.: ABI, Freiburger Beitraege zu Entwicklung und Politik.
Senge, Peter M. 1990. The Fifth Discipline: The Art and Practice of the Learning, New York: Currency/Doubleday.
Scott, John. 1991. Social Network Analysis, A Handbook. London: Sage Publications.
Solow, Robert M. 1956, February. "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics, 70/1.
Sommer, Manfred. 1981. System Dynamics und Makrooekonometrie, Dynamische makrooekonomische Modellierung in multimethodologischer Sicht. Bern/Stuttgrart: Paul Haupt: Duerr und Tuchtfeldt eds. Soziooekonomische Forschungen Band 17.
Swan, Trevor W. 1965, November. "Economic Growth and Capital Accumulation," Economic Record, 32.
Tiebout, C.M. 1956. "A Pure Theory of Local Expenditures", Journal of Political Economy, 64.