National Tax Association

FISCAL DECENTRALIZATION INDICATORS: LOCAL DEMOCRATIC GOVERNANCE

Author(s): Michael E. Bell and Charles F. Adams
Source: Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting of
the National Tax Association, Vol. 92 (1999), pp. 236-241
Published by: National Tax Association
Stable URL: http://www.jstor.org/stable/41954658
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 FISCAL DECENTRALIZATION INDICATORS:
LOCAL DEMOCRATIC GOVERNANCE

Michael E. Bell, MEB Associates

Charles F. Adams, Ohio State University*

services to be provided, the manner in which

Europe are developing new decentralized those services will be provided, and the
The intergovernmental Europe countries
intergovernmental are developing
fiscal systems, moving in Central fiscal new systems, and decentralized Eastern moving source of funds.
away from the highly centralized systems of the • Déconcentration involves the decentraliza-
last 50 years. Political, administrative, service de-
tion of central government ministries, with
livery, and financing responsibilities are being decisionmaking authority either vested in the
transferred from the central government to regional offices or maintained by the cen-
subnational governments. Such decentralization tral office.
can improve the level and quality of public ser-
vices being provided, ensure the most effective use • Delegation of authority lies between devo-
lution and déconcentration and involves in-
of limited public resources, and strengthen civic
society in the emerging democracies in Central and
dependent subnational jurisdictions, which
Eastern Europe. However, there is no standard are given service delivery responsibilities
and are subject to supervision by the central
model of intergovernmental relations applicable to
government regarding the level and quality
all countries in Europe; each has its own specific
of service to be provided, how the service is
needs, history, culture, institutions, and solutions.
to be provided and/or how the service is to
be financed.
DECENTRALIZATION
Devolution is fundamentally a bargaining pro-
Decentralization is a complex phenomenon that
cess between the central government and those
means different things to different people. Funda-
mentally, however, decentralization is concerned interested in developing autonomous local self-
governments. The bargaining takes place within the
about the relationship between the central govern-
context of each country's institutions and cultures;
ment and subnational governments along a num-
it is not simply a legal or constitutional construct.3
ber of different dimensions (e.g., fiscal, political,
administrative).1 Initiatives for decentralization As a result, there are different degrees to the cen-
tralization/decentralization continuum; it is not a
along each of these dimensions proceed at their
simple dichotomy between the two alternatives.4
own pace and each has its own objective. While
Public finance literature includes several eco-
we are interested in fiscal decentralization, it is
difficult to separate it from the other dimensions.
nomic arguments in favor of the devolution of
spending and revenue-raising responsibilities:
The following typology helps clarify the concept
of fiscal decentralization:2
• Decentralization of service delivery and
• Devolution involves independent subnational financing responsibilities (fiscal decentrali-
governments, which are given responsibil- zation) makes the level and quality of
ity for determining the level and quality of services provided by government more re-
sponsive to the differences that exist across
communities.
*Funding for this research was provided by the Local Government
and Public Service Reform Initiative, Open Society Institute, Budapest, • Decentralization encourages experimenta-
Hungary. The views expressed here are those of the authors. For a tion and innovation in the provision of pub-
fuller discussion of these issues see Fiscal Decentralization Indicators:
lic goods and services that respond to the
Local Democratic Governance, a publication in the discussion series
by the Open Society Institute in Budapest. The authors may be demands of their citizens - and their unique
contacted at: mebassociates@worldnet.att.net (Michael Bell) and economic, demographic, climatic, and topo-
adams.2@osu.edu (Charles Adams). graphic conditions.

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92nd ANNUAL CONFERENCE ON TAXATION

• Decentralization of service delivery and fi- Europe where housing and jobs are scarce and mo-
nance decisions provides the opportunity tobility is extremely limited. Thus, to obtain the
link the level and quality of service moreefficiency benefits of fiscal decentralization, po-
closely with the "price" paid by the local resi-litical decentralization is critically important so citi-
dent for those services, thereby improvingzens can exercise their voice option. Thus, while
governmental accountability, responsivenessdecentralization is concerned about the relation-
and, ultimately, legitimacy.5 ship between the central government and local gov-
ernment, local democratic governance is concerned
about the relationship between the citizen and
The most common argument advanced in favor
local government institutions, officials, and coun-
of fiscal decentralization is the attainment of
allocative efficiency in the face of differentcillors.
local The purpose of our study for the Open
Society
preferences for local public goods and services.6 Institute in Budapest was to develop a
When public goods and services are provided framework
by for describing local democratic gover-
nance in countries in Central and Eastern Europe.
local government, tax and benefit packages should
reflect the preferences of the community. If each
local government can tailor its tax and service pack-
LOCAL DEMOCRATIC GOVERNANCE
age to the preferences of its citizens, efficiency and
social welfare are likely to be maximized.7 Regardless of how much autonomy subnational
Realizing these efficiency benefits of fiscal governments
fed- have over spending and revenue rais-
ing
eralism depends, to a large extent, on citizens mak-decisions, the perceived economic efficiency
benefits of decentralization will not be realized un-
ing their preferences known to local
less local decisions reflect the priorities and needs
decisionmakers. Typically, there are two mecha-
nisms for expressing those preferences: of the citizens. If they do not, there must be means
of holding local officials accountable. Otherwise,
the perceived benefits of decentralization will not
• First, citizens express their preferences at the
be realized.
ballot box by voting for candidates who they
In this view, local democratic governance is a
feel most accurately understand and repre-
general rubric for the array of institutions, organi-
sent their interests. Citizens may make their
zations, and individuals that interact to realize the
views known also through other mechanisms
benefits of fiscal decentralization. Effective devo-
like public hearings. This is what Hirschman
refers to as voice .8 lution of responsibilities for revenue raising and
service delivery to subnational governments re-
• Second, families and businesses make loca-
quires both institutional structures and implemen-
tion decisions based, at least in part, on con-
tation processes.11 Or, to paraphrase Putnam, the
sideration of the level and quality of services
practical performance of institutions is shaped by
provided by individual jurisdictions and how
the social context within which they operate.12 Lo-
those services are financed. If they do not cal democratic governance is a crucial factor for
like the package of local taxes and benefits, realizing the perceived benefits of fiscal decentrali-
they have the option to exit, or vote with their
zation. In order to develop indicators of local demo-
feet, by leaving for another jurisdiction with
cratic governance, however, we need to develop
a preferred package.9 This option is only ef-
an operational definition of that concept.
fective to the extent that sufficient alterna-
Governance is not synonymous with govern-
tive packages of public goods and taxesment. McCarney, Halfani, and Rodriguez argue
exist to satisfy the wide range in demands
that, "Governance, as distinct from government,
across all individuals.10
refers to the relationship between civil society and
the state, between rulers and the ruled, the govern-
In addition, both Hirschman' s exit option and ment and the governed."13 Central to this relation-
Tiebout's voting- with-your-feet option depend on ship, they argue, is the idea of credibility for both
the mobility of families and businesses. Unfortu- politicians and governing institutions. The cred-
nately, however, these mechanisms for providing ibility and legitimacy of politicians and govern-
feedback to local officials and councillors may mental institutions depends on accountability,
not be available in much of Central and Eastern transparency, responsiveness, real participation,

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 NATIONAL TAX ASSOCIATION PROCEEDINGS

empowerment of groups in civil society, and pub-of other values, such as equity and social integra-
lic consultation. It is this interaction betweention. For example, the disposition of fixed assets
government councillors, officials, and local gov-
(land, housing, etc.) is an issue of paramount im-
ernment institutions and the public that distin-portance in Central and Eastern Europe and has
guishes governance from government. much more to do with matters of equity and fair-
The term democratic suggests a government, orness than with efficiency, per se.
process, in which power is vested in the people The communitarian view of local democratic
and exercised by them directly or indirectly throughgovernance allows a perspective on outcomes and
a system of representation involving periodic freeother values in addition to economic efficiency. In
elections. In the context of fiscal decentralization,this view, a democratic community is one in which
local democratic governance implies placing gov-
the common will is defined and redefined gradu-
ernment closer to the people in an effort to enhance
ally through civic activity. That is, citizens come
the responsiveness of policymakers to the prefer- together to identify and address community issues.
ences of their citizens. Decisionmakers at the lo- Government may be one mechanism for doing this,
cal level are likely to be more knowledgeable about but the essence of this view is that citizenship en-
the needs of citizens and can be held directly ac- tails a range of social duties that are conducted
countable for their decisions. through a variety of means. Peter Berger and Ri-
This notion of local democratic governance has chard John Neuhaus introduced the term mediat-
several important characteristics. First, it is results, ing structures to capture this concept, arguing that
or outcome, oriented. Local democratic governance such they are "essential for a vital democratic so-
is concerned about the results of local government ciety."16 Mediating structures include institutions,
decisionmaking and the relation between outcomes such as families, churches and synagogues, volun-
and citizen preferences. Second, effective local tary associations, and neighborhoods, that come
democratic governance requires meaningful inter- between the individual and the state.
action between decisionmakers and citizens. There Examples of the tension between the individual
must be meaningful citizen participation in setting and the community perspectives on problems are
priorities and developing and implementing solu- provided by the prisoner's dilemma or the tragedy
tions. Finally, effective local democratic gover- of the commons. In the prisoner's dilemma, two
nance requires a democratic decisionmaking partners in crime are held incommunicado and each
process that is democratic-open, transparent, with is told that implicating the other will mean a re-
ethical and honest politicians and officials, with duced sentence, or freedom. However, if one re-
effective channels of communication between the mains silent and the other confesses, the silent one
local government and civil society, and that enjoys will be punished most severely. If both remain si-
the trust of citizens.
lent, both would be let off with a minimum pun-
There is one troubling dimension of this defini- ishment. However, not being able to coordinate
tion. Specifically, as Wolman mentioned, the ben- their stories, each is better off implicating the part-
efits of fiscal decentralization are cast typically in ner, regardless of what the other does.
economic efficiency terms and are grounded in the In the case of the tragedy of the commons, no
paradigm of individual preferences. This approach individual herder can limit grazing by anyone else's
has two drawbacks. First, it ignores the possibility herd. However, if one herder limits his own use of
of the legitimacy of overriding national interests that the common meadow, he alone loses. Yet unlim-
may run contrary to the preferences of some com- ited grazing by all destroys the common resource
munities. Community needs are not the same as in- on which the health of all herds, and the entire com-
dividual needs, and sometimes the former must take munity, depends.
precedence.14 In the United States, for example, we In each of these cases, there is a significant di-
agree as a nation that we will no longer accept legal vergence between what is optimal from the indi-
racial discrimination, even if a majority of citizens viduals perspective and what is optimal from the
in some individual communities desires it.15 community perspective. In each case, all individu-
Second, this definition of local democratic als would be better off if they could cooperate.
governance may be interpreted to place primary One solution to these problems is strong third-
emphasis on the efficiency benefits of fiscal de-party enforcement. The problem with this ap-
centralization that ignores the possible legitimacyproach, however, is that for third-party enforcement

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92nd ANNUAL CONFERENCE ON TAXATION

devices for the types of behaviors that are germane

to work, the third party must itself be trustworthy.
That is, if the state has coercive power, those whoto any democratic system. From a critical perspec-
run the state could use that force to further theirtive (are things getting better or worse over time
and why?), we need to go beyond these descrip-
own interests at the expense of the rest of society.17
An alternative approach to addressing such dilem- tive frameworks. Specifically, Easton talks about
mas is collective cooperation-citizens take the ini- "mechanisms of support" as being important for
tiative to address community problems directly. the long-term sustainability of a system of local
democratic governance. As he lays it out, the criti-
cal issue is how systems manage to maintain a
CONCEPTUAL FRAMEWORK FOR LOCAL
steady flow of support. This is essential for Cen-
DEMOCRATIC GOVERNANCE
tral and Eastern Europe-how to keep this thing
A definition of local democratic governance is called local democratic governance going.
necessary, but not sufficient, to develop indicators Following Easton, the assessment of progress
to describe and monitor changes in local demo- in developing sustainable local democratic gover-
cratic governance. We also need a conceptualnance is a matter of gauging how well the system
framework for thinking about local democraticresponds to citizen demands (outputs) and promot-
governance that will help identify various charac-ing a reserve of support though politicization (loy-
teristics important for the success and sustainability alty). According to Easton, these are bottom-line
of local democratic governance. determinants of sustainability. On the output side,
One way to think systematically about localEaston argues that "persistent inability to produce
democratic governance is provided by Easton's sys-satisfactory outputs for the members of a system
tems approach to understanding how authoritativemay lead to demand for changing the regime (the
decisions are made and executed for a society.18rules about how we govern) or for the dissolution
Political decisions are viewed as a system of inter-of the political community." Thus, we need to de-
velop indicators of citizen satisfaction with out-
related activities (they all influence to some degree
the way in which decisions are formulated and ex-puts-not just the level and quality of services and
ecuted). His "primitive model" is very simple: "prices" paid for those services but also other fea-
Inputs - political decision process - outputs -tures of the overall system of local democratic gov-
feedback ernance, including inputs, the political decision
process, and feedback mechanisms.
Understanding local democratic governance in Just as importantly, Easton argues the need for
this context involves:
a "reserve of support" to ensure that systems sur-
identifying the inputs and the forces that shape vive difficult periods. This is Easton's second main
and change them; mechanism for sustainability, politicization or "the
tracing the decisionmaking process through way in which legitimacy is created and transmit-
which inputs are transformed into outputs; ted in a political system . . . support nourished by
describing the outputs, and an ingrained belief in the legitimacy of the relevant
governments and regimes." Here the notion of
understanding how those outputs affect the
support goes beyond just getting the trains to run
overall system of democratic governance on time. We need to take a measure of trust and
and the context in which the process works.
confidence in things like elections, political par-
This is a dynamic system with continual feed- ties, labor unions, universities, community-based
back on the environment and institutions that make organizations, the media, etc. Perhaps, too, we need
local democratic governance possible and effective. to take a measure of how much government trusts
the citizens to fend for themselves. To what extent
are citizens afforded opportunities to contribute
GAUGING PROGRESS
creatively to community problem solving? Or, is it
all one way - people trusting the government to
Toward Sustainable Local Democratic Governance: take care of community needs? The notion of
The Bottom Line
citizen trust goes to what Easton referred to as
Easton's systems approach and Hirschman's "state of mind" and what Hirschman refers to as
public choice framework are useful descriptive loyalty.

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 NATIONAL TAX ASSOCIATION PROCEEDINGS

Analytically, this combination of citizen satis-
faction and citizen trust provides the basis for con-
structing a two-by-two matrix that can be used to
characterize progress in developing sustainable
local democratic governance. Systems scoring high
in both satisfaction and trust would be put at the
high end of sustainability. Systems scoring low on
satisfaction and trust would be put at the low end
of sustainability; and those scoring high in satis-
faction but low in trust would be put at the higher
end but with some doubt about longer-term
sustainability; and those scoring low on satisfac-
tion but high in trust would be put at the lower end
the general public and/or key informants who
would come together to discuss various issues.
Careful attention must be paid to designing the
questions and facilitating the discussion of the fo-
cus group, as well as selecting representative par-
ticipants.20
Second , how the data will be collected and pre-
sented. Alternatives range from a simple scorecard
to a scale to an index. Each has its strengths and
weaknesses. For example, a scale is a rating de-
vice that presents a range of responses from excel-
lent/high at one end of the scale to poorly done/
low at the other end of the scale. Such a tool can

of sustainability but with some optimism about be used to gather information on "soft" dimensions
longer-term prospects. of local democratic governance, such as the qual-
ity of laws or the fairness of laws enforcement. A
scale reflects the subjective evaluation of the indi-
CONCLUSIONS
vidual respondent. Alternatively, an index is sim-
Moving from this general framework for think- ply the combination of the individual ratings on
ing about local democratic governance to the de- several different scales into one number. Construct-
ing meaningful indexes can be difficult because
sign of specific indicators is not an easy task. There
are methodological issues that need to be consid- the number of components to include, how they
ered. For example: are to be weighted, and how they are to be com-
First, the data required for individual indica- bined influences the final index. Finally, a scorecard
answers yes or no to a series of questions, each of
tors. This includes timeliness, validity, reliability,
duplication, cost of developing, and availability and
which captures a different dimension of the char-
meaning of data. Data are available from two ba- acteristic or component to be measured. It is simple,
sic sources-first-hand data, collected specifically does not require much training, and results in an
to gauge progress toward building sustainable lo- agreed-on rating for each component. However, it
cal democratic governance, and second-hand data does not differentiate between different types of
that utilizes already collected and published data. improvement and it may not fluctuate over time as
Some of the data needed for indicators of local some characteristics may improve and others may
democratic governance may come from second- decline.
ary sources, but information on public attitudes, Third, the level of government used as the unit
perceptions, expectations, and levels of satisfac-of analysis. Most often, local self-government
means the lowest tier of elected government-the
tion and trust relies mainly on primary data sources.
For example, when discussing public opinions municipality.
and However, the role of intermediate
attitudes, Putnam generally reports results from tiers of government-districts, or regions-must be
questionnaires administered to different segments considered. Also, how to deal with capital cities is
of the population, and their analysis and interpre-
an important issue because, typically, they consist
tation. While such surveys can be useful in gaug- of a metropolitan level governmental institution,
ing public attitudes and opinions, the resultsplus cana number of substructures, each of which may
have elected councillors and mayors.
be difficult to interpret at times. For example, while
the questions might focus on issues related to lo- Fourth, the operation of the system. Local demo-
cal democratic governance, the responses mightcraticbe governance does not exist in a vacuum; it
influenced by other factors like economic hardshipoperates within a specific setting or environment
or unrealistic expectations. Also, to be useful, such
defined in part by the civic culture of the commu-
surveys have to be relatively large-scale and may nity. Putnam made the same point when he talked
be expensive to conduct.19 An alternative approachabout socio-cultural factors that influence the per-
to gauging public attitudes and opinions is through
formance of government institutions. That is, the
well-designed focus groups. This approach would performance of a system of local democratic gov-
involve a smaller number of representatives from ernance depends in part on the disposition of the

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92nd ANNUAL CONFERENCE ON TAXATION

citizens in the local community-their political at- 7 Wolman, pp 30-3 1 .

titudes and orientations grouped under the general 8 Albert Hirschmann, Exit, Voice and Loyalty (Cam-
rubric of "civic culture."16 This civic culture can bridge: Harvard University Press, 1970).
9 In addition to Hirschmann, see Charles Tiebout, "A
act to facilitate or impede satisfaction and trust.
Pure Theory of Local Expenditures," Journal of Po-
These issues are discussed in greater detail in
litical Economy 13 (1997): 455-478.
Fiscal Decentralization Indicators: Local Demo-
10 Lars P. Feld, "Exit, Voice, and Income Taxes: The Loy-
cratic Governance (Open Society Institute, alty of Voters," European Journal of Political Economy
Budapest, discussion paper series). The next step 13 (1997): pp. 455-478.
in the process is to move beyond this conceptual11 Robert H Dorff, "Federalism in Eastern Europe: Part
framework to constructing an index of local demo- of the Solution or Part of the Problem?" Publius: The
cratic governance that can be used to describe the Journal of Federalism 24,. 2 (1994): 99-114.
12 Putnam, p. 8.
different systems of local democratic governance
13 Patricia McCarney, Mohamed Halfani, and Alfredo
emerging in Central and Eastern Europe and other
Rodriguez, "Towards an Understanding of Gover-
emerging democracies.
nance: The Emergence of an Idea and its Implications
for Urban Research in Developing Countries," in Ri-
Notes
chard Stren and Judith Kjellberg Bell, eds, Perspec-
tives on the City-Urban Research in the Developing
1 It is important at the outset to be clear on what gov- World , Volume 4 (Toronto: University of Toronto,
ernments we are talking about Typically, we are con- Centre for Urban and Community Studies, 1995), p.
cerned about all subnational governments-regional 95.
and local. But we want to focus on the relationship14 Benjamin R Barber, A Passion for Democracy
between the central government and self-government (Princeton, New Jersey: Princeton University Press,
at the subnational level. Part of this equation also must 1998), Chapter 6: Have Rights Gone Wrong? The
consider the relation between local self-government Reconstruction of Rights, pp. 78-92.
and regional governments that represent the central
15 Douglass North, Institutions, Institutional Change, and
government. Economic Performance (New York: Cambridge Uni-
2 Richard M. Bird, Robert D. Ebel and Christine I. versity Press, 1990, as quoted in Putnam, p 165.
Wallich, eds., Decentralization of the Socialist State:
16 David Easton, "An Approach to the Analysis of Politi-
Intergovernmental Finance in Transition Economies cal Systems," World Politics 9, 3 (April 1957): 383-
(Washington DC: The World Bank, 1995). 400

3 Robert D Putnam, Making Democracy Work: Civic 17 Nancy Hooff, ENI Division, US. Agency for Interna-
Traditions in Modern Italy (Princeton, New Jersey: tional Development, Memorandum to ENI Missions,
Princeton University Press, 1993), p. 23. Local Government Indicators for SO 2.3, October
4 Harold Wolman, "Decentralization: What is It and Why 1998.
We Should Care?" in Robert J Bennett, Decentraliza-18 Hooff, and US. Agency for International Development,
tion, Local Governments, and Markets (Oxford: Bureau of Global Programs, Center for Democracy
Clarendon Press, 1990), p. 31. and Governance, Handbook of Democracy and Gov-
5 Wallace Oates, Fiscal Federalism (New York: Harcourt ernance Program Indicators (Washington DC, August
Brace and Jovanovick, 1972); J. Owens and G. Panella, 1998), Appendix B, pp. 237-50.
eds. Local Government: An International Perspective , 19 For a good example of such scaling in connection with
(Amsterdam: North Holland, 1991); and Litvack, citizen satisfaction and trust, see Lyons, Lowery, and
Ahmad, Jennie, Junaid, and Richard M. Bird, Rethink- DeHoog, The Politics of Dissatisfaction: Citizens,
ing Decentralization , Sector Studies Series (Washing- Services and Urban Institutions (Sharpe, 1992), Ap-
ton DC: The World Bank, 1998). pendix A.
6 Litvack, Ahmad and Bird, p. 5. 20 Putnam, pp 9-11.

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