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Constraining the Leviathan:
An International Comparison of the Effects of People Empowerment on Local Government Size, Disposable Household Income and Local Development

By Peter Grubenmann,
Lecturer of Economics
Asian University of Science and Technology, Thailand
pgecon@asianust.ac.th

ABSTRACT

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.


 

I. Introduction

"...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.

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