Decentralization and Local Development in South East Europe

W. Bartlett, S. Malekovic, V. Monastiriotis, W. Bartlett, S. Malekovic, V. Monastiriotis, Kenneth A. Loparo, W. Bartlett, S. Malekovic, V. Monastiriotis, Sanja Malekovi?

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137295651
• Topic: Economia
• Subtopic: Politica economica

Decentralisation is changing the face of South East Europe. This book provides practical analysis of the devolutionary measures reshaping post-Communist economies. Using case studies from Croatia, the former Yugoslavia, Albania and more, this collection offers valuable insights into political and fiscal redistribution.

Part I

Introduction

1

Decentralization Paradigms in South East Europe: An Introduction

Will Bartlett, Sanja Maleković and Vassilis Monastiriotis

Introduction

The countries of South East Europe entered the period of transition in the 1990s with very different legacies of government. Albania, Bulgaria and Romania had experienced highly centralized systems of government, while in Yugoslavia a more devolved form of government had been adopted through the system of socialist self-management (Dubey, 1975). This involved the decentralization of most government functions apart from defence and monetary policy to the federal republics. Within republics, many government responsibilities were decentralized to the level of municipalities with their own tax-raising powers, although genuine autonomy was constrained by the institutions of the one-party state.

Following the fall of the communist systems in these countries, and the onset of the process of political and economic transition, the evolution of systems of government differed. In the formerly centralized countries decentralization legislation was introduced in the early 1990s in Albania (Sewell and Wallich, 1995), Bulgaria (Martinez-Vazquez, 1995), and Romania (Jakob, 1995). The opposite trend took effect in the former Yugoslavia where, following its break-up in 1991, the successor states centralized many functions of government to the level of the new states, the erstwhile republics. After the end of the wars and conflicts in former Yugoslavia, interest in decentralization was not regained until the successor states felt sufficiently well established to relinquish some powers to the local level. This happened after the democratic changes that took place in Croatia and Serbia in 2000 with the fall of the Tudjman and Milošević regimes and the coming to power of political parties with a greater commitment to the consolidation of democracy than had previously been the case. Policy interest in decentralization has been reinforced in several other successor states of former Yugoslavia at the same time, largely as a way of defusing ethnic conflicts as in Macedonia and Kosovo, or as part of the state-building process as in Bosnia and Herzegovina.

The influence of EU enlargement and accession processes has also led to a parallel policy interest in regionalization and the establishment of EU-style regional divisions, mainly for statistical purposes. In the EU member states in the region (Bulgaria and Romania) this regionalization process has naturally aligned with the activities of EU regional policies. The countries of the Western Balkans have developed regional profiles in accordance with EU principles (the so-called NUTS regions¹) in anticipation of future engagement with the EU regional development funds. However, while regionalization is largely an artefact of an administrative top-down approach to regional and local development practiced by the EU through the distribution of structural funds to member states, the decentralization process has been envisaged more often as a bottom-up process aiming to assist democratization and popular engagement in the political process at the local level. This approach holds the promise of releasing local energies for productive entrepreneurship and generating economic growth and ‘home-grown’ development potential, while at the same time addressing local specificities and permitting the peaceful expression of ethnic and cultural differences. Even so, decentralization has several potential drawbacks, including the possibility that a lack of administrative capacity may prevent the process from fulfilling its hoped-for potential and that it may even widen spatial disparities and worsen inequalities within countries. This book addresses these issues in a region in which the need for new dynamic sources of economic growth and the sustainable continuation of peaceful conflict resolution is of paramount importance for stability of the European continent as a whole.

Decentralization of government to regional and local levels, in both its administrative and fiscal forms, has taken place to different extents in the countries of South East Europe (Kandeva, 2001; Šević, 2008). It is a standard observation that decentralization has three main forms. In the least extensive form, central government powers may be simply ‘deconcentrated’ to local level with local offices of the central government providing centrally financed services at this level. A more extensive form of decentralization involves the ‘delegation’ of government functions from the centre to lower levels of government: while the broad aims of policy continue to be set by the central government which often supervises the delivery of services and provides most of the finance, the local level has autonomy in how services are to be provided and may also have some independent tax-raising powers. Both deconcentration and delegation can be observed in the countries in South East Europe. In Croatia, for example, one finds both central government offices and departments of democratically elected county administrations in most large cities, with each being responsible for delivering elements of local public services (Ivanisević et al., 2001). The institution of the Prefect plays a similar role in Albania and Romania. The most extensive from of decentralization is the ‘devolution’ of responsibility for defining, financing and providing services to lower levels of government. This latter form of decentralization was practised in the former Yugoslavia but has been rarely replicated apart from under the government arrangements in the rather special case of Bosnia and Herzegovina (Jokay, 2001; Fox and Wallich, 2008). The Bosnian case is an example of extensive devolution in which the powers of central government have been restricted to essential elements such as national defence and the regulation of the national currency and monetary policy.

Decentralization has been pursued for various reasons. One essential reason for decentralization has been to support local economic development and contribute to the creation of a competitive market economy. Decentralization of central government powers to local level may strengthen local governance and lead to an improved local business climate which may in turn incentivize increased local investment in physical and human capital giving rise to an ‘economic dividend’ due to decentralization. Improved local public infrastructure may also raise the attractiveness of a local economy to outside investors. The role of decentralization in promoting local economic development in South East Europe is addressed in Part I of this book.

Decentralization is also often applauded for its ability to bring government closer to the people and to match local preferences for an optimal mix of local taxation and expenditure or a mix of public services suited to the needs of the local population. It is thought that preferences can be better satisfied by local governments due to their greater awareness of local conditions compared to government at the central level (Oates, 1972). This benefit of decentralization is associated with variation in the demand for local services across jurisdictions and in the differing costs of providing such services. The key argument (sometimes referred to as the ‘decentralization theorem’) is that decentralization promotes allocative efficiency in the consumption of public services. This is held to be especially important in cases where the preferences across local communities are heterogeneous. Examples include cases where ethnic affiliations imply strong cultural differences and where ethnic rivalry has been a prominent feature of the political landscape. The role of decentralization in potentially defusing ethnic tension is further discussed in Part II.

Yet, while decentralization may promote local economic development, enhance allocative efficiency in consumption and diminish ethnic tensions over the distribution of public goods, it also has several potential drawbacks. These include a worsening of the efficiency of public administration due to the weak administrative capacity of local governments combined with a possible loss of effectiveness of public services due to an increase in corruption and a possible worsening of spatial inequality. The case for decentralization assumes that all units of local self-government have similar administrative capacity and similar levels of information and know-how. The issues of weak administrative capacity at local level, corruption and elite capture are dealt with in Part III of this book.

Decentralization is also commonly thought to have negative effects on the spatial distribution of income since wealthy localities generally have a larger tax base and can raise more tax revenue than poorer ones. If these tax revenues are used to invest in local economic development, a widening of income differentials may take place. There is then a role for central government in making compensating transfers, known as equalization grants, to poorer local authorities to redress imbalances due to an initial unequal distribution of resources. Whether these are sufficient to counteract the almost inevitable increase in inequality between different regions of a country is an empirical issue. Part IV of the book provides empirical evidence on the relationship between decentralization and spatial inequalities in three countries in South East Europe: Croatia, Serbia and Bulgaria.

The following sections of this chapter review the contributions of the book’s chapters in these interrelated thematic areas, regarding the relationship between decentralization and local development, ethnic conflict resolution, administrative capacity and the issue of spatial inequality.

Local economic development

Traditional approaches to local economic development favoured state intervention to correct market failures. Regional development funds and agencies have often been established to counteract the unfavourable effects of market forces on regional inequalities: the Yugoslav Federal Fund for Less Developed Regions was an example of this approach. In recent years this approach to promoting local economic development from the outside has fallen into disfavour. In contrast, new theories of local economic development emphasize the role of institutions in mobilizing local ‘endogenous’ resources such as entrepreneurship, skills and innovation to support the growth of local economies (Pike, Rodriguez-Pose and Tomaney, 2006). These theories emphasize the importance of effective local institutions, strong social relations, productive social capital and positive interpersonal trust in creating a supportive environment for local development. Such institutions are more likely to emerge and be effective in an environment of extensive decentralization whether of the delegation or devolution variety (de Mello, 2011). High trust relations help to reduce the transaction costs of doing business and thus promote economic growth; low trust environments increase the need for formal contracts, contract monitoring and recourse to ineffective judicial systems, all of which increase the transaction costs of doing business. In this view, local institutions which complement each other are needed to support business networks and clusters, local innovation systems, and education and training systems to support the skills of the local labour force. However, institutions that support endogenous development are unlikely to emerge at the local level in an environment characterized by high levels of ethnic tension or widespread social exclusion. In Bosnia and Herzegovina, for example, the breakdown of social capital and trust relations have had negative effects on the development of the SME sector (Rus and Iglić, 2005).

In Chapter 2, Bruno Dallago analyses the role of decentralization in supporting economic growth and promoting political freedom in the transition (or transformation) countries of South East Europe. He argues that when an economy undergoes relentless change it suffers pervasive uncertainty, which poses dangers for the sustainability of transformation. Decentralization and local development can be a guarantee against such risks. However, in the Balkans it has led in some cases to a segmentation of the territory, the society and the economy, and has generated serious inequalities. Comparison with the model of transformation adopted in Poland and Slovenia suggests that while policy should focus on the creation of local opportunities by mobilizing local endogenous resources it should also be supplemented by attracting external resources to finance infrastructure development and investment in human capital. Since ethnic tensions are a danger for stability and development in the region, local development policies that include support for transborder actions and regional cooperation may also play an important role. He concludes that cooperation among central and local governments is needed to achieve favourable outcomes that should also be complemented by cooperation among local governments to enhance accountability.

Much attention has been given to the relationship between decentralization and economic growth. By improving local responsibility and accountability, it is thought the decentralization can support local economic development, which in turn should raise overall growth in the economy (Oates, 1993). Empirical evidence on this point is ambiguous. Some studies have found a positive relationship between decentralization and economic growth in advanced economies (Iimi, 2005), while others have found a negative relationship (Rodriguez-Pose and Ezcurra, 2011). Still others have found no evidence of any relationship between the two variables (Rodriguez-Pose and Bwire, 2004; Bodman, 2011). For transition economies, Rodriguez-Pose and Kroijer (2009) found a negative association between fiscal decentralization and economic growth in a sample of 16 countries in Central and Eastern Europe, although the degree of local tax-raising powers appeared to have a positive effect on economic growth.

In Chapter 3, Dubravka Jurlina Alibegović quantifies the impact of decentralization on economic growth in the transition economy of Croatia, which launched a partial decentralization of public functions in 2001. The major change was in the distribution of income tax revenues, with a larger part of those revenues being attributed to local governments to cover expenditures on decentralized functions in primary and secondary education, health care, social welfare and fire protection. Equalization grants were established for the decentralized functions of local government units with insufficient resources. The empirical analysis identifies a positive relationship between the extent of fiscal decentralization and the rate of economic growth, suggesting that more decentralization would be beneficial for the Croatian economy.

Institutional theories emphasize the system of local governance as a key factor influencing local economic development. Local governance systems comprise not just the formal institutions of local self-government and the political parties which control them but also other actors such as small businesses, entrepreneurs, NGOs and external actors such as the central government, foreign investors, foreign donors who also influence local decision-making. Where local institutions are relatively weak, it may be difficult to build political coalitions to support the process of endogenous local development. In such a situation external actors – including central government bodies, foreign investors and international donors – often exert undue influence and may undermine the development of local institutions supportive of local economic development.

In Chapter 4, Will Bartlett and Božidar Šišević analyse the effects of decentralization policies in Montenegro on the development of the less developed municipalities in the North East region. This region underwent a severe process of deindustrialization during the economic transition period in the 1990s and the early 2000s. Many of the local wood processing factories closed down, leading to the paradox of widespread unemployment and closed factories amid an area of abundant forest resources. International aid programmes funded by the EU and bilateral donors sought to revive the prospects of the region, but with little success. The region had previously been supported by development funding from what ha...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Notes On Contributors
• Preface
• Part I Introduction
• Part II Decentralization and Local Development
• Part III Decentralization in Ethnically Divided Societies
• Part IV Implementation Deficits – Case Studies
• Part V Spatial Inequalities
• Index