constraining the leviathan

8/21/2019 Constraining the Leviathan

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Constraining the Leviathan:

An International Comparison of the Effects of People

Empowerment on Local Government Size, Disposable

o!sehol" Income an" Local Development

By Peter Grubenmann,Lecturer of Economics

Asian University of Science and Technology, Thailand

pgeconasianust!ac!th

A#S$%AC$

"evolution of political#administrative po$ers to localities is thought to create a moreconducive environment for local economic development! A policy and planningsimulation model $as developed to investigate this! The study compares t$odecentrali%ing Asian localities $ith t$o politico#administratively decentrali%edEuropean localities! The lac& of hard data on the local level suggested a non#orthodo'use of System "ynamics as analysis and simulation methodology! Social (et$or&Analysis $as used to develop the systems) po$er structure! Time simulations of

empo$erment policy changes revealed that these matter and that fully empo$eredvillagers are beneficial for the development of a locality!

C&'$E'$S

*! *ntroduction

**! Some Evidence +f The Leviathan)s Effects

***! uestions, Assumptions And -ethodology

*.! The "ynamic (arrative +f The Local Politico#economic Process

.! Local Government Policy Simulations


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.*! /onclusions

0eferences

I( Intro"!ction

1!!!government is a monolithic entity trying to ma'imi%e si%e and revenue!!!12Brennanand Buchanan, 34567

Brennan and Buchanan 234567 model government as a Leviathan, a monolithicmonster, trying to ma'imi%e si%e and revenue! They believe that, ceteris paribus, theoverall si%e of the public sector should inversely vary $ith the e'tent of simultaneousdecentrali%ation of the national government)s ta'ing and spending po$er, and,therefore, argue that decentrali%ed ta'ing and spending authority serves as a po$erful

constraint on the government Leviathan! They support their hypothesis $ith theTiebout 234897 model on fiscal decentrali%ation resulting in the notorious phrase1voting $ith ones feet!1 *n this model inhabitants move to the community $here theutility of their ta' contribution is ma'imi%ed! :or the Tiebout hypothesis to hold, adecentrali%ed, ideally federalist, political organi%ation $ith decentrali%ed ta'ing andspending authority is necessary! This creates competing ;urisdictions, $hich are forcedto ma&e use of available scale economies to achieve cost#efficient production andsupply of public goods and services!


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decisions as $ell!1

Li;eron 234497 sho$s in his time series study of 5 countries that as a conse>uence ofthe limited capacity of local governments to rely on their o$n ta'#base,intergovernmental transfers play a critical role in local finance! /entral government

transfers account for about 96 percent and ?8 percent of local government revenues inindustriali%ed and developing countries, respectively! e found that 1on average thereis, ho$ever, a tendency to reduce the local government dependency on central grants, both in industriali%ed and in developing countries! /ountries $ith a relatively highdegree of local financial autonomy sho$ a greater independence in decision#ma&ingand can be more sensitive to both costs and local priorities!!!1 e also found thatindustriali%ed countries have a higher decentrali%ation ratio than developing ones! Thereason for this situation is that the level of economic development of a countrydetermines the aggregate resources that are available for the gro$th of thegovernmental sector!

According to Li;eorn)s 234497 statistical findings, the degree of decentrali%ation ofe'penditures is generally higher than the degree of decentrali%ation of revenues and,therefore, local governments are al$ays financially dependent on central governmenttransfers! Although local governments are supposed to be more efficient and effectivein providing social services, evidence sho$s that social spending is still verycentrali%ed and evidence reveals a situation of imbalanced decentrali%ation $here localgovernments are forced to ta&e over more spending responsibilities but are not givenmore ta'ing autonomy!

Theory suggests that decentrali%ation of ta'ing and spending po$ers to localgovernments should produce positive $elfare effects and lead to smaller government,

as transaction costs are lo$er if both po$ers are in the hands of the same governmentallevel! Local governments 2LG7 are believed to spend more rationally if public goodsand services must be primarily paid through local ta'es, levies, and charges asta'payers demand value for their money and, if frustrated, might retaliate during thene't elections or vote $ith their feet, i!e!, move on to another ;urisdiction!

II( Some Evi"ence &f $he Leviathan)s Effects

*f Brennan and Buchanan)s 234567,


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local gro$th might be! To analy%e these >uestions, a comparative study $as underta&enin t$o industriali%ed and t$o developing countriesC Thailand and the Philippines and,S$it%erland and Spain! To further stress the poverty angle, a relatively poor localcommunity $ith a homogenous prevalent culture and little ine>uity $as selected ineach countryC Tambon uay Dai in /holburi Province in Thailand Barangay Labac in

/avite Province in Philippines orita in the Province of /aceres, 0egion ofE'tremadura in Spain and Sch$ende in /anton Appen%ell *nnerrhoden in S$it%erland!

The four countries can be summarily characteri%ed as follo$sC

Thailand is

• more or less homogenous culturally and has a common language

• a constitutional monarchy $ith representative democratic system

• a strongly centrali%ed governmental system and $or&ing on a process ofdecentrali%ation and

• struggling to become a (e$ly *ndustriali%ed /ountry!

S$it%erland is

• home to four distinctly different culturesC German, :rench, *talian and

0omansh

• a federal republic $ith a semi#direct democratic system

• an e'tremely decentrali%ed governmental system and

• economically in a process of transforming into a post#industrial economy!

Spain is

• a constitutional monarchy $ith representative democratic system

• a unitary, decentrali%ed governmental apparatus and

• an historically forced homogenous culture derived from the politicallydominant region of /astile, but contested by the other t$o ma;or culturalregionsC /ataluFa and the Bas>ue Territory! Today these t$o regions are1autonomous communities1 $here /atalan and Bas>ue are official languages besides Spanish

• Economically Spain has transformed during the past 8 years from a poor

agricultural economy into a very prominent and successful (e$ly


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*ndustriali%ed /ountry!

Philippines isC

•

ethnically and culturally e'tremely inhomogeneous $ith =8 distinctly differentethnographic groups and

• the only Southeast Asian country coloni%ed by the Hest before having

developed a central government! /onse>uently $estern political#administrativesystems $ere introduced at an early stage! istorically, the Philippines $asal$ays a strongly regionali%ed country $ith a relatively $ea& centralgovernment thus al$ays allo$ing a certain degree of regional and local self#rule of the elite classes!

• After decades of struggle against dictatorial rule, the Philippines is today a

unitary decentrali%ed, presidential parliamentary system!

• Economically the Philippines is strongly agriculture based belonging to the

group of developing countries!

Table 3 belo$ gives some evidence of the four countries) degree of decentrali%ation oftheir public financial systems and of their G"P gro$th data!

TABLE 3C Public finance data for some selected countries

/ountry

Government

E*pen"it!res of

All Levels as +

GDP --.

S!bnationalGovernment

E*pen"it!res as +

of $otal P!blic

E*pen"it!res --.

S!bnationalGovernment

%even!es as + of

$otal P!blic

%even!es --.

Average

Ann!alGDP

Growth

%ates --/

0 --1

Thailand 6!@ 4!9 8!8 @!=

Philippines 3=! 9!8 = ?!?

Spain =3!@ ?8 3?!5 3!4

S$it%erland ?9!4 =4!? ?8!8 6!=

2or comparison

Germany =8!5 ?@!5 5!5 3!9

S$eden 84!5 ?9! ?3!= 3!

USA ??!6 =9!= ?!4 !4

The Philippine e'penditures data refer to 3456SourceC Horld "evelopment 0eport 666, Horld Ban&, Hashington "!/!, 666 and Bundesamt fuer


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Statisti&, (euchatel, 666

Hith regard to the above data one can ma&e the follo$ing observationsC

• Both, Thailand and the Philippines are very centrali%ed in e'penditures and

revenue! The magnitude of their gro$th rates is due to their lo$ initial G"P!

Their gro$th figures are therefore not indicative of a superior performancerelative to industrial country results!

• Spain is decentrali%ed in e'penditures and centrali%ed in revenues!

• Germany, S$it%erland, S$eden, and the USA are decentrali%ed in e'penditures

and revenues!

Table 3 does not indicate an obvious relation bet$een sub#national fiscal behavior andG"P gro$th rates! Therefore, a more e'tensive correlation analysis of 3 industriali%edand 35 developing countries for $hich complete comparable data could be found in the

Horld Ban&)s Horld "evelopment 0eport 3444I666 $as carried out! 0esults aresho$n in Table , belo$! The t$o#country classifications are necessary as gro$th ratesin developing countries are generally higher than those of industriali%ed countries dueto the base effect of lo$ initial G"P! This $ould bias the correlation results!

Tables and ? belo$ sho$ the correlation results bet$een G"P gro$th rates and fiscaldecentrali%ation! The analysis of the industriali%ed countries sho$n in Table belo$reveals a statistically significant negative correlation at the 44J confidence level bet$een sub#national e'penditure ratios 2#6!84?7, sub#national revenue ratios 2#6!9@7and central government e'penditures!

The correlation bet$een central government e'penditures and G"P gro$th rates is$ea&ly negative, but statistically not significant!

TABLE C 3 *ndustriali%ed /ountriesC /orrelation of Average G"P Gro$th 0ates3446 #3445 and :iscal "ecentrali%ation

3ariables %eal

Ann!al

GDP

Growth

%ate

--/0--1

S!b0national

Government

E*pen"it!res

as + $otal

P!blic

E*pen"it!res--.

S!b0national

Government

%even!es as

+ $otal

P!blic

%even!es--.

$otal Central

Government

E*pen"it!res

as + GDP

--.

0eal AnnualG"PGro$th 0ate3446#3445

Pearson/orrelationSig 2#tailed7 (

3!666!

3

#!368!983

#!?6!38@3

#!6=9!55=3


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SubnationalGovernmentE'pedituresas J TotalE'peditures344@


#!368!983

3!666!

3

!54KK

!6663

#!84?KK

!6683

SubnationalGovernment0evenues asJ TotalPublic0evenues344@


#!?6!38@3

!54KK

!6663

3!666!

3

#!9@KK

!6633

Total /ental

GovernmentE'pendituresas J G"P344@

Pearson

/orrelationSig 2#tailed7 (

#!6=9!5==3

#!84?KK

!6683

#!9@KK

!6633

3!666!3

KK! /orrelation is significant at the 6!63 level 2#tailed7!SourceC Horld "evelopment 0eport 3444I666, Hord Ban&, Tables A3, 33, 3= TABLE ?C 35 "eveloping /ountriesC /orrelation of Average G"P Gro$th 0ates 3446#3445 :iscal "ecentrali%ation

3ariables %eal

Ann!al

GDPGrowth

%ate

--/0

--1

S!b0national

Government

E*pen"it!resas + $otal

P!blic

E*pen"it!res

--.

S!b0national

Government

%even!es as+ $otal

P!blic

%even!es

--.

$otal Central

Government

E*pen"it!resas + GDP

--.

0eal AnnualG"PGro$th 0ate3446#3445


3!666!

35

#!643!@3535

#!6?8!54335

#!?8=!38635

SubnationalGovernmentE'pedituresas J TotalE'peditures344@


#!643!@3535

3!666!

35

!@8KK

!66635

#!36@!9@?35

Subnational Pearson #!6?8 !@8KK 3!666 #!8=


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Government0evenues asJ TotalPublic0evenues344@

/orrelationSig 2#tailed7 (

!54335

!66635

!35

!?@35

Total /entalGovernmentE'pendituresas J G"P344@


#!?8=!38635

#!36@!9@?35

#!8=!?@35

3!666!

35

KK! /orrelation is significant at the 6!63 level 2#tailed7!SourceC Horld "evelopment 0eport 3444I666, Hord Ban&, Tables A3, 33, 3= The analysis of the 35 developing countries reveals the same correlation pattern,though the coefficients are statistically not significant! Hith some caution one could

therefore ma&e the prediction that, more decentrali%ed public e'penditures andrevenues lead to lo$er central government e'penditures and thus to higher gro$thrates!

Barro and Sala#*#-artin 234487, in $hat follo$s called BS-, and of Barro 23444, pp!?5#?47 both found that the level of government consumption has a negative 2#3!4J,BS- #33!6J, Barro7 effect on the per capita gro$th rate! Assuming that their findings,$hich relate to the national level, are also valid for the local level, the above sub#national fiscal data become important local gro$th determinants!

III( 4!estions, ass!mptions an" metho"olog5

These findings lead to the empirical >uestion of $hether decentrali%ing ta'ing andspending po$ers to the local level is indeed enough to contain the local Leviathan, and$hether this can positively influence gro$th rates and development! *t is assumed herethat the sum of the local government policies in a country influences to a large e'tentthe outcome of the national economy, and that therefore e'tensive research on theseissues on the local level are both timely and important for ans$ers to gro$th anddevelopment >uestions!

The present research deals $ith the devolution of po$ers to villagers versus the

e'clusive or partial concentration of these po$ers in the hands of the local governmentcouncil! Hhen the tal& is of decentrali%ation of government, it is al$ays understood toultimately mean granting direct democratic po$ers to the villagers themselves, $ith thelocal government being the e'ecutioners of the peoples) $ill only! This is more or lessthe local democratic system in S$it%erland, $hich is used as a benchmar& in thisresearch!

Ade>uate educational standards of the population and ade>uate ta' bases for the


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financing of the local government are considered a prere>uisite for a decentrali%ed state$ith self#administering, empo$ered political units! *nade>uacy $ith respect to theset$o factors is most often cited by central government as the basic hindrance to adecentrali%ation process! The above suggests, that decentrali%ation is often thought to be a concept more suitable for advanced, $ealthier economies than for poor ones! The

four localities mentioned above have been chosen to address this assertion! The fourlocalities) basic structural data are in Table = belo$!

TABLE =C +vervie$ of the Localities

!a5 6ai,

Cholb!ri,

$hailan"

Labac,

Cavite,

Philippines

7orita,

Caceres,

Spain

Schwen"e,

Appenzell I(

%h(,

Switzerlan"

Population 3@,399 =,?86 ,64 3,43=

(umber of ouseholds ?,839 556 58? @58

Average ousehold*ncome in 3445 US

,=? ?,666 36,4@9 =6,666

0egular LG *ncomefrom Ta'es and/harges in 3445 US2)6667

=49!@ ?@!9 ?5=!5 3,39!8

0egular LG *ncome inJ Total .illage*ncome

8!53 3!= =!33 ?!5@

Upper Government/ontribution in J0egular LG *ncome

?6!6 85!6 38?!6 =!5

LG E*pen"it!re Str!ct!re in + of $otal #!"get

Administration, "ebtService

39!5 36!5 ?6! 35!8

Education, /ulture @!6 @!= 5!? 3=!@

Helfare M 6 M 6 36!? 3?!69

*nfrastructure @6!@ 53!@ 83! 8?!9=

Savings 8!= 6!6 6!6 M 6

Analyses at the local level generally have to cope $ith poor data, both in >uality and>uantity! The research methodologies to be employed therefore had to allo$ the use ofsoft data and still produce valuable results! The ob;ectives of the research are of the


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1$hat if1 type, $hich means that ans$ers must be found through simulations! Asimulation methodology allo$ing the use of soft data is System "ynamics 2S"7, andthis methodology $as chosen for this research!

Although, the structure of political#administrative systems is generally considered to be

static, the behavior of the systems is not! The state apparatus behaves dynamically$ithin the 1informationIactionIconse>uences1 paradigm 20!G! /oyle, 34497! Toanaly%e the dynamic behavior of highly comple' systems such as politico#administrative systems, the research methodology to be applied must also enabledynamic modeling and simulation of systems $ith a large number of related sub#systems containing a great number of 1non#observable variables1 such as tastes, preferences and values! "ue to the lac& of hard data describing the very important non#observable variables in politico#administrative systems, econometric techni>ues become >uestionable as a ma;or instrument of analysis, though a number of the non#observable variables could reasonably be treated as dummy variables!

He deal here $ith managed, self#steering, intentional systems of the 1multiple#loopnonlinear feedbac&1 type 2Aulin, 345, p! 95I947, as encountered in governmentalreality! A system dynamic approach seems best suited for the simulation ofdecentrali%ing governments! +nly in an iterative time simulation process can the manyand highly complicated forces of influence be brought to $or& and made to reveal thelong#term dynamic behavior of the system! This is e'actly $hat can be accomplished ina system dynamic analysis 2:orrester, 34@3, Senge, 34467!

Unfortunately, a fruitless academic divide has developed bet$een econometricians andsystem dynamicists! The econometricians re;ected the system dynamic approach byclaiming it to be unscientific, speculative, lac&ing factual analysis and missing a clearly

defined methodological apparatus! The system dynamicists on the other hand re;ectedthe purist econometric approach, arguing that econometric analysis is basically a staticapproach, as the past is merely and mostly linearly e'trapolated into the future,$hereas the system dynamic approach embodies multiple feedbac& learning systems in$hich everything changes and adapts over time to create a ne$ future, different fromthe past status 2Sommer, 34537!

:orrester 234@37, the founder of system dynamics, argued that in analy%ing socio# political systems, the very important 1non#observable1 variables mostly have to bee'cluded from econometric models due to the absolute need for hard statistical data!System dynamic analysis is based on the profound &no$ledge and e'perience of the

researcher in the topic she analy%es! 0ough estimates of necessary values are sufficient!The aim of system dynamics is not, as in econometrics, to determine functionalrelations based on theories and statistical data, nor to numerically predict short tomedium range outcomes! 0ather, the aim is to sho$ in a strategic fashion development paths of complicated managed systems over the long to very long term! *n systemdynamics, actual or theoretical structures and processes are fundamentally important,and these can be derived only through e'pert &no$ledge of the problems and situationsunder revie$! Sommer 234537 declares that it is, therefore, futile to claim superiority


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for one or the other methodology, as they serve totally different aims! "uring the pastt$enty years, there have ho$ever, been developments, mainly in the field of policyconsulting, to econometrically estimate parameters for system dynamic models, and toinclude them in the analysis! S" in this non#orthodo' sense is used here!

+ne of the more fundamental criti>ues of econometricians $as that system dynamicstreated all realities as closed systems, thus not allo$ing e'ogenous or policy variables!The closed system approach $as introduced because :orrester and most of his studentshad an engineering or natural science bac&ground! They, therefore, treated all systemsas physical or biological systems that follo$ the mass conservation la$ of physics!This meant that no ne$ mass can be created, or in more general terms, nothing can becreated $hich $as not already there! They thus follo$ed closed systems! This isobviously $rong, particularly in the socio#political sphere $here human inventivenesscreates ne$ structures, processes, products, and services! System dynamicists have,therefore, begun to $or& $ith open systems using e'ogenous variables and policy

parameters, implying that there are things that penetrate and enrich e'isting systemsfrom the outside! *t is this non#purist system dynamic approach also employed here, in$hich econometric tools are used together $ith system dynamic tools, that ma&e thismethodology interesting and re$arding!

+ne ma;or problem in econometric analysis is the determination of causality! Througha system dynamics approach, this problem can be solved to a great e'tentC Totalcausality can be detected by departing from the smallest cause effect chain, anddeveloping it into an ever larger interrelated system!

The basic system dynamics model elements are the stoc& and flo$ variables calledlevels and au'iliaries, respectively! Levels describe the status of the system, $hereasau'iliaries cause change in the levels over time!

Though system dynamics simulations can be carried out based solely on assumedstructures, processes and data, the present research $as intended to be more empirical!To be able to fill the system models $ith empirical behavioral data, t$o >uestionnairesurveys on a confidence level of 46 percent $ere carried through in each locality, one$ith the local leaders and one $ith the general public! The >uestionnaires $ere ami'ture of >uantitative and semi#open >ualitative >uestions! The ob;ective of thesurveys $as to gain data on people)s needs, perceptions and relations! The data $erealso used to estimate household incomes and e'penditure patterns, because official data proved to be too contradictory to be confidently used! 0elational data on the villageleaders $ere collected to serve as the basis for a Social (et$or& Analysis 2S(A7! TheS(A $as carried through to be able to include into the models bargaining po$ers ofthe relevant political village groups!

NThe S" soft$are used $as .ensim PLE version =!3 and the S(A soft$are $asStructure =! 2Burt, 0!, 34437! Table functions for the S" models $ere estimatedstatistically $ith SPSS soft$are!O


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0iggs) Sala -odel 20iggs, 34997 is assumed to represent reality to some e'tent fordeveloping countries or for small localities in industriali%ed countries! The Sala modeldeals $ith the full range of social phenomena and behavior, subsuming political andadministrative aspects! *t thus is a model pertaining to the ecology of administration ina society! eady 2349, p!537 proclaims that 1!!!the Sala is associated $ith une>ual

distribution of services, institutionali%ed corruption, inefficiency in rule application,nepotism in recruitment, bureaucratic enclaves dominated by motives of self# protection, and, in general, a pronounced gap bet$een formal e'pectations and actual behavior! !!!1 *t is assumed that the Sala behavior $ill be less prevalent, the more politically empo$ered the villagers are!

Structure and relations of social systems as outlined in the Sala -odel can be describedand analy%ed $ith the tools of S(A! The intensity of relations, $hich resulted from the>uestionnaire surveys, and $hich $ere measured in terms of ho$ often an individualmeets $ith other individuals $ithin a year, are the basis of the social net$or& analysis!/li>ues are the focal groups in S(A! /li>ue building depends very much on the

researchers choice of relation measurement! +perationally, a cli>ue is defined as anaggregate of actors clustered on a criterion of cohesion! Burt)s 234457 -a'imumStrength 0elation measure is used in this research! This relation measures pro'imity ofactors according to their strongest Euclidean "istances measured in terms of contacts per year!

*n the clustering algorithm, the first step merges t$o most pro'imate or cohesiveactors! See :igure 3 belo$! Pro'imity of an actor to this cluster is defined as thema'imum cohesion bet$een the actor and the actors in the cluster! The second stepagain merges the former cluster $ith the ne't most pro'imate actors and so on until the$hole system is one cluster! This clustering algorithm ignores $ea& or absent ties! The

higher up in the cluster hierarchy actors are, the more closely tied they are, and thuscan be identified as a group entertaining more intensive relations among each otherthan $ith other actors of the system! Such a cluster can then be identified as a relationor interest cli>ue!

MAXIMUM

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!"##! " " " " " X X X " " " " " "

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$"'( " X X X " X X X X X " " " " " "

!(("$' X X X X X " X X X X X " " " " " "

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%&&"&& X X X X X X X X X X X X X " X X X X X X X X

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:*GU0E 3C Stucture =! +utput of Positional E>uivalence Analysis for the orita

-unicipal /ouncil

+ne can identify t$o cli>ues in :igure 3 above! This grouping actually coincides $ithreality $here, $ith the e'ception of *sidoro, that is the -unicipal Secretary, thecouncilors :rancisc2o7 to Tomasa are all members of the Socialist Party! The group"iego to uivalence identified hereare the socialist homogenous bloc and the heterogeneous, less po$erful bloc of theother councilors! The heterogeneous bloc forms the opposition in the -unicipal/ouncil, $ho is e>uivalent in this function only!

:igure 3 also reveals that the socialist group is positionally less e>uivalent than theopposition! *t appears that there is a female dominated group 2erminia, Tomasa ual person $ithin the council! As he is the -unicipal -ayor, this position clearly suggeststhat he is the most po$erful person $ithin the council, a fact that is confirmed througha subse>uent po$er analysis, and acts as a bridge bet$een the t$o political blocs! *tcan therefore be claimed that the methodology can identify cli>ues >uite $ell!

Hithin the cli>ues, the >uestion of $hich actor is most po$erful, and $ho is most

li&ely to be a follo$er, is of premier interest! *t is assumed that personal influence patterns and po$er in the localities develops according to Burt)s 234457 Po$er andStructural ole models! (et$or& po$er is defined as the relative connectedness of anactor that is reciprocated! The most po$erful actor is the person $ith the highestrelative score! *n the conte't of the Sala model, the Structural ole model describesopportunities for the trading of advantages $ithin the local political conte't $here persons at the crossroads of information flo$s gain information and connections acrossgovernmental levels and local social groups, enabling them to influence plans and budgets to their and their clientele)s advantage through the trading of such information!The analysis of the orita -unicipal /ouncil indeed reveals :rancisco as the most po$erful person $ithin the council, as $as already suggested in the positional

e>uivalence analysis in :igure 3!

To identify po$er and bargaining positions, cli>ues $ithin the local government $ereidentified, and the po$er of each village councilor in the four localities $as thuscalculated! The councilors $ere grouped in cli>ues on the basis of their ans$ers torelevant survey >uestions, $hich allo$ed assigning them to one of t$o groups! Socialconcerns prevailed in one, and infrastructure and building concerns prevailed in theother!


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+n the basis of the relevant la$s in each country, the survey, and the S(A results atemplate 1Politico#Economic System1 $as constructed $here the ultimate drivers ofthe system are the 1"evelopment :rustrations1 defined as the difference bet$een thee'pected and actual development status of politically empo$ered villagers, and thelocal government 1Self *nterest1 defined as pro;ect preferences as revealed by the field

survey results!

"ue to their large si%e, the full versions of the systems cannot be sho$n in this paper!:igure belo$ sho$s a simplified version only! The sytem process steps are numberedfrom 3 to 35!

:*GU0E C Simplified "ynamic Politico#Economic System of a Locality

Some important sub#processes $ill be e'plained belo$! The models in this researchcontain one ultimate Level, the 1Perceived "evelopment Status1, and four intermediaryLevelsC Education Status, ousehold Population, Total Local Government "ebt andTotal .illage *ncome! These Levels are driven by all the au'iliaries in the system,$hich themselves are determined and driven by parameters, loo&ups, and time!Loo&ups are arbitrarily specified nonlinear relationships describing assumed orempirically derived relations bet$een system variables! Loo&ups thus force variables to behave according to a theoretical or empirical model!

The system dynamic process is based on a system of first#order difference e>uationsthat drive the au'iliaries and levels from time step to time step!

*t is important to note that the models of the four localities differ in t$o respectsC

• StructureC The researcher)s present base is Thailand! -ore detailed information

on the informal financing process in uay Dai could be gained from fieldresearch! This allo$ed the construction of a detailed model of the irregularfinancing process for the Thai locality! This $as not possible for the otherlocalities, $here a blac& bo' approach had to be applied $ith regard to irregular


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financing! Besides this small difference, the structures of the four localities areidentical, and designed to accommodate various degrees of grassrootsempo$erment and political state organi%ation ranging from dictatorship to afully empo$ered federalist system, depending on the values given to the

system)s structural parameters!

• Parameters and functionsC apart from the Barro and Sala#*#-artin 234487

gro$th parameters 2see e'planation belo$7, all other parameters and functionsare different from locality to locality! They represent the legal basis and the present politico#economic reality of each country and locality found through thefield research!

The full systems are very complicated and detailed representations of the villages) politico#economic reality! Their structure consist of the follo$ing elementsC

• uay Dai, ThailandC 38 au'iliaries and constants plus 3 loo&up functions, ama'imum of ?,@99 feedbac& loops and

• Labac, Phlippines orita, Spain Sch$ende, S$it%erlandC 3?= variables and

constants plus 3 loo&up functions, a ma'imum of ?,@99 feedbac& loops!

I3( $he D5namic 'arrative &f $he Local Politico0economic Process

The local planning and policy process devolved as sho$n in :igure above $henfollo$ing the numbered steps! To illustrate some of the more important processes,

detailed vie$s of the complete model are sho$n!

"evelopment :rustration as a result of steps 3 and is defined as the discrepancy bet$een actual and e'pected "evelopment Status, and gains in strength $ith increasingorgani%ational po$er of the villagers! +rgani%ational Po$er is defined as theorgani%ation memberships per villager as determined through the field research!0ueland and Ladavalya 2344?7 sho$ the importance of peoples) organi%ationalintensity in Thailand in the local political po$er play, and that in a first step to$ardsdevolution of political and administrative po$ers, local organi%ations and communitylife have to be built and strengthened! *ddagoda, !S!, and "ale, 0, 2344@ p! 57declare $ith respect to Sri Lan&a, 1+rgani%ation is, !!!, closely lin&ed to

empo$erment!1 According to the field research results, the organi%ational intensity ofthe villagers changes $ith changing household incomes! *t first increases directly $ithhousehold income, and then from a middle income decreases slightly to increase againfrom an above average income on$ards! :or each locality, organi%ation intensityloo&up functions $ere developed by means of a regression analysis! These changingvalues po$er the "evelopment :rustration 2steps 3 and 7!

Part of the regression output from SPSS and its translation into the S" model for orita


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is sho$n belo$ as an e'ample for the other three villages! See Table 8!

TABLE 8C orita SPSS 0egression +utput of +rgani%ation :re>uency as :unction ofousehold *ncome

Depen"ent variable &%GPA%$ 8etho" C9#IC

-ultiple 0 !84=8?

0 S>uare !?8?=@

Ad;usted 0 S>uare !83?4

Standard Error !9@69=

: Q ?!=98? Signif : Q !6?94

The +LS 0 result for >uestions , 8, and @@ of the survey 21Are you a member of a

political partyR,1 1Are you a member of any local organi%ation, association or clubR,11Please assign yourself to one of the follo$ing groupsC ho$ large is your total monthlyhousehold income appro'imatelyR17 in orita is only 6!?8?=@, and suggests a cubicrelationship bet$een organi%ation membership and income! *t is assumed that thisrelationship describes reality to some e'tent! The regression graph is translated into aloo&up function in the system dynamic model! The hori%ontal a'is sho$s incomegroup, the vertical a'is average organi%ation membership per person!

The relationship suggests that villagers first become members of local labor unions,farmer and house$ife organi%ations, and local political parties and then $ithincreasing income refrain from engaging themselves further! Beyond a medium

income, they become members in regional organi%ations and political parties or serviceclubs!

Translating the cubic regression into the system dynamic loo&up function, thefollo$ing values are found! -embership increases first from its original 6!899 value,i!e!, every person in the village is on average member in 6!899 organi%ations, to 6!4,then decreases to a value of 6! and increases again to a value of 3! The estimatedvalues entered are as follo$sC household income 36)666 Q 6!899 is set e>ual to 3,6)666 Q 6!4 Q 3!9 K 6!899, =6)666 Q 6! Q 6!?8 K 6!899, 96)666 Q 3Q 3!@@ K 6!899!This loo&up function drives the membership fre>uency variable in time as householdincome changes!

"epending on the local legal frame$or&, villagers are either given no direct fiscal nor pro;ect po$er, meaning the locality is ruled through a complete representativedemocratic system or they are given po$er to directly participate in pro;ect andIorfiscal policy decisions, i!e!, giving the villagers total po$er thus activating ta'ing and pro;ect po$er simultaneously! This means that the locality is ruled by a complete directdemocratic system 2steps ?, =, 87!


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:igure ? sho$s the education and culture pro;ect bargaining structure, $hich is one ofthe three pro;ect planning processes! The three pro;ect planning processes areCeducation and culture, $elfare and, infrastructure! *t sho$s ho$ po$ers and needs,$hich are empirical parameters, drive the planning processes to eventually reach acompromise plan decision! o$ever, villagers) needs and po$ers become effective in

the planning process only if villagers are pro;ect empo$ered!

The group sums of the councilors) individual S(A po$er measures $ere added torepresent the total bargaining po$er of the Social and *nfrastructure Groups $ithin thevillage council! A villagers) pro;ect pressure factor based on unfulfilled developmente'pectations $as added to this! The sum of these three factors represents the totalvillage political po$er and the group)s percentage in the total their relative bargainingstrength $ithin the village! These po$ers $ere then entered into the dynamic systems) planning module! The outcome is a compromise allocation in percent of the totalregular Local Government 2LG7 income 2step 9 in :igure 7!

:*GU0E ?C Su&hapiban uay DaiC The Education and /ulture Pro;ect BargainingProcess

(oteC *n the follo$ing model details the names of the local Thai administrative units are usedSu&hapiban Q Sanitary "istrict, is the lo$est political administrative unit $ith some legislative andta'ing po$ers of its o$n, since completion of the research, Su&hapiban have been upgraded to1 TessabanTambon1 $hich is to a status of lo$est -unicipality!

Pro;ect plans are tallied against available finances in steps @ through 36 of :igure ! *f planned e'penditures e'ceed available finances, and if irregular financing is possiblethen the councilors see& irregular finances from private sponsors or upper governmentsources! *rregular finances are mostly granted against promises to satisfy vestedinterests! *f irregular finacing is constrained or not possible, the LG see&s creditfinancing if allo$ed by la$! The total finances available to the LG are then dividedaccording to agreed plan allocations!

:igure = sho$s the regular financing process of a locality $here villagers $ant to push


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do$n ta'es and levies and local government is forced to increase them due todecentrali%ation of public services to the localities! Upper government is assumed toreduce contributions to the locality to a level of 8 percent of regular LG income!

The conditional e>uation of ad;usted local ta', charges and levy rate is sho$n belo$ as

an e'ample of ho$ e>uations must be entered in .ensim PLE!

23!7 Ad;usted local ta', charges and levy rate Q*: TE( ELSE2villagers) public finance bargaining po$er in a decentrali%ed system accordingto general =5 ffvillagers) pro;ect bargaining po$er in adecentrali%ed system according to general Q6,decentrali%ation ad;usted longterm overall local ta' and levy rate,villagers) ta' rate loo&up2villagers) finance pressure7decentrali%ationad;usted longterm overall local ta' and levy rate7

E>uation 3 above sho$s that the variable 1ad;usted local ta', chargers and levy rate1 issimply the 1decentrali%ation ad;usted longterm overall local ta' and levy rate1 if public

finance bargaining po$er and pro;ect bargaining po$er is set to 6, i!e!, if villagerscannot decisively participate in the financing nor in the pro;ects decisions! .illagers)influences become active only if they are empo$ered as revealed from the results of>uestions and =5 of the field survey, and the respective po$ers are set to 3 then theta' rate loo&up function becomes active!

:*GU0E =C Su&hapiban uay DaiC The 0egular Local Government :inancing Process

:igure 8 sho$s the irregular financing process of Su&hapiban uay Dai as an e'ampleof an irregular financing process! There are t$o parallel governmental setups in theThai localitiesC the /entral Governmental Setup $ith .illage eadmen 2Phuyai Baan7,Subdistrict ead 2amnan7 and "istirict Authority 2Amphur7 and the local governmentsetup, $hich $as the case at the time of the research, the Su&hapiban 2no$ TessabanTambon7! The structure also sho$s the connections of these local entities to the upper


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governmental levels, the Province 2/hang$at7 and the Provincial Parliament0epresentative 2Sor /hor7 and to the /entral Government -inistries and (ationalParliament 0epresentatives 2Sor Sor7! The lin& via outside 1sponsors1, here called1/hao Po1 2in EnglishC 1Godfather17, is also sho$n!

+n top of :igure 8 is the accountability pressure 2Steps 3? through 39 in :igure 7!This sho$s the development of accountability pressure, $hich is thought to increase$ith increasing education status, defined as accumulated private and public educatione'penditures! The higher the education status in a locality, the more constraints areimposed on irregular financing and public finance lea&s! Though :igure 8 sho$s thereality of uay Dai only, the process is similar in the Philippines according to fieldinformation!


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:*GU0E 3?C uay Dai "evelopment StatusC Policy /hanges from (o Empo$erment to:ull Empo$erment $ith Ta' 0ate 0educed by alf, and Education Budget "oubled

:*GU0E 8C *rregular :inancing Process Su&hapiban uay Dai

Steps 33 through 3= of :igure sho$ the lin&s bet$een e'penditures, gro$th anddisposable household income! Gro$th is modeled according to the empirical cross#country gro$th model of Barro and Sala#*#-artin 234487 and Barro 234447, $hich is based on the neoclassical gro$th model a la Solo$ 234897, S$an 234987 and 0amsey23457, enriched by government policies, human capital, and the diffusion oftechnology! Barro and Sala#*#-artin 23448, p! =37 define their function of a country)s per capita gro$th rate in period t, "y as

2!7 "yt Q :2yt#3, ht#3!!!7Hhere yt#3 is initial per capita G"P and ht#3 is initial human capital per person 2based onmeasures of educational attainment and health7! The omitted variables comprise a

number of variables such as government policies, mar&et distortions and others! "yt isassumed to decrease $ith increasing yt#3 and ht#3! This is the standard observation thatcountries $ith higher G"P gro$ slo$er than countries $ith lo$er G"P or healthstatus! This function specification represents the gro$th rate convergence hypothesis of Barro and Sala#*#-artin 234437!

:or the present research, it is assumed that the Barro and Sala#*#-artin regression parameters can also be applied to the local level, and that it is admissible to


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superimpose the local gro$th rates on the national gro$th rate! This $ould e'plain$hy the development status in all countries differ form region to region or even fromlocality to locality! *t is assumed that the local gro$th rate is enhanced by those public policies the local government can control independently, and by the private investmentsmade in the locality! Each local influence factor is multiplied by the respective

regression factors of the Barro and Sala#*#-artin empirical gro$th function! *t isassumed that these local gro$th factors enhance local gro$th in addition to the nationalgro$th factors!

The model)s gro$th function, in .ensim PLE language, is specified as follo$sC

2?!7 *ncome gro$th rate Q converged longterm average G"P gro$thrategro$th effect of the rule of la$gro$th enhancing effect ofinvestment e'pendituresgro$th enhancing effect of local educatione'pendituresgro$th reducing effect of local governmentconsumption

Thus the local income gro$th rate is determined by the follo$ing five main factorsC

• The first factor is a converged longterm average G"P gro$th rate! The national

gro$th rates are assumed to converge to percent p!a! as described in Barro234447! This is assumed to be reached at a household income of =6,666 US,$hich is the average household income 3445 in Sch$ende S$it%erland!

• The second factor is the gro$th reducing effect of local government

consumption! Barro and Sala#*#-artin 2BS-, 34487 estimated that governmentconsumption e'pressed in percent of national income 2here total village

income7 in per capita terms contributes #3!4 percent to the change of thenational gro$th rate, here longterm village gro$th rate!

• The third factor is the gro$th enhancing effect of local education e'penditures!

The BS- coefficient is percent of total education e'penditures e'pressedhere in percent of total village income!

• The fourth factor is the gro$th enhancing effect of investment e'penditures!

The BS- coefficient is ? percent of public and private investment in percent oftotal village income!

•

The fifth factor is the gro$th effect of the rule of la$! The BS- coefficient is!4? perecent! *t is assumed if the rule of la$ improves the gro$th rate isenhanced by !4? percent! *f it deteriorates the gro$th rate declines by !4? percent!

The rule of la$ is e'pressed as the sum of public finance lea&s and irregular financese'pressed in percent of total regular LG income, and is called rule of la$ inde'! Theeffect is based on the nac& and eefer 234487 country inde' prepared for the


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*nternational /ountry 0is& Guide, $hich is the basis of the Barro and Sala#i#-artinrule of la$ coefficient! nac& and eefer use a 3 to 9 scale $ith 9 indicating the mostfavorable and 3 indicating the $orst state of the rule of la$ present in a country! BS-have ad;usted this scale to a range of 6 to 3, $ith 6 indicating the $orst maintenance ofthe rule of la$, and 3 the best! ere the scale is transposed and divided by 36, thus 6!3

indicates the $orst and 6 indicates the best maintenance of the rule of la$! This $asnecessary because here the coefficient enters negatively into e>uation ?, $ith moreirregular finance decreasing the longterm average gro$th rate, as Barro and Sala#i#-artin use it as a positive effect! *t is assumed that the $orst state is reached $hen theirregular public finances in a locality reach 36 percent of total local village income!:igure 9 sho$s the local gro$th process!

:*GU0E 9C *ncome Gro$th Process

*n step 3@ of :igure , disposable household income, public e'penditures reduced bythe villagers valuation of the ta' costs incurred and, private investment determine the perceived development status attained through the villagers) development perception process! *n this process, the villagers) valuation of their infrastructure and non#infrastructure needs are e'pressed as percentage of all needs cited in the field survey,and are entered as utility values into valuation loo&up functions that drive the villagers)valuation of the local infrastructure and non#infrastructure e'penditures according tothe la$ of diminishing marginal utility! Table 9 belo$ reports the needs and ta' costcoefficients of the four localities!

TABLE 9C .illagers) Ta' Burden and (eeds as Percent of all (eeds /ited in uestion?6 of the :ield 0esearch

Localit5 Infrastr!ct!re 'on0Infrastr!ctire $a*


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'ee"s 'ee"s #!r"en

uay Dai @=!5J 39!8J 6!=38

Labac =8!?J 8=!@J 6!58

orita 3!J 5@!5J 6!=8Sch$ende 3@!4J 8?!8J 6!?68

The difference of the needs $ith respect to 366 percent accounts for the villagers $ho stated that theyhad no needs! As is to be e'pected, there are large differences in needs bet$een the localities! Astri&ing result is the lo$ value of uay Dai, and the high value of orita $ith respect tonon#infrastructure needs! These values represent the local culture >uite $ell! The Thaisare used to being independent and to helping themselves, a fact $hich greatly helped insoftening the effects of the recent economic crash in Thailand! The Spaniards, ho$ever,clearly assign the social safety net function to the state! The ta' burden values are alsoa clear reflection of the t$o countries) ta' levels! Thailand and Spain each charge

higher ta'es in their country category, and thus the villagers also give the perceived burden a higher value!

The ta' burden valuation is integrated into each S" -odel as described hereafter foruay Dai! According to 8@ of the field research in uay Dai, respondents assessed thevalue received from their ta', levies and fees payments on average as !?= 2standarddeviation 6!4=7 on a scale of 3 Q practically no value to = Q very good value! This scaleand the average value $as transformed to a scale ranging from 6 # 3 to match themetrics of villagers) development perception! The difference bet$een the average value!?=I= Q 6!858 and 3 23 # 6!858 Q 6!=387 $as then entered in the development perception as 2negative7 cost value, symboli%ing the cost incurred $ith the local

governments) efforts! This cost value is entered in the ta' burden function at the initialta' rate of 8!53 percent, and increases $ith increasing ta' rates!

The period#by#period aggregation of these perceived development and cost valuesestablish the perceived development status! *f the villagers) development e'pectations,defined as the previous period)s development status gro$n at the converged economicgro$th rate, are not met, perceived development status leads to 1"evelopment:rustration,1 and thus a ne$ process of bargaining and planning begins!

3( Local Government Polic5 Sim!lations

The system simulations presented here are limited to changes in people empo$erment,ta' rate changes and changes in public education e'penditures! As the title of this paper states, the ob;ective is to &eep the government sector as small as possible under theconstraint of the highest possible disposable household income and development status!:or space reasons, the simulations of policy changes are sho$n for the Thai localityonly! This should provide sufficient evidence, as the policy simulation results vary in


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degree only but appear to point in the same direction for all localities!

The simulations have a time hori%on of 86 years, $ith a time step of 6!38 years! :irst,the real actual local systems $ill be time simulated $ith changing peopleempo$erment status! The empo$erment status is determined by the local la$s and

$hether the villagers ma&e use of their legal rights as revealed in the field research!The status found through the field research in each locality is called real system! Thereal systems) empo$erment policy status is as follo$s!

TABLE @C The real local empo$erment statusC

Location I"entifier Definition

uay Dai Dreal people have no fiscal nor pro;ect po$ers, i!e! no po$er

Labac Labacreal people have pro;ect but no fiscal po$ers, i!e! pro;ectpo$er

orita oritareal people have pro;ect but no fiscal po$ers, i!e! pro;ectpo$er Sch$ende Sch$endereal people have pro;ect and fiscal po$er, i!e! fullpo$er

:igure @ belo$ sho$s the gro$th of disposable household incomes in the localities$hen the real systems empo$erment parameters are not changed! The values given onthe vertical a'is are real values in 3445 US! /urve 3 represents uay Dai, curve Labac, curve ? Sch$ende, and curve = orita!

:*GU0E @C "isposable ousehold *ncomes in The 0eal Systems

:rom the above simulations it becomes clear that $ithout massive economic and political changes orita, Labac and uay Dai $ill not be able to catch up Sch$ende


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due to Sch$ende)s very high starting value! The same applies to the development statusas sho$n in :igure 5! "evelopment Status is measured on the vertical a'is relative tothe initial level of Sch$ende, $hich had a value of 3! The development measurementsare to be interpreted as indicators of direction and position, and not as absolute orrelative changes in development status!

:*GU0E 5C Perceived "evelopment Status in the 0eal Systems

:igure 4 belo$ sho$s that the locality $ith the least empo$ered villagers, uay Dai,

eventually achieves the highest level of local government consumption! The place $iththe most empo$ered villagers, Sch$ende, has the lo$est local governmentconsumption ratio! The follo$ing analysis therefore concentrates on the differences inthe transition from total absence of villagers) po$er to full empo$erment in uay Dai!


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:*GU0E 4C Local Government /onsumption as Percent of -igration Ad;usted .illage*ncome in the 0eal Systems

:igure 36 belo$ sho$s that only full empo$erment can reduce the local governmentconsumption ratio in uay Dai, and as :igures 33 and 3 sho$, a policy of fullempo$erment $ould also be accompanied by the highest disposable income anddevelopment status!

:*GU0E 36C Local Government /onsumption uay DaiC /hange in Peoples)


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Empo$erment

:*GU0E 33C "isposable ousehold *ncome uay DaiC /hange in Peoples)Empo$erment

:*GU0E 3C Perceived "evelopment Status uay DaiC /hange in Peoples)Empo$erment

:igures 36 through 3 also sho$ that if villagers are financially empo$ered 2as sho$nin curve ?7 that they $ill hold government consumption do$n, resulting in lo$ ta'es in


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the locality, attracting investors! Their investments increase disposable householdincome and development status to a practically identical level as achieved $ith fullempo$erment! :ull empo$erment, ho$ever, achieves a some$hat lo$er governmentconsumption ratio! :inances are the &ey factors in the local development process! A policy $here villagers are given full financial empo$erment $ithout pro;ect

empo$erment $ould also be an efficient policy alternative to control the localgovernment, but this &ind of setup in $hich the &eys to po$er are given a$ay $ill probably not be found any$here in reality if citi%ens are not fully empo$ered already!

*n a second simulation, the local government of uay Dai halves the initial local ta'rate from 8!53 percent to !4 percent, and doubles education allocation from @ percentof the local budget to 3= percent! *ncreased education spending produces a highereducation status! This increases accountability pressure, $hich reduces irregularfinancing and finance lea&s! This enhances private investments and local incomes,$hich gives local government more regular income, enabling lo$er ta' rates! Thus thegovernment consumption ratio should also be pushed do$n!

:*GU0E 3=C uay Dai "isposable ousehold *ncomeC Policy /hanges from (o

Empo$erment to :ull Empo$erment $ith Ta' 0ate 0educed by alf, and EducationBudget "oubled

:igures 3? and 3= sho$ that the most po$erful driver for disposable income anddevelopment status is lo$er ta' rates! *ncreased education spending has only a minimaleffect on these aggregates! :igure 38 belo$ again demonstrates that full empo$ermentand ta' rate reductions &eep the local Leviathan at bay, and that increases in education


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spending is less po$erful in this respect!

:*GU0E 38C uay Dai Local Government /onsumption 0atioC Policy /hanges from (o Empo$erment to :ull Empo$erment $ith Ta' 0ate 0educed by alf, andEducation Budget "oubled

3I( Concl!sions

Table 5 belo$ sho$s the ran&ings of the simulation results! The target variables appearin the table head! The policy variations are found in the ro$s! :ull po$er means thatthe villagers are given and ma&e use of fiscal and pro;ect po$er, and no po$er meansthat they do not have these po$ers at all, or do not ma&e use of them! The policy end#results are ran&ed from 3 to =, $ith 3 standing for the policy $ith the highest end#valueand = for the policy $ith lo$est end#value!

A conspicuous result is that 1pro;ect empo$erment1 never ran&s first and, in fact,

ran&s last seven times! The reason is that pro;ect pressure $ithout villagers) financecontrol increases LG spending either through more irregular financing, or throughhigher ta'es, or both! igher ta'es and more irregular financing both have negativeeffects on villagers) development status perception and on private investment andgro$th!

TABLE 5C The Simulation 0esults of the Local Government Policy /hanges


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ScoresC "evelopment Status and "isposable ousehold *ncomeC 3 highest, = lo$estLocal Government /onsumptionC 3 largest, = lo$est

The >uestion, 1$hat policy controls the si%e of the LGR,1 can best be ans$ered $ith,1any policy mi' $ith fully empo$ered villagers!1 These are ran&ed 9 times $ith =,$hich means smallest LG consumption in percent of total village income! :inancialempo$erment is four times ran&ed $ith grade four and pro;ect empo$erment t$otimes! 1(o po$er, 1 produces the largest local government every$here!

:inally the >uestion, 1Hhich overall policy or policy mi' scores highest in terms of

lo$est government consumption, highest income, and highest development statusR, 1can be ans$ered as follo$sC

• :ull Po$erC 9 times smallest LG, combined $ith 8 times highest income and, ?

times highest development status

• :inance Po$er onlyC = times smallest LG, combined $ith ? times highestincome and, ? times highest development status

• Pro;ect Po$er onlyC times smallest LG, no highest ran&ing in income nor

development and

• (o Po$erC every$here largest government and practically every$here lo$est

values in income and development status!

The simulations clearly demonstrate that policy variations matter very much 1on1 thelocal level! Are there significant differences bet$een the Asian and EuropeanlocalitiesR :rom the point of vie$ of cause and effect of the policy variations, the


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ans$er is 1no1 but from the perspective of structural and process settings, 1yes1!

This is particularly obvious $here irregular finance practices are more prevalent! TheAsian localities are clearly more centrali%ed than the European ones! /redit financingis also less restricted in the European localities! -a;or differences are also found in

peoples) pro;ect priorities and valuation! *n the Asian localities, villagers generally $antmore infrastructure and protective services $hereas in the European localities,villagers prefer more $elfare and economic activity!

Another conspicuous difference bet$een the European localities and the Asianlocalities is that in the Asian localities 1:inance Po$er only1 is ran&ed first nine times,$hereas in the European countries this policy never occupies the first ran&! The reasonfor this is that financially empo$ered villagers e'ert pressure to enforce accountabilityof the LGs, and this reduces their irregular financing practices, thereby also reducingthe negative effect on private investments and gro$th! There is practically no irregularfinancing in the European localities! :ully empo$ered villagers create a >uasi#mar&et

bet$een government and villagers) interest groups! These cost minimi%ing, utilityma'imi%ing agents are beneficial for the development of a locality $ith a small LG!

%eferences

Aulin, Arvid! 345! The /ybernetic La$s of Social Progress, To$ards a /ritical SocialPhilosophy and a /riticism of -ar'ism! (e$ Dor&C Pergamon Press!

Bahl, 0oy and Linn,

Barro, 0obert

Brennan, G! and Buchanan


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S+/=64! /hicagoC University of /hicago!

/oyle, 0!G! 3449! System "ynamics -odelingC A practical approach, LondonC/hapman all!

eady, :errel et al!, eds!349! 1An Ecological ApproachC The Sala -odel,1 Ann ArborCPapers in /omparative Public Administration!

:orrester,


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Gro$th,1 uarterly

constraining the leviathan

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