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The Importance of Local Taxation, Capabilities and Political Competition

Several studies in the project found that, as expected, limited local political competition negatively affects service delivery, as citizens find it harder to punish poor performance under such circumstances. As an example, the Peruvian study on local water supply found econometric evidence that both re-election of mayors and the percentage of votes obtained by the mayor are negatively associated with coverage and service continuity.

The Colombian study distinguished between local and national elections with regard to local political competition. It found extremely interesting evidence of how channels of accountability depend on the relations between local and national politics and how these determine the level of local hscal effort,23 which, in turn, is a major determinant of differences in service outcomes among municipalities in Colombia.

indeed, their econometric results show that when there are fewer parties in the municipality competing for departmental representation in Congress, cadaster values are less frequently updated (given the importance of local property taxes, updating cadasters is a key determinant of local fiscal effort).24 In addition, per capita transfers from the central government are strongly and negatively related to cadastral updates, indicating that local fiscal effort is curtailed when the municipality is freely financed from other sources, a result that is common to many other studies on fiscal decentralization. As further discussed below, a strong association between local fiscal effort and quality of services was found.

Interestingly, the authors also found that, in contrast to local political variables related to regional or national elections, political variables related to local elections are only weakly correlated to service outcomes. They offer the following explanation for this surprising finding: when municipalities are controlled by regional elites, regional political leaders reward their local loyalists with national or regional budget allocations and, under such a soft budget constraint, local politicians are able to spend more than they collect. Local politicians would in this case most likely lobby for more national resources instead of raising local taxes, and the role of regional elites becomes more significant in determining local policy outcomes. Local public spending decisions then become more responsive to the interests of regional elites, than to those of local citizens. In other words, regional/national leaders become the principals of local politicians and, as a consequence, local politicians are less accountable to local citizens.

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