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Democratic decentralization and economic development

Kyiv School of Economics10 Sept 2014

Roger Myerson

Text:http://home.uchicago.edu/~rmyerson/research/decent.pdf

These notes:http://home.uchicago.edu/~rmyerson/kyiv.pdf

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Decentralization has a long history in England and America

The primary institution of medieval English government: the Exchequer, a court for public accounting of transactions between national and provincial governments.

Next great institutional development (1300), Parliament, was a national political forum for local leaders who were responsible for taxation.

In 1700s, turnpike trusts under autonomous local governments made England's roads best in the world, setting the stage for the industrial revolution.

American colonial governments included locally elected legislatures, to encourage English settlers to come to America and offer loyal service in local militias.

The Declaration of Independence claimed sovereignty for 13 provincial assemblies.The first transitional government of USA was characterized by decentralization and

parliamentary responsibility (Articles of Confederation, 1776-1788).

In 1776, every community had at least one local leader, its representative in the provincial assembly, who had a vested interest in defending the new regime.

The establishment of competitive national democracy after 1789 depended on the supply of candidates with proven records of public service in the 13 provinces.

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Autocrat's credibility problem & foundations of the constitutional state[APSR 2008]

Agents in a firm might look to state courts for contract enforcement, but not in a political faction that acts to take state power itself.

Political leaders are the highest guarantors of social incentive systems.

Political institutions are established by recognized leaders who can motivate a network of active supporters, who are needed to win power and wield it.

Any leader needs a reputation for reliably distributing patronage benefits to his loyal supporters (fundamental political law).

The state is a network of agents who could profit from abuse of power, and so must expect greater long-term rewards from good service (moral-hazard rents).Candidates would pay for such offices.

Promises of back-loaded rewards become a debt owed by the state, which leaders could be tempted to repudiate and re-sell the office.

Political leaders must guarantee the state's allocation of moral-hazard rents, but who can bind a leader who wields sovereign power of the state?

His supporters together have such power, if violation of norms could lose their trust.The foundations of constitutional states may depend on their leaders' fragile

reputations for reliably rewarding their supporters' loyal service.

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Federalism and incentives for success of democracy [QJPS 2006]...We should see leaders' political reputations as social capital of state-building.Even a benevolent autocrat would find it hard to resist supporters' urge for more

privileges if more exploitation of the public would entail no risk of losing power.

Will democratic competition raise standards? Voters would not reject a corrupt incumbent unless they could expect better from another candidate.

Democratic development depends on an ample supply of leaders with reputations for using public resources to serve the public, not just to give patronage jobs.

Promises of better government are not credible from one who has never held power.An incumbent leader at the top has no have incentive to raise voters' expectations.In federal democracy, local officials who provide better public service can become

strong competitive candidates for higher office.Responsible local governments become a source of trusted democratic leadership.

My QJPS 2006: with small transition costs and virtue rare, frustration of democracy is equilibrium in a unitary state but not a federal state.

Autonomous local governments can reduce barriers against new political entry into national democratic competition. (Local gov not better, but improves national.)

Ideally, local and provincial governments form a ladder of democratic advancement that successful leaders can climb into national politics by better public service.

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Other advantages of federal democracyNational political parties can also help to make local politics more competitive,

by sponsoring alternatives to unpopular local bosses.So each level of democratic politics can make the others more competitive.Structural pillars for successful democracy include a multiparty national assembly

and elected local councils, each funded with a transparent budget.

A community can mobilize resources for public investments only with local leaders who are trusted to appropriately reward contributors and discipline free-riders.

Such trust can be expected when leaders' are locally elected.Local officials whose positions depend on national political patronage are inevitably

less concerned about developing trust among the residents of a small community.See L. Fortmann, "Role of local institutions in rural development" (Botswana, 1983)

http://pdf.usaid.gov/pdf_docs/PNAAT392.pdf

Political decentralization can strengthen a state against insurgency, by ensuring that every region has local leaders with proven ability to mobilize residents politically and a substantial stake worth defending in the country.

Electing a national leader whose main power is to appoint local government heads may particularly exacerbate regional tensions.

(Candidates promise good government where strong, sell local offices where weak.)

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Forces against decentralization

Separatism may be tempting for leaders of a large province that can stand alone as a separate nation, but not when power is devolved to smaller districts.

(Risks of local democracy exacerbating ethnic tensions may be reduced by council responsibility of local executive, avoiding winner-take-all election for governor.)

New competitive entry into national politics is generally against the interests of incumbent national leaders.

Centralization lets the president allocate moral-hazard rents of local government, and then his key supporters may expect a powerful local office as reward for service.

A reform to let voters allocate local offices would be a costly disappointment for such key supporters, which is risky for any leader.

So political decentralization is often undersupplied, because it runs against the vested interests of those who hold power at the national level.

But federal democracy is stable once established, as elected governors and mayors then become vital local supporters for national politicians.

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Suppression of local leadership as moral basis of a backward societyEdward Banfield, Moral Basis of a Backward Society (1958), pp 155-163.

"That the Montegrani cannot act concertedly in the common good is a fundamental impediment to their economic progress."

"Amoral familism is not a normal state of culture. It could not exist for long if there were not an outside agency, the state, to maintain order and mitigate its effects. "

"A few persons, at least, must have the moral capacity to act as leaders.These need not act altruistically; they may lead because they are paid to do so.But they must be able to act responsibly to inspire morale in organization."

"The extreme centralization of power in the prefect, which is now one of the conditions preventing the development of a competent political style in the village, could be used to further an educational program."

"The suggestion here is for the rapid devolution of as many governmental functions as possible from the ministries in Rome first to the provincial prefects and then from them to local bodies which demonstrate capacity for self-government."

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Summary: What are essentials for democratic development?The foundations of the state depend on political leaders with reputations for reliably

providing benefits to reward their supporters.

Democratic competition for popular approval should limit elite benefits,but it may be ineffective if voters do not trust any alternative candidates.

Democratic development depends on an ample supply of leaders with reputations for using public resources to serve the public, not just to give patronage jobs.

This vital supply of trusted leadership can develop best in local government.Strong foundations for democracy should be both national and local.Local democracy strengthens national democratic competition:

Successful local leaders can become candidates for higher offices.National democracy strengthens local democratic competition:

National parties can support alternatives to unpopular local bosses.Ideally, municipal, provincial, and national democracy should form a ladder of

democratic advancement for leaders to climb by earning popular trust.

Incumbent leaders of a centralized state may have incentive to resist decentralization, and so it may be undersupplied.

But federalism can also be stable, as national leaders' reputations for working with elected local leaders within constitution limits become essential political assets.

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Some cross-national empirical studiesInformation about sub-national political institutions in many countries has been

collected by United Cities and Local Governments:http://www.cities-localgovernments.org/gold/

Other sources of information on local democracy in developing countrieshttp://home.uchicago.edu/~rmyerson/research/locdemocinfo.pdf

R. A. Ponce-Rodriguez, C. R. Hankla, J. Martinez-Vazquez, E. Heredia-Ortiz, "Rethinking the political economy of decentralization: how elections and parties shape the provision of public goods," (Aug 2012).http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1903106

They develop an international dataset on sub-national politics, find that local elections and party centralization together may improve educational outcomes.

R. Enikolopov and E. Zhuravskaya, "Decentralization and political institutions" Journal of Public Economics 91:2261-2290 (2007)

In a cross-national study, they find that devolving fiscal authority to sub-national governments can improve public services when parties are centralized.

See also J.-P. Faguet's book on Bolivia (2012), and World Development (Jan 2014).

See also G. Mansuri, V. Rao, Localizing Development (World Bank, 2013).