Utrecht University

School of Governance

COMPARATIVE ANALYSIS OF DECENTRALIZATION

PROCESS IN CROATIA AND DENMARK

Final Paper

Professor: dr. Sc. Gijs Jan Brandsma

Student: Anamaria Pejković

Utrecht

March, 2018
 1. Introduction

In the paper, I will compare two EU countries, Denmark and Croatia. The central point of
comparison will be the decentralization process in these countries and the effects of this process.
There are two main research questions that I want to address by writing this paper. First is: What
are the differences between these two countries in the aspect of decentralization process? In
order to answer this question, I will present their governmental structure. Also, I will compare
the rates of decentralization in different sectors, education, healthcare and social service. My
second research question will focus on the results of decentralization. Does decentralization
improve the efficiency of public service delivery? In my analysis, I will use both quantitative and
qualitative methodology. Qualitative methodology is important for explaining the process of
decentralization, giving theoretical background and comparison of advantages and disadvantages
of the process. On the other side, quantitative methodology will be used to show different
governmental structure, public service expenditures and efficiency of public service delivery. I
particularly chose these two countries that are very similar in their size and political systems, but
have very different decentralization processes. While one of them is a very fiscally decentralized
country with effective public services, the other one has a very fragmenteted territory with low
rate of fiscal decentralization and inefficient public services. In the first part of my paper, I will
explain what is decentralization, why is important and what can be the effects of this process.
Also, I will describe the data that I am going to analyze. In the second part, I will make a country
profile. So, I will present different decentralization process in both countries and main effects on
the political system. In the end, I will give my analysis of both processes and try to give an
ansswer to my research questions from the introduction.

Decentralization is the transfer of authority and responsibility for providing public services from
central level of government to the lower tiers. There are four types of decentralization: political,
adiministrative, fiscal and economic or market economy. Political decentralization supports
democratization because it gives the possibility the of formulation an implementation of public
policies to citizens or locally-elected representatives. Administrative decentralization is the
transfer of responsibility of planning, financing and management of public functions from the
central governement to subordinate levels of governement, semi-autonomouspublic authorities or
regional authorities. Fiscal decentralization focuses on finances. In order to provide public
services, lower levels of governement need to have an adequate amount of revenues. They need
to have the right to impose and collect taxes or receive support from the central governement.
Last, economic decentralization is closest to privatization. It means that the central government
gives the right to provide public services to private institutions. There are a lot of good
consequences of decentralization, but this process can also result in some, not so positive, results.
Advatages of decentralization are: public services are tailored to the needs and preferences of
local people, better control over services on local level, better representation of religious, ethnic
and cultural minorities, more efficient public administration. On the other side, decentralization
can lead to less efficient public administration if local government doesn't have adequate
administrative or financial capacity to provide public services, corrupted system because of the
strength of local elites, and a more complex system in which is very difficult to coordinate
different activities. In order to have positive results of decentralization, it is important to find the
optimal size of administrative units in relation to the country population. Also, the new structure
must be clear and simple for better coordination and efficiency. Last but not least, tasks should
always be followed by funds. If these preconditions are not followed, you will have a messy and
complex system with too small or too big units that cannot bring decentralization into practice.

In order to answer two research questions from the introduction, I need to explain why did I
particularly chose these two countries for my comaparative analysis. Also, I will present the data
that show the rate of decentralization in them. Croatia and Denmark are two very similar
countries in their size. While Denmark has a population of five million people and it covers
around 42 thousand square kilometres, Croatia has 4.3 million people and 50 thousand square
kilometres. They are both unitary countries with parliamentary political system. The only
difference here is that Denmark is a monarchy while Croatia is a republic. This difference is not so
important if we know what are the functions of Croatian president and Danish monarch- mostly
ceremonial ones. Also, they are both members of European Union and North Atlantic Treaty
Organization. Big and important difference between these two countries is the rate of their
decentralization and efficiency of their public services. Denmark is a highly decentralized country in
fiscal and administrative aspect. In the same time, in Croatia, central government is still responsible for
providing and financing most of the public services. Thus, Danish public administration is a very efficient
while Croatian is very complicate and fragmentated. Main data that I will analyze to see how
decentralized both countries are is connected to the structure of local governemnt and their functions.
Also, I will research the expenditures of local governement and their main sources of financing. Next, I
will present the data concerning their expenditures in different sectors: healthcare, education and social
services. I will analyze if citizens are satisfied with public service delivery and their quality. Also, as
successfull decentralization should produce lower level of corruption I will show citizens perception of
corruption in both countries and their particiaption in local elections. My main sources of data will be
different academic articles, case studies, Eurostat, Denmark Statistics, Croatian Office for Statistics and
World Bank.

2. Denmark

Denmark is a small Nordic country with the population of approximately 5 million people. It is a unitary
constitutional monarchy with parliamentary system. Also, it is a country with a tradition of demoratic and
stable political system. Their decentralization process started back in 1970s with a Structural Reform of
its local government and functions. Before that reform, Denmark was divided into 86 borough and 1,600
parishes. This structure was very inefficient because most of the parishes were too small to provide public
services for local citizens,. Since 1970, Denmark has been divided into 14 counties and 275 municipalities
that gained more and more functions,especially within healthcare and social services. Till 1990s more and
more functions were transfered from central government to its lower levels. Also, the financing system
changed with 1970s reform. Before the reform, local government was financed through state
reimbursements, but after 1970s this was replaced with the system of general grants and equalisation
between rich and poor. In 2000, Danish government started plans for new local government reform
because of the new needs of citizens and low efficiency of public administration. Three major problems
weer that: administrative units are too small to produce efficient services, some responsibilities belong to
different decentralised units in the same time which results in „grey zones“ and that this complex
structure causes problem of consistency and coordination. So, after a lot of discussions between
politicians, experts and institutions, in 2007, Danish government started the new local government
reform. This reform changed the map of Denmark which stands till today. Denmark is divided into 98
municipalities and 5 regions, while counties have been abolished. Since this reform, for municipalities to
gain this status, it was necessary to have the population of at least 20 thousand people.
A lot of them had to merge in order to get this status. After the reform, municipalities had the population
of approximately 55 thousand innhabitants.

Main functions of municipalities are: social services (financing, supply and authority), child care, primary
school, care for elderly, health care (every treatment expect for the ones that demand hospitalization),
employment policy, integration of immigrants. As I sad before, Denmark is also divided into five regions.
Their size varies from 500 thousand to 1,2 million innhabitants. Main responsibilities of regions are:
hospital service, regional development, raw material mapping and planning, establishment of transport
companies and special social services and education.

Municipalities are mainly financed through taxes. Almost 56 percent of their revenues come from taxes.
Other important sources are: operating and capital revenue, reimbursment, general subsidies and loans.
The most important tax is income tax. Other less important taxes for financing local government are land
and property taxation and company tax. Denmark has introduces the equalisation system that is very
important for financing of municipalities. The goal of this system is that citizen pay same amount of tax
for same level of service regardless of their income or demographic factors. On the side of expenditures,
Danish local government has a share of 67 percent of General Government expenditures while the state
spends 33 percent. Eurostat data from 2013 show local government expenditures in general government
expenditures by sectors. It can be seen that 98 percent of all expenditures for health are carried by local
government. Also, 83 percent in social security, 63 percent in housing and community amenities, 56
percent in environment, 48 percent in education and 41 percent in economic affairs. As we can see in
these data, sectors of healthcare and social security are very decentralized while education is
decentralized to some extent. While primary schools are led by municipalities, higher education is under
control of the state. Also, healthcare is financed mostly by state but most of the services are provided by
regions and municipalities what makes this sector very decentralized. The same situation is with social
service where planning, financing and providing the service belongs to municipalities. The state only
decides how much money somebody will receive. In order to say that decentralisation is successfull we
need to check the efficiency data in these sectors. In the sector of education, Danish students have 21st
highest score in PISA tests. They are above the average in all three groups: reading, mathematics and
science. Also, in the sector of healthcare, most patients are very satisfied with the services, according to
different opinion polls. Also, life expectancy in Denmark increased from 2005 (77,9) to 2013 (80,6). Last
but not least, waiting list in Denmark for different surgeries are very short, approximately around 36 days.
To conclude, Danish social system is among best in Europe and world.

Sometimes decentralization can lead to highest rates of corruption. But, not in Danish case. Denmark is
the second country in the world with the lowest perception of corruption by their citizens. Their
democratic and open political system assured the low rate of corruption. It is important to mention that
goal of Danish politicians, when they started the reform, was to bring political decisions closer to people.
They also started different programs to support citizens to be more politically active. The efficiency of
their system can especially be seen in voter turnout in regional and municipal elections. The numbers are
always around 70 percent. We can conclude that Denmark has a very decentralized and effective local
government system accomplished by numerous reforms carried out by their politicians, experts and
citizens. They made all the right moves in structuring their local government system and today they have
one of the most successfull systems in the world. It is effective, open, transparent system characterized by
high quality and high satisfaction level from its users.

3. Croatia

Croatia is a small Southeastern European country and a parliamentary, unitary republic. Before 1990,
Croatia was a state within communist federation of Yugoslavia. Back then, Croatia was very quasi-
decentralized country where local government held a lot of important functions. Croatian local
government system was more efficient back in 70s and 80s than today. The only disadvantage was that
Yugoslavia was a communist country so every function was indirectly under control of the Communist
Party and its leaders. In 1990, following Croatian procclamation of independence, the war broke out. To
stabilize the country and assure that all public services are provided, government decided to centralize the
responsibilities for majority of public funtions. Croatia welcomed the end of war in 1995. Government
decided to divide Croatia into 20 counties and The City of Zagreb functioning as a city and a county in
the same time. They introduced 127 cities and 428 municipalities. With this structure, they wanted to
support democratization by giving people the opportunity to vote for local representatives accountable to
them. But, in 1990s Croatia was an authoritarian country, and rulling Croatian Democratic Union (HDZ)
wanted to stay in power. This structure allowed them to make a corrupted system where they could
control election and exercise their big power. Today, 25 years after the war, there are still no changes in
the number of local and regional administrative units. One of the reasons for this behaviour is that every
party that decides to reform this system will have to make downsizing in the number of employees. So,
everyone is scared to lose their voters. On the other side, when Croatia became a candidate state for
membership in European Union, under a lot of pressure from Brussels, it started to make some small
changes towards decentralization. In 2001, government transfered some functions from central to local
levels of government but this reform included only 10 percent of administrative units. Also, tasks weren't
followed by funds. „Many municipalities are too small and have too little capacity for good governance
and efficient management, including mobilization and use of resources necessary for their further
development.“ But, the main problem is territorial fragmentation of Croatia combined with irrational and
complicated structure of government. Just to show how Croatian system is complicated and irrational, we
can see the data about the size of cities and municipalities. As I mentioned earlier, Croatia has 127 cities
with Split as the biggest counting 178 thousand innhabitants (not counting the capital Zagreb because is a
county and a city). In the same time, the smallest city is Pazin with just above 9 thousand innhabitants.
Both of these cities have the same status and functions. So, there is a difference in population between
two cities of almost 170 thousand people. Also, more than half of Croatian municipalities count between
1000 and 3000 innhabitants. Second immense irrationality are tax revenues per citizen that are very
different from city to city. While in the city of Slavonski Brod people pay 80 euros of tax, in Rovinj they
pay 450 euros for the same service.

Croatian municipalities have a lot of functions, they are responsible for primary healthcare, communal
activities, urbanistic planning, social services, primary education, culture, nature and environment,
consumer protection and fire protection. Counties have following functions: education, healthare
(hospitals), economic development, transport infrastructure. This division look pretty good on paper, but
in reality it doesn't function. We can only take a loo into data about the share of local government
expenditure in general expenditure. In 2015, local and regional administrative units had a share of only 13
percent in general expenditures. Out of these 13 percent, the City of Zagreb has a share of 30 percent, all
other cities 40 percent, counties 15 percent and municipalities 15 percent. I found the data from 2007
about the structure of subnational levels expenditures: these units spent 17 percent on general public
services, 23 percent on housing improvement services, 16 percent on education, 16 percent on economic
affairs, 3 percent on healthcare, 6 percent on welfare and 12 percent on recreation, culture and religion. If
we look into regional and local budget expenditures, they spent most on the use of goods and services (39
percent), compensation of employees (25 percent), social benefits (5 percent), subsidies (8 percent) and
19 percent on other expenses. Now i will present the structure of revenues of local government: own
revenues, joint revenues shared between the government, municipalities, cities and counties, state grants
and receipts on the basis of borrowing in accordance with a special law. Majority of revenues come from
taxes (income tax is the most important one), non-tax revenues, capital and grants.

Education in Croatia is not very decentralized, except of primary education. Municipalities are the owners
and providers of primary education. But, secondary and high education is mostly in the hands of the state.
The state is the major source of finance for education, while local government spends around 17 percent
of their total expenditure on education. The efficiency of educational system is not very high. The
curriculum is very outdated and quality of education varies between big cities and small municipalities.
Croatian students have under average results in PISA tests, in mathematics, science and reading (in
comparison to the EU average). Healthcare is also a very centralized system where the central
responsibility has The Ministry of Health. I presented the data earlier about the expenditures of local
government on health (just 3 percent). Croatian health system is very inefficient with long waiting lists
for simplest surgeries and examiniations. One more interesting data is the one about life expectancy that
is around 77 years. Also, health system is very closed and not transparent. More than 8 percent of patients
in Croatia had an experience with corruption within the system. This is much above the European average
of 2 percent. Social service is the most decentralized between these three. But, there are still a lot of
things that should be made to make this sector a positive example. In the end, I want to mention that this
complicated and irrational system led to high level of corruption in local and regional administrative
bodies. Also, it didn't improve the participation of citizens in politics. Voter turnout in local elections of
2013 and 2017 are around 47 percent. So, Croatia is a very territorially fragmentated, functionally and
fiscally centralized country. This system produces inefficiency and complication in providing and
coordinating public services. There are small changes towards a decentralized, efficient and transparent
system but for the right results structural reforms are inevitable.

4. Comparative analysis of both cases

We have two countries that had very different development of decentralization. Denmark is for more than
a century an independent, and stable country, while Croatia fought for its independence just 25 years ago.
In that situation, Croatia had to introduce central authority and responsiblity for providing public services.
In the same time, Denmark already had a decentralized system to some extent and they just continued to
improve it. After the war, Croatia had to pass the transition from a communist and authoritarian country
to a democratic and stable political system. Because of these obstacles, it developed a territorially
fragmented system with almost 550 subnational administrative units. These units are inefficient and too
small to finance any of its functions or mobilize resources for their own development. This happened
because government did not start an administrative and fiscal decentralization. Most of the resources are
still in the hands of the central state. On the other side, Denmark developed an efficient system with only
about 100 subnational units that are able to accomplish their tasks. This difference in decentralization and
its efficiency becames obvious if we compare the data. While Croatia has almost half of the
municipalities with the population between 1000 and 3000 innhabitants, Danish municipalities count over
20 thousand people. Also, there are extreme differences in the size of municipalities in Croatia. One of the
most important preconditions for successfull decentralization is to find the optimal number and size of
administrative units. Croatian local government is very irrational and complex. A lot of functions are
shared between different administrative counties, state and municipalities. This causes a lot of conflicts
between different administrative units when it comes to the responsibility of accomplishing some
function. On the other side, Denmark has a clear system where every administative unit knows its job.
Even if they share the responsiblity in some sector, it is clearly defined which functions within the sector
belong to each administrative unit. Another irrationality of Croatian system are the differences in taxation
between people that live in different municipalities but get the same service. Denmark has introduced the
system of equalisation so every citizen must pay the same amount of tax for same service.
On the paper, Croatian local government has the same number of functions as Danish ones, but in practice
this does not work. If we look into data of local government expenditures in general expenditure, Danish
local government has a share of 67 percent while Croatian have 13 percent. This shows how irrelevant
Croatian local government really is. Also, within this budget, biggest percentage of expenditures belongs
to the capital Zagreb and other cities, while the minority belongs to municipalities and counties. Both
countries have similar structure of revenues for local government: they are mostly financed from taxes,
especially income tax. But, the revenues from income tax are way higher in Denmark than in Croatia.
Next, I will look into specific sectors of healthcare, education and social service. Danish helathcare is
very decentralized, financed from the state and municipality. Their local government spends almost 98
percent of total healthcare expenditures, while Croatia is not even close. Croatian local government spend
only 3 percent of their budget on healthcare. Its healthcare system is totally inefficient which can be seen
by comparing Croatian and Danish waiting lists. In Croatia, the averafe waiting list for cataract surgery is
150 days. In Denmark, it is 36 days. Also, in Croatia, the quality of the service and its availiability varies
in big cities and periphery. Croatia has a lot more corrupted system while Danish is open and transparent
with corruption level a lot under European average. Next, education is more decentralized than healthcare
in Croatia. Local administrative units spend 17,1 percent of their total expenditures. But, still, this is very
centralized in comparison to Danish system where they spend aorund 50 percent. Muncipalities are
responsible only for primary education, while secondary and higher education belong to the state. On the
side of efficiency, we can see that Croatian students have a lot lower results on PISA tests than their
Danish colleagues. This is because of outdated curriculum in Croatian education system and this complex
and irrational structure. Last but not least, Croatian and Danish system are most similar in the sector of
social services. But, still, Croatia has to make a lot of reforms to be even close to successfull
decentralization Denmark has carried out. In the end, I want to make some remarks on the level of
corruption and citizens participation. The fragmentated system in Croatia build strong networks between
political elites on lower level of government. According to the data from Transparency International,
Croatia is one of the most corrupted EU member state. In the same time, clear structure of responsibilities
and authority in Denmark led to an open and transparent system. That's why Denmark is the second
country in the world with the lowest level of corruption. Also, the system with a lot of municipalities
didn't improve the participation of Croatian citizens in local elections. The voter turnout in elections of
2013 and 2017 are around 47 percent. In the same time, the level of the voter turnout in Danish local
elections is around 70 percent.
 5. Conclusion

We can conclude that Denmark has developed its decentralization very successfully. It became an open,
transparent and clear political system with high efficiency and high level of user satisfaction with
services. Their decentralization was carried out perfectly and that is why Denmark is today one of the
most developed countries in the world. On the oher side, Croatia has a very fragmenteted and centralized
system. We can't forget that Croatia became an independent country just 25 years ago so it was expected
that this development will be slower. But, today, it is the perfect time to start reforms that will improve
the efficiency and quality of public services. A more clear and decentralized structure of local government
will lead to a more efficient and competitive system, transparent and open with low level of corruption.
Of course that Croatia needs to find their own solutions for its problems but Denmark is a great example
and teacher that Croatia can follow in its decentralization process.
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