How to promote accountability in localgovernments

Susana Peralta

Nova School of Business and Economics

October 2019European Week of Regions and Cities

Fiscal decentralisation, transparency, and involving citizens indecision-making

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Roadmap

I the mechanisms of political accountability

I transparency and accountability

I voter involvement and accountability

I decentralisation and accountability

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Political accountability

I politicians differ in their competence or honesty

I the broad research question is then how to design rules that promoteaccountability, i.e., politicians acting in the voters’ best interest

I mechanisms

ex-ante selection people that become politicians are of the “right”type

ex-post selection voters are empowered to oust “bad” incumbentsdiscipline laws to ensure that politicians refrain from bad

behaviour

I fundamental trade-off between ex-post selection and discipline

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How to improve accountability?

I institutions that may improve the quality of politicians or theirdiscipline while in office

I free pressI transparency in public procurementI politicians’ wageI independent candidates, citizens’ iniatives and other

institutions that change the power of political partiesI proportional vs majority voting rules or other constitutional

rulesI etc

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Fundamental problem of causality

I suppose, e.g., that one finds that local governments with moretransparency in public procurement also have “better” politicians

I can one conclude that more transparency leads to less corrupt (ormore honest, whatever the case) politicians?

I not necessarily! it could be that better politicians also design betterrules

I important to keep this in mind when analysing results below

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Monitoring and transparency

I Gianmarco Daniele, Benny Geys, 2015, “Organised Crime,Institutions and Political Quality: Empirical Evidence from ItalianMunicipalities”, The Economic Journal

I data from over 1,500 Southern Italian municipalities in the period19852011

I municipal government dissolutions imposed by the nationalgovernment for (presumed) mafia infiltration

I since 1991, when there is the presumption of ties between localpoliticians and organised crime, Italian local governments can bedissolved by the national government and replaced by a group ofthree commissioners that stay in power for the next 1224 months

I average education level of local politicians significantly increaseswhen active mafia infiltration of local politics is remedied throughthe implementation of a stricter legal- institutional framework

I populations of these municipalities tended to shift their votes to alarger degree than observed elsewhere in Southern Italianmunicipalities towards younger, female and non-entrepreneurialcandidates

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Monitoring and transparency

I Grossman and Hanlon, 2014, “Do better monitoring institutionsincrease leadership quality in community organizations? Evidencefrom Uganda.” American Journal of Political Science

I increasing importance of community organisations in developingcountries

I does increasing citizen information improve the quality of theleaders?

I trade-off between increased discipline and selecting out leaders withbetter outside options (many of these local leaders have otherprivate occupations besides community engagement)

I data on 50 farmer associations and several monitoring institutions(whether there is anyone responsible for monitoring, a financecommittee and/or an audit committee)

I main conclusionsI monitoring increases the leaders’ effortI in districts with better outside income opportunities, increased

monitoring discourages high-quality candidates from becomingleaders 7 / 28

Electoral rules

I Galasso, Vincenzo, and Tommaso Nannicini, 2011. “Competing ongood politicians.” American political science review

I looks at electoral districts in general (not local) elections

I show that parties compete by selecting and allocating goodpoliticians to the most contestable districts

I politicians with higher ex ante quality, measured by years ofschooling, previous market income, and local governmentexperience, are more likely to run in contestable districts

I politicians belonging to opposite political coalitions converge tohigh-quality levels in close electoral races.

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Electoral rules

I Beath et al., 2016, “Electoral Rules and Political Selection: Theoryand Evidence from a Field Experiment in Afghanistan”

I effects of differences in electoral systems (district magnitude inparticular)

I randomised variation in electoral rules for local council electionsacross 250 villages in Afghanistan

I 125 were randomly selected to compose councils by districtelections: divided into several single-member districts, withcandidates elected from each district separately

I the other 125 villages were assigned to at-large elections: onemulti-member district, with villagers facing no restriction on whichcandidates in the village they could vote for

I at-large elections result in the election of more competent councilmembers, as proxied by their level of education.

I effect is strong in heterogeneous villages (as measured by thedivergence of villagers ex ante policy preferences, the geographicsize of villages, and ethnic composition)

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Voter involvement

I Benny Geys, Friedrich Heinemann, Alexander Kalb “Voterinvolvement, fiscal autonomy and public sector efficiency: Evidencefrom German municipalities”, European Journal of PoliticalEconomy 2019

I 1109 municipalities from Baden-Wrttemberg, where local electionsare characterised by the increasing importance of so-called free voterunions

I show that voters’ political involvement improves governmentperformance

I more so the more fiscally autonomous is the local government

I do not look at politicians’ quality directly!

I political involvement: voter turnout, share of eligible voters to totalpopulation, existence of free voter unions at the local level

I fiscal autonomy: whether municipalities receive grants from thehorizontal fiscal equalisation scheme

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Decentralisation: central government transfers

I Brollo, Fernanda, et al., 2013 “The political resource curse.”American Economic Review

I in Brazil, federal transfers to municipal governments changeexogenously at given population thresholds

I measure effects on corruption of the incumbent mayors (asmeasured by the random audit program) and on the composition ofthe pool of opponents (as captured by their years of schooling andprivate sector occupation).

I empirical evidence shows that larger transfers increase observedcorruption and reduce the average education of candidates for mayor

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Decentralisation: taxing powers

I Bordignon et al., 2017. “Who do you blame in local finance? Ananalysis of municipal financing in Italy.” European Journal ofPolitical Economy

I 1999 reform that allowed Italian municipalities to partially substitutea more accountable source of tax revenue (the property tax) with aless transparent one (a surcharge on the personal income tax ofresidents)

I offset by a decrease in central government grants

I citizens’ ability to punish or reward hinges on being sure about whois responsible for each tax

I eligible mayors, with respect to mayors at their final term, increasedtotal tax revenues, reduced the property tax rate on commercialbuildings, and increased deductions on the property tax on dwellings

I reduction in property tax higher in smaller municipalities, in citieswith lower level of social capital and less information on municipalpolicies

I transparency in local taxation is an important factor for politicalaccountability 12 / 28

Decentralisation: autonomy to accumulate debt

I Gamalerio, Matteo, 2017. “Fiscal Rules and the selection ofpoliticians: evidence from Italian municipalities.”

I domestic stability pact: limit local governments’ capacity toaccumulate debt in 1999, relaxed for small municipalities (<5,000inhabitants) in 2001

I less autonomy decreases the education of the Italian mayors

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Decentralisation: tax autonomy

I Peralta and Pereira dos Santos, “Who seeks re-election: local fiscalautonomy and political careers”, forthcoming in Public Choice

Research Questions

1. Does less autonomy lead mayors to retire from politics?

Yes, but not always.

2. Is the effect heterogeneous with respect to mayor quality?

Yes! Highly educated mayors retire more.

3. Does the education level of newcomers make up for thedecreased quality of stepping out incumbents?

Only partially – so the reform has an overallnegative impact on mayoral education.

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Quasi-experimental setup

2005 2008 2009

Local Election

LocalElection

Reduction in maximum

property tax rate

I Unexpected decrease of the maximum local property tax rate

I Tax base set by the central governmentI Municipalities choose their tax rate within a range

I Immediate protest by the mayor association:“ease the taxpayers’fiscal burden at the expense of someone else’s money”

treatment group 127 municipalities who had a tax rate above thenew threshold, i.e. forced to decrease tax rate

control group remaining 151 municipalities

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Local Finance in Portugal (% current revenue)

Year Direct taxes Indirect taxes Fines Transfers Other

2005 31,11 2,89 2,95 39 24,052009 30,09 2,51 2,88 34,76 29,76

I Local taxes: property tax (IMI), indirect tax on transfer of realestate (IMT), corporate tax surcharge (derrama), personal incometax surcharge

I property tax is the most important one, revenue-wise (about half ofown taxes)

I property tax set freely within the range [0.4, 0.8] (pre-2008) and[0.4, 0.7] (post-2008)

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Shock in property tax revenueper capita, thousand euros

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Geographical distribution

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Data Sources

Statistics Portugal socio-demographic controls of municipalities

Direccao Geral das Autarquias Locais municipal finance data

National Election Commission political variables

Ministry of Internal Affairs mayor characteristics (age, occupation,gender)

Local Employment Office number of registered unemployed

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Methodology

I Dependent variable: dummy that turns one when incumbent mayorseeks re-election

Recandit =α1Year 2009it + α2IMI Reformit + α3Year 2009 * IMI Reformit

+ α4Controlsit + α4Regional fixed effectsi + εit(1)

I mainland municipalities: number of observations 278 × 2 = 556

I two elections: the one before the reform (2005) and the one justafter (2009)

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How we measure mayor quality

I unobserved characteristic

I usual proxies in the literature: occupation and/or education

I only exception is recent paper by Dal Bo et al. (2017) that use fixedeffects estimated from private sector wage equations and militarydrafting IQ data on political candidates from Sweden

I in our case:

I no data on education levelI we use previous occupation as a measure of qualityI “highly educated” mayor if she was previously working in any

of the following areas – law, economics and management,medicine, engineering – or if she was an entrepreneur

I number of high quality mayors

2005 2009

Treatment 102 (80%) 101 (79.5%)Control 94 (62%) 101 (67%)

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Distribution of Mayors’ previous occupations

High-Quality Low-QualityLaw 78 Blue-Collar workers 88Economics and Management 73 Low-skilled workers 21Education 109 Undefined retired workers 26Medicine 34 Other 23Engineers and Architects 84Entrepreneur 20

I Law includes notaries, jurists, and magistrates.

I Economics and Management includes accounting.

I Blue-collar workers includes public servants.

I Low-skilled workers includes electricians and factory workers.

I Other includes politicians.

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Observed decisions to seek reelection

I All mayors

Election 2005 2009 Difference

Treatment 113 111 -2Control 121 135 +14

Difference-in-Differences -16

I High-quality mayors

Election 2005 2009 Difference

Treatment 99 95 -3Control 107 120 +13

Difference-in-Differences -16

I As will be shown, overall DiD does not resist the introduction ofcontrols, whereas educated mayor result does

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All Mayors

I The DiD coefficient does not survive the introduction of controls

LPM with NUTS 3 Dummies(1) (2) (3) (4)

Year 2009 0,093** 0,126 0,149 0,140(0,044) (0,089) (0,092) (0,095)

IMI Reform 0,096** 0,096** 0,077* 0,080*(0,045) (0,046) (0,045) (0,045)

IMI Reform* Year 2009 -0,108* -0,110* -0,074 -0,081(0,061) (0,062) (0,058) (0,059)

Reform controls No Yes Yes YesPolitical + Mayor controls No No Yes YesSocioeconomic controls No No No YesNumber of observations 556 556 556 556Adjusted R2 0,018 0,012 0,070 0,086

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Subsample of Educated Mayors

I The DiD coefficient survives the introduction of controls – resultsdriven by educated mayors

LPM with NUTS 3 Dummies(1) (2) (3) (4)

Year 2009 0,140*** 0,180* 0,202* 0,192*(0,050) (0,102) (0,112) (0,116)

IMI Reform 0,127** 0,117** 0,100* 0,100*(0,054) (0,054) (0,053) (0,053)

IMI Reform*Year 2009 -0,180** -0,172** -0,153** -0,160**(0,070) (0,070) (0,068) (0,067)

Reform controls No Yes Yes YesPolitical + Mayor controls No No Yes YesSocioeconomic controls No No No YesNumber of observations 398 398 398 398Adjusted R2 0,033 0,037 0,096 0,093

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Overall impact on education of mayors

I do newcomers make-up the retirement of highly educated mayors?

I only partially – overall negative impact on mayoral quality in treatedmunicipalities!

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Conclusions

I our results confirm recent literature: decreasing autonomy is bad forselection

I results are robust to a number of tests – restricting municipalities tothose with property taxes between 0.6 and 0.8, excludingmetropolitan areas, coastal areas dinosaur mayors (not in slides),and excluding individual NUTS II in turn (not shown in the slides)

I newcomers do not make up for the loss in mayoral education and wefind an overall negative impact on the level of education of themayors in treated municipalities

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Main take-home messages

I empower voters: increase transparency, allow them to participate

I foster political competition: multi-seat districts, low barriers to entry

I do not simply pour money on local governments

I allow for the use of local sources of revenue

I give some autonomy to local governments in managing theirrevenue sources (but paying attention to fiscal imbalances...)

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