SIGMA Support for Improvement in Governance and Management

A joint initiative of the OECD and the European Union, principally financed by the EU

This document has been produced with the financial assistance of the European Union. The views expressed herein are those of the author, and can 1

“EUROPEAN POLICY OPTIONS FOR THE DISTRIBUTION OF COMPETENCES ACROSS LEVELS OF GOVERNMENT”

MS. CLAIRE CHARBIT, REGIONAL COMPETITIVENESS AND GOVERNANCE, OECD DIRECTORATE FOR PUBLIC GOVERNANCE AND TERRITORIAL DEVELOPMENT

CONFERENCE:

PUBLIC ADMINISTRATION REFORM AND TERRITORIAL ORGANISATION: EMPOWERING LOCAL GOVERNMENTS

ANKARA

28 February – 1 March 2006

in no way be taken to reflect the official opinion of the European Union, and do not necessarily reflect the views of the OECD and its member countries or of the beneficiary countries participating in the SIGMA Programme.

Ms. CLAIRE CHARBIT

Claire Charbit joined the Directorate for Public Governance and Territorial Development (GOV) of the OECD in January 2004. Before this date she was an Associate Professor of Economics in Paris and her publications include articles on the local dimension of digital economics and on local public governance in the Information Society. On several occasions, Claire Charbit has served as an economic advisor to public organisations (the European Commission in international partnership research contracts, the French Ministry of Infrastructure, and the French Ministry of Research in public-private partnerships). She holds a PhD in economics, with a specialisation in institutional economics. In the Regional Competitiveness and Governance Division of GOV, she is in charge of multi level governance and its consequences on regional economic dynamics. Her activities include analysing the contractual approach of relations across levels of government and the various modalities of coordination among municipalities as well as contributing to national territorial reviews (Finland, France, Japan, etc.), on the topics of regional policy and decentralisation. She is the GOV coordinator of the OECD Network on Fiscal relations across Levels of Government.

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Introduction

1. How to ensure an efficient decentralisation so to improve outcomes of public policies for development? Answering this question is crucial for reasons related to both economic development and decentralisation processes.

2. Economic development (encompassing both economic performances and social concerns) requires an effective and efficient production of public investments and services guaranteed by a trustable, equitable and coordinated action of all levels of governments. In decentralised contexts, these objectives not only depend on central government decisions but have to be addressed by various interacting players at the different levels of government.

3. Multi-level governance, which can be understood as the exertion of authority and the various dimensions of relations across levels of government, has changed over the last two decades, especially because decentralisation has made local and regional governments more powerful and supposedly increased their capacity to operate their own development and management policies. Local and regional governments, for whom the economy is much more exposed to global competition than twenty years ago, want to have a bigger say in the setting and implementation of national policy measures. People at the local and regional level put pressure on the outcome of policy delivery, and require that publicly funded programmes have a real and positive impact on their lives. And last but not least, the main objective of regional policy is evolving towards enhancement of competitiveness and not only redistribution. Taking such trends into account, management and governance of public policies have become more complex and more demanding, involving multiple actors (public but also private) and requiring a rethinking of how central and sub-national governments should collaborate.

4. The first part of this note is a synthetic presentation of what decentralisation is and what are the main issues attached to this phenomenon. The second part is devoted to the reasons motivating decentralisation and the presentation of its possible advantages and risks. The third part further details the various dimensions and modalities of decentralisation and the fourth briefly presents decentralisation trends in European countries (more detailed information are available for some unitary countries in an annex). A small section will conclude this note, insisting on the crucial aspect of multi-level governance in decentralisation processes.

What is decentralisation and what are the main issues attached to this phenomenon?

5. Decentralisation is in the academic air. It is also very much on the policy ground. Developed countries, developing countries, transitional countries, federal countries, unitary countries – wherever one looks in the world these days, some kind of decentralisation seems to be taking place, or is at least being discussed. But what is exactly going on? And why is it going on? An incredible variety of rationales and institutional arrangements can be, and are, encompassed under the portmanteau label “decentralisation”. In short, formal authority has been dispersed from central states both up to supranational institutions and down to sub national governments.

6. Decentralisation is a process of reforming assignment of responsibilities among various levels of government. From a strict point of view it could mean that only Unitarian countries, evolving towards greater allocation of competences to sub national levels of decision are concerned by such an issue, while federal countries can, on the opposite, think about “centralisation” of some responsibilities devoted by the sub national authorities to the central level of government (or allocation of regional responsibilities to the local levels of government as a specific type of decentralisation). However the usual sense of decentralisation encompasses all these concerns, and can be understood as the processes of public decisions and actions set by various levels of government.

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7. Three main economic observations underline the necessity of such interplay of the different levels of government in decentralised contexts:

• Some basic fiscal information can help in understanding the variety of OECD countries choices and some general trends in decentralisation. The degree of fiscal decentralisation (defined as the share of sub national expenditure in all governments’ expenditure) varies from less than 6 % upon more than 50%, and in most countries this share increased between 1985 and 2003, partly expressing new responsibilities assigned to sub national governments. However the gap between fiscal autonomy (defined as the share of the own revenues of sub national governments in the total revenue of sub national government) declined or remain stable (with a few notable exceptions) (see Annex I). Accordingly, the dependence of sub national governments on transfers has increased. Fiscal decentralisation has led to increased sub national responsibilities in the area of spending, while at the same time, sub national governments have become more dependent on central governments for their resources.

• This fiscal dimension of the links among levels of government is just one aspect of the multi-dimensional feature of multi level governance. Regarding the assignment of responsibilities, other types of apparently contradictory trends can be observed. Central governments while devolving new responsibilities to sub national authorities, in order to both answer to the civic demand for bringing government closer to the people (favouring local democratic processes) and to organise an improved provision of public goods, are concerned by the control processes on standards of such public goods and the efficiency of local public providers.

• The results, again, are contradictory: while some convergence in per capita income among EU countries can be observed, this has not been paralleled by a convergence across regions. Indeed, variations in interregional per capita income have increased in some countries. In addition, this type of divergence can also be observed within regions. In short, the factors of national growth tend to be strongly localised in a small number of regions, so that promoting national growth would require improving the use of these factors within regions. Thus, dealing with increased regional income disparities may in turn call for a greater central government role.

8. However, beyond these economic considerations, it must be underlined that the political dimension inherent to the decentralisation process is as important as economic factors to an understanding of developments in central-sub-national relationships. Political decentralisation refers to the devolving power to locally-elected officials and whether different levels of government are elected in a representative fashion. This political dimension of decentralisation is often associated to the constitutional framework: the distinction between federalism and devolution/decentralisation in unitary countries is that in the latter the central state theoretically can take back the powers it has handed down, whereas in the former both levels are subject to the constitution. A federal country is a country in which the constitution guarantees the competences of the highest level of sub-national government and provides sub-national authorities with an appeal to the courts in case of infringement upon those competences. In practice strong forms of devolution resemble federalism since it is politically impossible for the centre unilaterally to change the settlement. Rather than make the formal distinction, then it is more useful to see sub national governments as more or less strongly entrenched, in a range of constitutional, legal and political factors (assigned competences are more or less exclusive to each level vs. competences are shared between levels; types of resources; allocation of civil servants; mechanisms of co-ordination between the levels; mechanisms of representation of the lower levels, etc.).

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9. Whatever the type of decentralisation and constitutional context, this is intended to guarantee that the decentralised units will have a capacity to act autonomously in a range of fields, while securing national-level policy goals and achieving harmony among the levels. Important trade-offs are attached to decentralisation, which are often linked to three macro-economic objectives: efficiency in public spending, equity and stability. However, as it will be seen, solutions to these trade-offs, always country-specific, are very much attached to political and institutional arrangements among different levels of governments.

10. There is a fundamental trade-off that has to be struck in any country between the extent to which its political system represents different local points of view and its capacity for effective political action. Some degree of decentralisation may, in some circumstances, be needed to maintain the nation-state, but too much decentralisation might render the state ineffective in coping with crisis. Another famous trade-off is between effectiveness and decentralisation and manifests itself with respect to redistributive policy, whether interregional or interpersonal. It is not “by chance” that the “welfare state” was a centralising state (Wilensky, 1975): only at the national level could the interests of the disadvantages be given enough weight to overcome those of local elites. To the extent that effective decentralisation implies in principle local autonomy in revenue and expenditure policy, there may thus seem to be an inherent conflict between subsidiarity and solidarity, between local autonomy and national redistribution. “The precise terms of such a trade-off, and whether there is a ‘breakpoint’ beyond which a country cannot both have its autonomous cake and eat its redistributive one seems largely to depend upon the details of local institutions and circumstances” (Bird, 2003, p.6)1.

11. Further developing this debate is crucial. Limiting the issues of decentralisation to short term and domestic macro-economic considerations impedes to consider the possible impact of this reorganisation of public responsibilities. In globalised contexts, where regional industrial specialisations are more directly in competition with other regions, policies have to focus on regional performance and its consequences on national economic development. Decentralisation, or more directly multi-level governance as it will be developed below, is a possible tool for improving regional economic performances and should not be limited to redistribution issues. Equity is certainly a condition but it is not the end of the decentralisation story. National competitiveness, strongly dependent of regional competitiveness, requires the exploitation of local potential through a more open voice let to sub national entities, the rich as the poor. Decentralisation can contribute to this openness, while maintaining rules of cohesion among regions and shared benefits.

Why decentralising?

12. Answering this question means paying attention to the advantages and difficulties/risks attached to decentralisation. Both can be either of economic or political types.

Economic reasons and difficulties

13. There is no strong consensus among experts on whether a centralised government system works better than a decentralised one. Rather, both approaches can work relatively well, or badly, depending on how successfully they exploit inherent strengths and minimise potential weaknesses (see Joumard and Kongsrud, 2003). When there is significant decentralisation, strong local democracy is a key precondition for a successful system, i.e. broad-based awareness and interest among the electorate in local policymaking

1 For Spahn and Franz (2002) for example, the incorporation of the much poorer eastern regions may have pushed Germany closer to this breakpoint. If even basically homogeneous Germany has a point beyond which those in richer regions are not prepared to expand their ‘span of concerns” to encompass those in poorer regions within their redistributive concerns, other countries would appear likely to reach this point at considerably lower levels of redistribution.

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supported by an effective local media. If this condition is fulfilled, and combined with appropriate steering and oversight by central government, the following basic strengths are usually argued to follow:

• A healthy process of competition and comparison between local governments in the provision of services and investment activities.

• Linked to this, progress in best practice from a process of policy innovation because the wide range of policy approaches provides a rich information base on what works and what does not.

• Public services and investment priorities that reflect local preferences and provide well-tailored responses to problems because of the strong in-depth local knowledge of policymakers.

14. However, there are also a number of potential weaknesses, most of which can be avoided by getting the allocation of responsibilities right and by having appropriately sized units:

• Competition in some areas of policy can be damaging, the classic situation being the risk of races to the bottom in re-distributive systems such as social welfare2

• Macroeconomic concerns such as fiscal discipline3, equalization and accountability are more complex objectives to reach in decentralized contexts

• Inefficiencies from a failure to exploit economies of scale, a standard example being where local governments are very small and do not co-operate in provision. Inefficiencies can also arise through excessive multiplication of administrative overheads or because local officials lack adequate expertise.

• Co-ordination problems and high transaction costs in making reforms. Difficulties can arise when coherence across policies provided by different levels of government is important. Multiple layers of government, especially when there are large numbers of units, also complicate political processes and can mean a slow pace of reform.

15. In addition to these weaknesses it seems that some assumptions are questionable (Tanzi, 2001). One of the strong theoretical arguments advanced in favour of fiscal decentralisation is that the preferences and the needs of citizens and taxpayers for public sector activities are better known to the local government officials than those who represent the central government. The reason given is that contiguity provides more information while distance reduces the amount of information necessary to make good decisions. This argument is assumed to be strong enough to neutralise the advantages that economies of scale in the

2 “Race to the bottom” also concerns less constraining environmental rules for attracting firms. From a general point of view, in decentralised countries each jurisdiction may introduce rules that lead to some de facto fragmentation of the national market. Residency or others requirements may restrict the movement of labour and various transparent or hidden obstacles may restrict the movement of goods and capital (domestic frontiers and customs). For instance, tax competition among states and regions, through different incentives for enterprises, may contribute to some misallocation of capital. And different sales taxes or personal income taxes may have influenced spending patterns and the allocation of labour. Thus, in many practical situations, decentralisation may be market constraining rather than market enhancing. 3 At times, sub national governments may pursue expansionary fiscal policy at the time when the national government is pursuing a contractionary policy - it is especially true when local governments can easily borrow.

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production of public goods and public services and in the generation of tax revenues. However, it may or it may not…..4

16. Another question concerns the link between decentralisation and corruption. Some papers have called attention to the potential connection between decentralisation and corruption. Others have attempted to refute the existence of such a connection or even argue that decentralisation reduces corruption. This debate is linked to the one of the level of development of local institutions, which are in a lot of countries less important than at the central level (the brightest people tend to join the central government where their long run career prospects are better, Tanzi, 2001). The question of transparency and accountable administrations does not lead to a univoque answer: for some authors, the national governments are likely to be able to create more transparent and more accountable public administrations, while for others, the proximity to citizens is a factor for developing more accountable behaviours. This question of accountability is a crucial one, depending not only of control over corruptions but more basically on available and trustable information (which are sometimes difficult to obtain from central levels of much decentralised federal governments).

17. Decentralisation, instead of improving allocation of civil servants, may generate larger public employment because of the need to have public administrations at more levels than in a centralised structure and because of the more limited ability to exploit economies of scale. In addition, while success or failure is difficult and often premature to judge, some common problems associated with decentralization’s impact on service delivery have begun to emerge (and are especially underlined in the World Bank documents on developing countries, see Ahmad et alii, 2005). The most frequently-cited problem is the lack of capacity at sub national levels of government to exercise responsibility for public services (in terms of ability to manage public finances and maintain proper accounting procedures).

Political reasons

18. There is an emerging consensus in the literature that resource distribution across sub national governments cannot be explained by efficiency and equity considerations alone, that political variables representing the incentives of central political agents are additional and significant determinants. Thus, sub national governments that are politically disadvantaged in that there are weak political incentives for central resources transfer towards them, risk having poor capacity for services delivery5. Regarding uncertainties or results of decentralisation in terms of usual good economic criteria (efficiency, equity and stability), it seems that instead of being motivated by economic principles, the main reason for the rising interest in decentralisation in many countries seems clearly to be political stability rather than economic, efficiency, growth or any of the other factors of strict economic type.

19. The decentralisation is often designed to bring public administration closer to the people and to reinforce local democracy. In addition, bringing decisions closer to citizens may promote their involvement in the democratic process. It has also been underlined, especially in developing countries, that an additional reason for decentralisation rests on improving service delivery because central public spending has not proved to be effective and some regions even remain “ignored” by central governments.

4 Another argument for decentralisation is the size of the government. The smaller is the role of government in a country (= the more the activities are privatised), the less need there is for decentralisation. In that sense, privatisation might be considered as a possible alternative to decentralisation for at least some of the government activities. Examples go from collecting garbage, to providing electricity, transportation water health services,...even jails or cemeteries can be privatised. Some of these are exactly the activities that are often in discussion for decentralisation (Tanzi, 2001). 5 Adopting independent commission, like in Australia, can be a relevant way for solving such problems and of course the more the grants are formula based the less the discretionary power of central governments can play a role.

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20. However the main political arguments for supporting decentralisation are the following:

• to balance within a constitution by providing a countervailing force to the central government so as to preserve democracy and enhance liberty (balancing power);

• to manage nationally diverse and divided societies by giving groups a degree of self-rule while maintaining the overall unity of the state (giving group autonomy). This argument will be developed in the next section on asymmetric decentralisation.

How decentralising ? There is no one optimal way

21. Whatever its rationale or form, decentralisation involves different dimensions: fiscal, political and administrative. After having précised this variety, two key questions about implementation of decentralisation will be addressed: its sequencing and the issue of asymmetry in regional approach. These elements are illustrated in Annex II, about four European countries cases: France, UK, Italy and Spain.

22. Decentralisation has invariably involved (or resulted in) changes in the fiscal structure of the State and hence in the nature and the scope of State activities (see Annex 1). It is not the place her to further analyse fiscal concerns on decentralisation, however it is necessary to recall that a large part of the literature on various modalities of decentralisation is linked to this analytical field, each case having to be positioned by the answers to the following questions:

• Who determines who gets what revenues?

• Who is responsible for what expenditures?

• How do intergovernmental transfers work?

• What degree of freedom do sub-national governments have with respect to borrowing?

• Who determines the institutional setting within which the preceding questions are answered?

23. In principle, the key normative fiscal rules suggest that for binding the various players in the inter-government game it is necessary that, if the outcome is to be efficient and responsible provision of public services in an equitable and stable way, the following things have to be included: clear expenditure assignments, giving the responsibility for determining the rates of some major revenues to sub national governments and distributing transfers by a predetermined formula, mainly provided through general purpose rather than earmarked grants.

24. Macro-economic stability also requires that sub national borrowing may initially have to be constrained by hierarchical controls, although in the longer run it should ideally become subject primarily to market constraints. “And finally, to make the whole system work, not only must the central government itself keep to the rules, but there should be an adequate institutional structure to ensure both the development of sufficient local capacity and, even more importantly to provide for periodic adjustments to meet changing circumstances and a forum for the resolution of the disputes that inevitably arise in any functioning intergovernmental system” (Bird, 2003).

25. All this is fine, but what is clear is that such rules are a long way from describing reality in most countries. Moreover, the relation of such institutional rules to the political issues that appear to be motivating much of the current concern with decentralisation seems to be at best remote. Consequently it is

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in concrete organisation, implementation of decentralisation steps and variety of treatment of decentralised units that useful information can be found.

26. Table 1 describes the key features of the political6, fiscal and administrative dimensions within the context of deconcentration, delegation and devolution. There are various degrees of decentralisation: In addition, there are different degrees of decentralization, which tend to be divided into three general levels: deconcentration, delegation, and devolution. Deconcentration occurs when the central government disperses responsibilities for certain services to its regional branch offices. With deconcentration there is no transfer of authority to lower levels of government; rather, decision-making has simply been shifted to national government staff that are located in the regions. In contrast, delegation occurs when the central government transfers responsibility for decision-making and administration of public functions to local government or semiautonomous organizations that are not wholly controlled by the central government, but are ultimately accountable to it. Delegation is often characterized as a principle-agent relationship, where the agent is induced to act in accordance with the wishes of the central government. Finally, devolution occurs when the central government transfers authority for decision-making, finance and management to quasi-autonomous units of local government, who are accountable to their constituencies for their performance. (Litvack, Ahmad and Bird 1998).

6 Political rules are far for being all encompassed in Constitutions. See for instance examples of formal rule: are regional governments represented in a senate at the federal level that can veto certain policies? Are there routinised meetings between federal and state executives at which binding decisions are made? However informal relationships are not to be underestimated: if decision makers at different levels of a decentralised polity are coordinated in a centralised political party, the polity may be far more centralised than it formally appears.

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Table 1: Key Features Distinguishing Degrees of Decentralization (From Evans and Manning, 2004)

Political Features Fiscal Features Administrative Features Deconcentration (minimal)

• No locally elected governmental authority.

• Local leadership is vested in local officials, such as a governor or mayor, who are appointed by and accountable to the central government.

• Local government is a service delivery arm of the central government, and has little or no discretion over how or where service is provided.

• Funding is provided by central government through individual ministry budgets.

• There are no independent revenue sources.

• Staff working at the local level are employees of the central government, and fully accountable to the center, usually through their respective ministries.

Delegation (intermediate)

• Government at the local level is lead by locally elected politicians, but they are accountable, or partially accountable, to the central government.

• Spending priorities are set centrally, as well as program norms and standards; local government has some management authority over allocation of resources to meet local circumstances.

• Funding is provided by the central government through transfers, usually a combination of block and conditional grants.

• There are no independent revenue sources.

• Staff could be employees of the central or local government, but pay and conditions of employment are typically set by the center.

• Local government has some authority over hiring and location of staff, but is less likely to have authority over firing.

Devolution (substantial)

• Government at the local level is lead by locally elected politicians who are fully accountable to their electorate.

• Subject to meeting nationally-set minimum standards, local government can set spending priorities and determine how to best meet functional obligations.

• Funding can come from local revenues, revenue sharing arrangements and transfers (possibly with broad conditions) from central government.

• Staffs are employees of local government.

• Local government has full discretion over salary levels, staffing numbers and allocation, and authority to hire and fire.

• (Standards and procedures for hiring and managing staff, however, may still be established within an overarching civil service framework covering local governments generally).

27. In practice, however, these different dimensions do not always line up. For instance, even though there may be locally elected governments that are accountable to their constituents, the degree of fiscal decentralization may be more characteristic of delegated authority. In some cases, there may be extensive fiscal autonomy in the form of taxing authority and formula-based unconditional grants, but centrally determined wage rates and establishment controls may effectively dictate how those funds are spent. Similarly, full local authority over hiring, firing and establishment controls may be overshadowed by fiscal arrangements that are governed by detailed conditionality. (Evans A. & Manning N. 2004).

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28. Another way for thinking about the variety of decentralisation frameworks is to pay attention to “ideal types” such as the ones developed by Hooghe and Marks (2003). These authors oppose two contrasted types of decentralised systems, Types 1 and 2 (see BOX 1).

Box 1. - Two contrasted types of decentralised systems

In Type 1:

• the sub central jurisdictions are multipurpose

• jurisdictions have mutually exclusive territories

• there are a fixed number of levels of sub central jurisdictions

• the whole system follows one uniform design.

The simplest such systems might involve, under a national government, a set of provincial authorities each with broad ranging, identical powers and responsibilities; and clear non overlapping responsibilities for a given territory and population. In most large countries there will be at least one other level of territorial public authority (local), which relates to the provincial level in the same way that the provincial level relates to the national level. These are the systems which are often thought as “normal”.

In Type 2:

• jurisdictions are task-specific

• with overlapping memberships

• the number of jurisdictional levels is unlimited

• and the design is flexible.

More “traditional examples” would include many empires, and the United Kingdom itself, in which the Channel Islands, England, Northern Ireland, Scotland and Wales each have a different relationship to the Crown. More relevant temporary cases are found in many large urban areas,, in which responsibility for different functions and services – schooling, police, road transport, rail transport, bus services, hospitals, planning, electricity, gas, water, economic development, etc. – are divided among many different bodies, each organised in their own way, with different territorial boundaries, different numbers of sub-levels, etc.

29. The second type is based on policy per policy considerations, while in the type 1, the unit of analysis is the jurisdiction7. In practice both types co-habit either because of asymmetric approach of sub national entities or because of “poly- centered governance” (Ostrom and Ostrom, 1999). Each type of 7 The first type is based on federalism, for which the unit of analysis is the individual government instead of the individual policy. For Oates: the traditional theory of (fiscal) federalism lays out a general normative framework for the assignment of functions to different levels of government and the appropriate fiscal instruments for carrying out these functions (Oates, 1999). In this model, a system of multi-task and mutually exclusive jurisdictions sets a ceiling on the dispersion of authority. The consequences are a limited number of jurisdictions: they must tend to be large enough to carry out multiple tasks (see the various policies of amalgamation during the 1970s and even currently in several European countries because existing local governments were perceived to be too small to function efficiently). Another consequence should be the limited number of jurisdictional levels: dispersion of authority is constrained by limiting the number of levels of authority

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system can work well in some contexts and show strengths and weaknesses. Once a level of governance is established, it is likely to become a magnet for additional competencies, even if this is not optimal from a pure efficiency point of view. This line of analysis also shows that multi level governance is based on path dependent systems: it is possible to add new jurisdictions but very difficult to suppress the previous ones (see the French decentralisation system).

The sequencing of the decentralisation process

30. Decentralisation is not an outcome, it is a process, and one that proceeds in fits and starts, occasionally with reversals. Furthermore, the way in which decentralisation is carried out – the sequencing, the choice among different forms of decentralisation and how the politics in managed – can be just as important to service delivery as the decision to decentralise itself. Ideally, sub national governments should first be given clarity about their functions and associated expenditure responsibilities and based on these, the proper assignment and design of tax instruments and transfers systems should be done. The rule that finance follows function appropriately defines this sequencing. In addition, to ensure service delivery and the exercise of devolved powers in general, administrative decentralisation should be implemented along with expenditure and fiscal arrangements. So function, finance and functionaries all need to be sequenced properly. Different sequencing trade-offs characterise decentralisation processes:

• Equalisation vs. competition: In theory, fiscal equalisation could be considered as a prerequisite for effective fiscal competition, by allowing levels of public service to be compared at comparable resource levels. By reducing ex-ante disparities across jurisdictions in providing comparable levels of public services at comparable taxation levels they act to level the playing field between poor and rich jurisdictions and/or between jurisdictions with differences in costs of providing public services reflecting exogenous reasons (including population density and geographical factors). So, equalisation is a prerequisite for a fair competition among jurisdictions. So in the process of decentralisation, equalisation is a first step (even if by impeding changes in costs differentials and reducing migration flows across regions, fiscal equalisation transfers may hold back growth in more dynamic regions and hinder necessary adjustment in less dynamic regions. Fiscal equalisation transfers may also create poverty traps, by reducing sub national government incentives to introduce growth-promoting policies (Joumard and Kongsrud, 2003).

• Allocation of spending responsibilities vs. autonomous resources: It is often the case that devolution of revenue raising powers lagged the rapid decentralisation of spending competencies, generating growing imbalances between tax assignments and expenditure functions (see “fiscal federalism” considerations in this conference).

• Learning by decentralising or decentralising on the basis of existing competences: The twin tasks of administrative devolution and building local capacity are closely linked, making the task of bringing this alignment about even more daunting. This leads to questions of sequencing between different aspects of decentralisation and whether to wait to build local capacity before providing local governments the autonomy to respond to local needs, or to let local autonomy precedes the creation of such capacity. Alongside fiscal resources and autonomy, a key issue facing sub national governments is the access to staff and human resources. Decentralised service delivery is difficult when sub national governments lack skills and institutional capacity. More often than not, administrative decentralisation claims far less attention than political and fiscal factors, with decentralisation proceeding without explicit staffing strategies or public administration reform. Administrative devolution is inevitably drawn out, often falling behind political and fiscal decentralisation. It is however an important source of failures in decentralisation implementation

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31. There are no one-size- fits-all answers to these difficult issues, but there are some principles dealing with the role of central government that are worth heeding in implementing decentralisation: a cooperative approach, at least for the first steps of implementation, can help to solve such issues: in particular by establishing learning networks among jurisdictions. However much effort is put into specifying the competences of each level, a large shared area will remain. There is thus a need for co-operation, both vertically between the centre and the lower level, and horizontally among the constituent units themselves.

Asymmetric treatment of sub national levels8

32. Virtually every country, federal or unitary, large or small, appears to offer some evidence of asymmetry in practice – between rich and poor, urban and not urban, capital cities and frontier territories, and territorial grouping based on language, religion, etc. Such asymmetry illustrates the adaptative nature of political institutions: it may be imposed from above, agreed to by all parties, or optionally chosen by particular communities. There are in fact two types of asymmetrical arrangements: some arise from political reasons, to diffuse ethnic or regional tensions, or for such efficiency reasons (economic type) as to achieve better macroeconomic management and administrative cohesion to enable sub national governments with differing capacities to exercise the full range of their functions and powers. The former type, clearly driven by non-economic concerns, might for example be implemented bilaterally through a staged –or contract9) approach under which those units that met certain standards (sized budget, institutional development) might be granted greater autonomy than others. Alternatively, administrative asymmetry might be applied more generally in accordance with predetermined rules.

33. Either type of asymmetry might be either transitional or permanent in nature, might have functional and financial dimensions, may be manifested by different degrees of autonomy of powers, through different degrees of representation in central institutions or though different applications of central laws. The results of such asymmetric treatments are difficult to assess since they can improve or worsen the efficiency and effectiveness of the public sector as a whole, improving or worsening the uniformity of services delivery or macroeconomic balance. And critically it may sometimes strengthen and sometimes weaken the allegiance of differentially treated communities to the nation state as a whole. The most important questions about asymmetrical decentralisation thus relate to its effect on the dynamics of political equilibrium, something which appears to be very context-dependent and not easily reducible to simple generalisations, (Bird 2003, p. 11).

34. A central problem in any decentralised country is to explain why rich regions are willing to “support” poor. Viewed from the recipient’s side, in a sense what interregional transfers do is to enable provinces to behave “badly” in such respects without paying the full economic penalty for their misbehaviour because of wrong incentives. Economists have frequently criticized such transfers for this reason. On one side it can be argued that transfers may remain with better incentives, not only aiming at short term efficiency but also for developing long run concerns (participating inn local capacity building). On another side such economic inefficiencies might be considered to some extent a necessary cost of political stability. Indeed at the extreme the total “rents” that are created and distributed through economic inefficient policies implemented for political ends may perhaps be used as a measure of political capital that has been created (Wintrobe, 1998). The linked result of such assessment is that it can be observed in some countries that the larger transfers went to those regions that could most credibly threaten to damage the nation-state by secession and/or withholding revenues. The sum of such “inefficient” transfers can thus be considered as an investment by the central government in securing the “loyalty” of recalcitrant regions. 8 Sometimes, see the European context, “asymmetry” has been referred as “variable geometry”. 9 A contract among levels of government is an institutional arrangement allowing diversity in coherent framework (see OECD, 2005).

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35. A particular concern in the respect of asymmetrical decentralisation relates to the phenomenon of globalisation. Asymmetrical policies may sometimes be required to elicit uniform responses to central policies from differently advantaged regions or for maintaining political stability. The economic and political factors giving rise to such policies have in many ways been accentuated in recent years by the much discussed phenomenon of globalisation. By reinforcing the disparities between regions and contributing to the pressure placed on them as to compete with one another, globalisation forces central governments to adopt differentiated policies. These policies are first concerned with political cohesion and redistribution. However, under the framework and with the support of the central level, these policies aim above all, to fully exploit regional advantages. Benefits at local and regional levels can thus contribute to national resources and wealth. Institutional arrangements supporting such "asymmetrical" choices, such as those provided by the contractual approach, can support for local initiatives in terms of economic development. The difficulty for central governments lies in taking into account two (simultaneous) forces: the globalisation of economic activities, which leads to more pronounced regional disparities, and the trend toward decentralisation, which decreases the capacity of central governments to regulate problems through the usual means of transfers or the authority.. Some form of fiscal decentralisation may be a sensible means of coping with downside risk by achieving a certain degree of risk pooling.

Decentralisation trends: Evidence from European countries

36. European integration has had important effects on federal and devolved systems. In the post-war years, there was a trend in Western Europe towards co-operative federalism and a blurring of the responsibilities of the two levels. In recent years there has been a move to competitive federalism and a clarification of the roles of the levels (Keating, 2006)10. The interest of efficiency, clarity and responsibility became stronger even if they have not affected different reforming states the same way. With globalisation regions are no longer complementary elements in a national development programme but rather competitors in European and global markets. Systems of fiscal equalisation have come under strain as wealthy regions complain that transfers are impeding their efforts to compete internationally. In these circumstances, the incentives to co-operation have been weakened. Such competitive “federalism” may be constructive if it involves regions developing their own policies, which may be taken up by others, or competing to demonstrate to their citizens that they are providing a high level of welfare. It can be destructive when it involves regions seeking to attract investment by cutting taxes, social programmes or environmental regulations in a process known as “race to the bottom”. Governments have responded with institutional change in diverse ways but with tendency to decentralisation.

37. A notable feature has been the rise of an intermediate or “meso” level of government between the centre and the municipal levels. Governments have found this an appropriate level for a range of functions, including economic development, planning and labour market policies. There have also been efforts to disentangle the responsibilities of the different levels of government in the interest of transparency, accountability and efficiency. This has applied both to functions and to fiscal powers. In practice, disentanglement has proved very difficult, since no fixed division of responsibilities can accommodate the changing nature of policy issues and social problems. Examples of federalism are quite rare, but some European states have divided powers in rather similar ways, using expressions like “devolution” (in the UK and now being used in Italy), the “estado de las autonomias” in Spain, and recent laws for “decentralisation” in France. The following presentation is mainly focused on unitary countries cases and is based on DEXIA, 2004.

10 Usual distinction is set between co-ordinate federalism –the classic type, in which each tier goes its own way- and co-operative federalism, for instance US vs. Germany. Over the years, co-ordinate federalism has tended to give way generally to co-operative federalism. The policy challenges of modern government no longer correspond to competences as defined in constitutions, fiscal imbalances arise as the level with most money is not always the one with most needs, the areas of shared tasks expands at the expense of exclusive ones, etc.

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38. The local public institutional landscape in the 25 European Union countries is characterised by a wide range of configurations made up of one, two or three tiers of local government, while at the same time displaying shared characteristics, such as the generally small size of the first local government tier (municipalities) and the extension of responsibilities for the higher local government tier.

39. Three contrasting situations can be found in unitary states:

• 5 countries with a three-tiered local government system: France, Ireland, Italy, Poland and Spain

• 9 countries with a two tiered local government system : the Czech Republic; Denmark, Greece, Hungary, Latvia, The Netherlands, Slovakia, Sweden and the United Kingdom

• 8 countries with a single government tier: Cyprus, Estonia, Finland, Lithuania, Luxembourg, Malta, Portugal and Slovenia. Most of the countries in this category are demographically small.

40. Trends towards “regionalisation”: 8 European Union countries have local governments named “regions”. They represent the third local government tier in France, Spain, Ireland, Italy and Poland and the second level in the Czech Republic, Slovakia and UK. Finland’s 19 “regional councils” are in fact ad hoc inert-municipal structures. In Portugal the central government project to create a decentralised regional tier was not successful, having been rejected by the population in 1998 referendum. The trend towards regionalisation in the European local public sector led either to the creation of an additional tier or to an extension of responsibilities devolved to regions. 5 countries have created regional local governments in the past years, namely Ireland (in 1994), the UK (in 1998 and 1999), Poland (in 1999), the Czech Republic (in 2000) and Slovakia (in 2002). Regional policy in the UK called devolution came into being with the creation in 1998 and 1999 of Regional Assemblies in Northern Ireland, Scotland and Wales. The regional tier in other countries (the Czech Republic, Ireland and Slovakia) was mainly created to bring the country into the line with EU regional policy: the territorial boundaries are generally based on NUTS statistical and planning criteria.

41. Projected regions: The creation of new regions is expected to continue in the coming years, since five other countries are planning to create a regional tier in the near future:

• the UK, where in England, where , in England the transformation of the eight existing regional development agencies into elected regional assemblies is currently under review,

• Hungary, with the transformation of the seven existing statistical planning regions into local governments,

• Latvia, with the creation of 5 regions to take over the current responsibilities of counties, which are state administrative structures at the local level,

• Slovenia, with the creation of a second local public tier.

42. Powers strengthened: More or less wide-reaching legislative measures have been taken in France, Italy and Spain to consolidate regional local governments’ powers, with regard to their responsibilities and/or financial resources. This trend continued in France in 2005. The most significant consolidation of the regional tier took place in Italy and Spain, where the reforms carried out in the 1990s expanded the responsibilities of regions and consolidated their fiscal autonomy. The transfer of new responsibilities to regions has generally been accompanied by a significant increase in their budgets. In Spain, for example, the budgets of the autonomous communities went from €56 billion in 2001 to €88 billion in 2002.

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43. Main responsibilities of sub national government: The main responsibilities exercised by sub national governments in virtually all the countries include:

• supply and distribution of drinking water, sewerage facilities;

• waste collection and processing;

• the arts, tourism and sports;

• education: upkeep of primary and secondary school buildings (and vocational schools in certain countries), remuneration of teaching staff inn slightly more than half of the countries (Denmark, Estonia, Finland, Hungary, Italy, Latvia, Lithuania, Poland, Slovakia, Slovenia to some extent, Spain, Sweden and the UK)

• social welfare: aid to the disabled, children, families, the elderly, people in, difficulty, etc. inn some of the acceding countries (in Lithuania for example) this responsibility can also include heating, water and transport expenses for low income families,

• electricity and city-heating systems (Denmark, Finland, Portugal and most of the acceding countries)

• public health: prevention, free medical care for the underprivileged; health responsibilities in several countries also extend to hospital management (Denmark, Hungary, Italy, Poland, Spain and Sweden)

• housing: management of rental properties, construction of social housing, allocation of housing or heating subsidies (in acceding countries)

• retirement homes

• local roads and local public transports services

• city and country planning, urbanism and economic development.

44. Municipalities are generally responsible for providing and managing basic community services, while higher-tier local governments are responsible for supra-municipal tasks. However certain responsibilities such as education, public health, social welfare, environmental protection, or economic development are often jointly managed by several sub national government tiers and sometimes also by the central State. In the sector of education for example, responsibility generally devolves to municipality for primary school, to higher-tier sub national governments for secondary education and to the State for higher education. The increase in sub national government responsibilities in recent years has mainly benefited the regional tier.

45. Local public expenditure/GDP is highest in countries in which sub national governments are responsible for the remuneration of teaching staff and/or hospital management which are the most costly operating expenditure items. Local public spending responsibilities are particularly extensive in Denmark, followed by Sweden, Finland and the Netherlands.

46. From the investment point of view, sub national government capital needs are numerous, mainly in the sectors of city and country planning, education and environmental protection. Local governments are very active in the environmental protection sector: water supply, sewerage, collection and processing of

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household waste, management of parks and rivers, reduction of air pollution via the creation of cycling tracks or the development of local public transport systems. Their capital expenditure requirements are further exacerbated by the obligation to bring infrastructure up to EU norms.

Conclusion

47. Decentralisation can lead to some difficulties in redistribution objectives. However, territorial devolution, inn combination with the opportunities for regions to mount their own economic development projects, to maintain their culture and to project themselves into European and international economic and political networks, has diminished the attractions of statehood and contained secessionist and irredentist demands. If decentralisation is an important political objective for a particular country, the country will have first to establish the institutions that will make decentralisation work with a reasonable degree of efficiency (institutions related to tax policy and administration, expenditure management systems, transfers systems, etc....). In real world cases, analysts are dealing with countries that, to some extent, are already decentralised. Decisions are made at the margin and the main issue is whether to decentralise more; It has to be recognised that the conditions for the success of decentralisation could, in theory, be created by the process of devolution itself and there are examples of local governments that are able to respond to the challenge of increased responsibilities. In other cases, more decentralisation means that the country pays a price in terms of efficiency and/ or stability.

48. It seems that there is a bedrock agreement that governance has become and should be multi-levels, however, there is no convergence about HOW multi level governance should be organised. What is perhaps more important is not the exact division of powers but that each tier should have its own defined powers and thus something on which to bargain in intergovernmental negotiations. At the same time, the central level needs the powers to secure its basic responsibilities.

49. An important issue: evaluation. Are decentralised systems more performant than centralised ones? “Dissatisfied with centralised approaches to delivering local public services, a large number of countries are decentralising responsibility for these services to lower-level, locally elected governments. The results have been mixed and above all the process of implementing decentralisation can be as important as the design of the system in influencing service delivery outcomes”. (Ahmad J., Devarajan, S., Khemani, S. and Shah, S. (2005). Decentralisation is not a one-off policy change; it is an on-going process where the end point of accountable and efficient local governments may well take many decades to achieve. In addition, in such a dynamic process where decentralisation processes across countries have different entry points with different mismatches, it is difficult to objectively measure decentralisation and its impact. In addition, in the process of institutional change, inertia and resistance can occur from those who have benefited from the previously centralised system, especially in terms of power, information and decision.

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References

Ahmad J., Devarajan, S., Khemani, S. and Shah, S. (2005) “Decentralization and Service Delivery”, World Bank Policy Research Working Paper 3603, May

Bird, Richard.M. (2003) “Asymmetric Fiscal decentralization: Glue or Solvent?” International Studies program, Working paper 03-09, April, Andrew Young School of Public Studies, Georgia State University

DEXIA (2004) Local finance in the twenty five countries of the European Union, Dexia editions, May

Evans A. & Manning N. 2004 “Administrative Decentralisation: A review of staffing practices during decentralization in eight countries” Draft paper prepared for the World Bank.

Hooghe, L and G. Marks (2003) “Unravelling the Central state, but How? Types of Multi-level Governance” in American Political Science Review, Vol.97 n°2, pp. 233-43

Joumard, I and Kongsrud, P. (2003) “Fiscal Relations across Government Levels”, OECD Economic Department Working Paper, n°375

Keating, Michael (2006) “Federalism and the balance of power in European states, paper prepared for SIGMA, OECD, January

Litvak, Jennie, Junaid Ahmad and Richard Bird. 1998. Rethinking Decentralization in Developing Countries. Report No. 21491. World Bank.

Oates, W.E. (1999) “An Essay on Fiscal Federalism”, Journal of Economic Literature, Vol 37, n°3, Sept.

OECD, 2005 Building competitive regions: Strategies and Governance, OECD Publishing

OECD, 2006 Territorial Review of France, OECD Publishing, to be published

Ostrom, Elinor and Ostrom, Vincent, (1999) “Public Goods and Public Choices”, in Polycentricity and Local Public Economies. Readings from the Workshop in Political Theory and Policy Analysis, ed. by Micheal McGinnis, Ann Arbor: University of Michigan Press

Spahn, Paul B. and Franz Oliver (2002) Consensus democracy and Interjurisdictional Fiscal Solidarity in Germany” Paper for World Bank Institute

Tanzi, Vito (2001) “Pitfalls on the Road to Fiscal decentralization”, Carnegie endowment for International Peace working Paper, 19, Washington DC: Carnegie Endowment

Wilensky, Harold (1975) The Welfare State and Equality, University of California Press, Berkeley

Wintrobe, R. (1998) The Political Economy of Dictatorship, Cambridge University Press, Cambridge

Annexes

Annex I Fiscal Federalism information in OECD countries

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Figure 1. Decentralisation in OECD countries: change expressed in percentage points, 1985 (1)-2003 (2)

Note: Decentralisation is measured by the changes in the share of sub-national governments in total public revenues and spending

1. Or earliest year available: 1987 for the United Kingdom, 1989 for Canada, 1990 for Japan, Luxembourg and the Netherlands, 1991 for Germany, 1993 for Sweden, 1994 for Finland, 1995 for Austria, Belgium, the Czech Republic, Denmark, Greece, Poland, Portugal and Spain.

2. Or latest year available: 2000 for Japan and 2002 for Denmark.

3. Excluding transfers received from other levels of government.

4. Excluding transfers paid to other levels of government.

5. The share of subnational revenues is expressed in percent of total government mainland revenues.

Source : OECD National Accounts database; Statistics Norway; Statistics Canada; US Bureau of Economic Analysis.

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Figure 2: Sub national government share in total public revenues and spending

Percent, 2003 (1)

Changes expressed in percentage points, 19851- 20032

Reve

nues

3

Spending4

Aut

Bel

CanDeu

USADnk

FinFra

Grc

Cze

Ita

Jpn

LuxNld

Nor (5)

Prt

Esp

SweGbr

-10

-5

0

5

10

15

20

-10 -5 0 5 10 15 20 25

Pol

Note: revenues consist of direct and indirect taxes and levies that flow to local and regional governments. Expenditures are measured as a percentage of general public spending. Transfers are shown at net value.

1. Or last available year: 2000 for Japan, 2002 for Denmark and Mexico.

2. Mainland only: data do not cover revenue from oil production.

3. Excluding transfers received from other levels of government.

4. Excluding transfers paid to other levels of governments.

5. The share of subnational revenues is expressed in percent of total government mainland revenues.3. Excluding transfers received from other levels of government.

Source : OECD, National Accounts; Statistics Norway; Statistics Canada; US Bureau of Economic Analysis.

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Annex II

Box 2. Decentralisation in France: the central government maintains an important role (see OECD, 2006)

In general it is difficult to summarize simply, clearly and precisely how responsibilities are divided among tiers of government in France, but the allocation across sub national levels is symmetric and their autonomy is limited.

History

In France, for over a thousand years, the State evolved to produce a nation through the gradual merging of the provinces. The basic principle of the French institutional structure is founded on a unique equation: one state = one nation = one people = one territory = one language. In this society, equality is supposed to be a normative rule. At the beginning of the 1980s, policy was still essentially in thrall to a centralised approach. Awareness of this situation led to the reforms of 1982. The decentralisation then undertaken was designed to bring public administration closer to the people and to reinforce local democracy, while at the same time rationalising the administration itself. Thus, the central government transferred responsibility in “blocks”, seeking to allocate homogeneous blocks of responsibilities at the appropriate level. In addition, in 1986, the regional councils were elected by direct universal suffrage.

Although this first stage, or “Act I”, of the decentralisation process does not seem to have achieved all its objectives, it brought a profound change to the French political and administrative system and gave a further boost to sub national government. In practice, however, the transfer of responsibilities has not been complete: quite apart from the basic functions of the central government (justice, currency etc.), none of the territorial responsibilities can be considered exclusive. Moreover, these trends have not yet called into question the existing structures of sub national governance. In effect there seems to have been a compromise between a strong tendency to maintain traditional governance structures (central government, department and commune) and the desire for a new model where the region’s role would be reinforced (at the expense of the departments) and where the number of communes would be drastically reduced (through highly structured inter-communalities, intercommunalités).

This initial stage was followed more recently by what is generally called “Act II” of the decentralisation process, with the new legislation of 2003 and 2004.86 Those laws not only reinforced the transfer of powers and responsibilities (to the departments, the regions and very marginally to the communes)87 but also entailed a constitutional reform. The region is now recognised in the Constitution. Moreover, the financial autonomy that sub national governments already enjoyed (in the form of freely disposable resources) seems to have been reinforced. The law now provides that taxes and other own-revenue sources must represent “a determined portion of all resources”. Finally, the transfer of responsibilities from the central government must be accompanied by the allocation of equivalent resources (just as for the creation or expansion of responsibilities that entail increased spending). The blocks of responsibilities are now allocated in the following manner (according to a schedule covering the period 2005 to 2008):

• economic development and vocational training are essentially assigned to the regions, as is territorial planning;

• major infrastructure projects (ports, airports) are assigned to the departments (départements) or the regions, as appropriate;

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• roads are assigned to the départements;

• social services, including health and services to the elderly, fall essentially to the departments;

• education and culture are shared among the different levels.

Local economic players are also associated with these provisions. On one hand, the chambers of commerce and industry may be consulted in the preparation of large-scale projects. On the other hand, the regions can count on the CESR (Regional Economic and Social Council), representing businesses, labour organisations, associations and individuals involved in regional development, for advice.

In fact most of the responsibilities are shared (except for vocational training which is a regional competence) according to an allocation that may be very clear, but is sometimes less so (see annex A, regional and departmental responsibilities). Education represents a case where this sharing is very specific: the central government retains responsibility for teaching, recruitment, management and remuneration of school personnel and university, while sub national governments assume investment and maintenance responsibilities for the primary schools (communes), the colleges (departments), and the high schools or lycées (regions), with transfer of technical personnel in the two last cases. However, the pattern is not as clear for other shared responsibilities, and even if there is an assigned co-ordination role, such as the region has in the case of economic development, this can conflict with the freedom of action at each level. This situation is the consequence of the constitutional principle of absence of hierarchy among sub national authorities (non tutelle d’une collectivité locale sur l’autre)

Main features

There are a large number of levels of public action: the State, the regions (26), the départements (100), and the municipalities or communes (36 560) to which should be added the supranational level of action (European organisms), and the interdepartmental levels (in mountain areas, for example) and most of all the intercommunal levels (over 17 000 groupings if one counts the 2 525 public intercommunal cooperation bodies and the 14 500 “communes associations”). Vertically, there are thus seven levels of administration in France and over 50 000 institutional actors (not counting the “pays”, see below). This multiplicity of public institutions undoubtedly generates significant additional costs. However, several other member countries practise forms of governance that are complex and even informal. The multiplication of levels and complexity of institutions is not a defect in itself, but it does mean that coordination is essential.

Beyond the accumulation of levels of decision-making, the French system has one peculiar feature: the coexistence, in a highly structured way, of decentralised levels (in the sense of being “elected by local voters”) and deconcentrated levels (by which is meant the presence of central government and its different ministries in the regions and the départements). This “parallelism” could lead the local authorities to go beyond the strict logic of transferring manpower (from the centre to sub-national) and encourage the creation of new public sector jobs. Unlike many other member countries, France has indeed registered an increase in public jobs over more than a decade, particularly at the local authority level. Furthermore, this trend gives rise to a somewhat ambiguous perception of decentralisation. This becomes clear when one considers the very major role played by the prefects (préfets) (i), the still somewhat ill-defined role of the regions (ii) or the rather narrow margins of manoeuvre of the local authorities (iii).

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(i) With the new laws on decentralisation, the regional prefect (préfet de région) becomes the pivot for central government action in the region, responsible for coordinating the different departments grouped around him and overseeing the coherence of the measures adopted in his territory. The préfet is also charged with leading the dialogue and negotiations with the elected bodies and their leaders. French préfets are thus one answer to a problem encountered in a number of OECD countries, namely that of inter-ministry coordination in regional policies. They also exercise a coordination function, not only between the different local actors but also between these and central government. However, while this is an undisputed advantage in terms of the coherence of regional policy, the new reform has increased the decision-making role of the préfet in the regions and départements.

(ii) The State does not yet seem to have digested all the implications of the recent creation of the regional entities (which are only 20 years old). Policy action is still shared between the municipalities, the départements, the regions and central government, without it really being clear which are the prerogatives of the regional level. Thus the regions are described, for example, as “coordinators” of rather than as “responsible” for economic development. A study of the data for 2002 shows that the three levels of sub-national authorities were very active in this area, essentially in the form of various kinds of aid to business. The rationalisation of such aid into strategies conducted at a sufficiently high level to avoid a scattergun effect is being done at the regional level, through initiatives taken in a sort of operational or even political vacuum. Some regions can count, in these fields, on the existence of a high social capital in their territory as well as adherence to the collective interest on the part of a majority of actors. In the context of French decentralisation, the Regional Councils could thus confirm their willingness to coordinate actions and to support the definition of joint strategies applied over the whole of the territory they administer, in conjunction with the other public actors involved.

(iii) Central government seems to be by far the greatest financial contributor to the territorial authorities. What is more, it might be emphasised that the nature of the budgets and mandatory responsibilities do not leave the different levels of the administration with the same type of decisions and missions. In practice, one of the features of the French regional system is that the Regional Council has a budget (and staff) that is much lower than that of the council of the département. Its primary role is to define the medium-term strategy for the region, while the council of the département is responsible for social policy, in particular in social affairs management, and maintenance. The involvement of the communes is focused more on local neighbourhood matters (urban traffic, primary schools, etc.). The communal and département levels therefore seem to be specialised around the management of public services that are very high consumers of manpower and redistributive budgets, and that offer a very low level of freedom, while the regions are more geared to the definition of strategies.

Box 3. Some elements about decentralisation in the United Kingdom: the choice of asymmetry

Government in the United Kingdom is centralised but not uniformly so. Institutions differ from one region to the next, and the number of administrative levels is not the same in urban and rural areas.

Thus, the "Nations" under the responsibility of the government at Westminster have elected regional structures: Scotland, Wales (no legislature powers) and Northern Ireland (where devolution is currently on hold). This level of government is not elected in the regions of England itself, however, where there seems little demand for greater local democracy: in a recent referendum, a proposal to introduce an elected regional assembly for the North East (Newcastle region) was overwhelmingly defeated.

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To this variety of regional status must be added the variety of local situations. The process of merging the communes has left only one decision-making level for urban areas, where the Council is the "Unitary Authority". Rural areas have “County Councils" under which fall the more numerous "District Councils". Finally, there are still some “parishes” in different places, with limited powers.

These different levels betray overlapping powers and the central government's presence is so strong as to suggest a tendency towards "prefectoralisation" (via the "Government Offices"), driven essentially by the weakness of sub national government. In fact, the Government Offices are to prepare "Regional Emphasis Documents" addressed to the Treasury and identifying priority areas for government spending in the regions. Their chief task however is to implement central government policies and the responsible ministry maintains control over each set of expenditures. The question of reducing the central government role in the delivery of local public services appears to focus essentially on using private operators rather than decentralised public units. This same tendency is apparent in the debate over the definition of regional strategies. The Regional Development Agencies (RDA) are councils made up of local business representatives and members of public commissions, are appointed by the central government. Their task is to prepare a document, the “Regional Economic Strategy" (RES), heavily focused on economic development and competitiveness issues (financing for these bodies comes from the Department of Trade and Industry). There are a number of agencies that oversee the work of this structure and other “QUANGOS” ("Quasi-Autonomous Non-Governmental Organisations" that deliver public services and whose members, although often from the private sector, are appointed by the State) and in particular the Government Offices that have sectoral responsibility.

Regionalisation thus seems more the product of iterative processes than of any co-ordinated plan. The system is characterised both by a high degree of centralisation and by the fragmented intervention of many players. The absence of an elected regional level contributes to this complexity, and regional governance thus relies on a great variety of organisations ranging from government agencies (appointed) to “quangos” (also appointed) and a wide assortment of arrangements between local and regional authorities and private players.

Box 4. Decentralisation in Italy: A constitution based on subsidiarity rules, but implementation concerns

According to art.114 of the Italian Constitution, “The Republic is composed of the Municipalities, the Provinces, the Metropolitan Cities, the Regions and the State.” This formulation of art.114 is the outcome of constitutional modifications introduced in 2001. Up until 2001, the system of sub-national government was three-tiered, including only Regions, Provinces and Municipalities. Thus, these three layers of territorial government have been in place for a while, while the set-up of Metropolitan Cities is still in the process of being implemented.

Italy is divided into 8104 municipalities, 103 provinces and 20 regions. The latter, in turn, can be categorized into 15 “ordinary” regions and 5 “special statute” regions, i.e. regions traditionally enjoying wider legislative and administrative powers. Moreover, one of the special statute regions, Trentino-Alto Adige, is divided into the two autonomous provinces of Trento and Bolzano that are in many ways akin to regions.

Decentralized national offices exist at each of the levels of sub-national government. Each municipality has a “municipal secretary” responsible to the Ministry of Interior of the legality of municipal action. In each province there is a “Prefect of the Republic”, nominated by the Council of Ministers and responsible to the Ministry of the Interior for maintaining public order. At the regional level, a regional commissioner exercises a supervisory role with respect to the administrative activities of all local authorities, including the regions.

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The 2001 constitutional reform has considerably augmented the powers attributed to the regions, rendering the structure of the Italian Republic more similar to that of a federal state. Most importantly, differently from the past, the powers of the Central State are expressly indicated, while regions are attributed (residual) legislative powers over all the subjects in which the constitution does not envisage the attribution of legislative powers to the Central State, as in federal states. Important differences nevertheless persist. The first concerns the nature of the matters over which regions can legislate. Indeed, the greatest part of ordinary legislation is reserved to the State, including civil laws, criminal laws and procedural laws. The second important difference concerns the fact that the regional layer of government does not enjoy a privileged position in terms of normative powers vis-à-vis the lower levels of sub-national government (Provinces, Municipalities and Metropolitan Areas). Finally, a third relevant aspect is given by the limited opportunity to participate to national-level decision-making accorded to Regions.

As a final note, it should be pointed out that ordinary and special statute regions have traditionally differed quite markedly in terms of the exercise of their financial autonomy. Until the 2001 constitutional reform mentioned above, special statute regions enjoyed both access to greater amounts of national tax revenues and greater freedom to impose their own taxes and levies as compared to ordinary regions. With the 2001 constitutional reform, the financial autonomy of ordinary regions has been significantly increased and brought more in line with that enjoyed by special statute regions. However, it remains to be seen whether the concrete operationalizing of the 2001 constitutional reform will determine a full assimilation of the two types of regions in terms of financial autonomy

Box 5. Decentralisation in Spain: greater autonomy at the expense of less transparency

Strictly speaking, Spain does not qualify as a federal state, as Article 2 of the Spanish Constitution declares the sovereignty and unity of the Spanish state and “recognizes and guarantees the right to self-government of the nationalities and regions of which is composed”. However, Spain can be described as a politically decentralized country with three tiers of government (central, regional and local) in which the distribution of functions and the system of governance are very close to those of a federal state (see., e.g., Moreno, 1997 and 2002). Regional governments (called ‘Autonomous Communities, AC’s) have their own legislature, executive and judiciary and, thus, carry state qualities. Moreover, the right of existence of AC’s is not merely derived from Spanish Constitution but is grounded in a basic law for each AC (called ‘Statute of Autonomy’) which is subordinated to the Constitution but is not an ordinary law.

Spain is comprised of 17 AC’s, which were established from 1978 to 1983. Actually, the powers devolved to each one are very similar, but they were not at the beginning of the decentralization process. The Spanish Constitution envisages two different decentralization routes, the one faster than the other. On the one hand, the Article 151 allows the AC’s with past history of self-government (i.e., Basque Country, Catalunya and Galicia) to get all the Constitutional responsibilities from the beginning. One the other hand, the Article 143 says that the other AC’s could also get the additional responsibilities (i.e., mainly the administration of the health and education systems) if some special conditions are met. The AC’s of Andalucía, Valencia, Navarra and the Canary Islands followed this route during the 80’s. Finally, as a result of a pact that took place in 1992 between the two main national parties (PSOE, on the left, and PP, on the right) also the rest of AC’s get the remaining responsibilities during the 90’s.

Summing up, actually the Spanish AC’s have responsibilities in a wide range of policies: health care, education, social services, environment, housing, economic promotion, agriculture, tourism, etc. They have both legislative competences in most of them, but the decisions of their parliaments are subject to the basic laws of the State. There is a general feeling by some AC’s that sometimes the basic laws are too detailed, not giving chances to further develop substantial aspects of the law. In any case, the AC’s have executive and budget powers in all these matters. Some AC’s (specially the historical ones) consider this behavior as an encroachment of the State over its competences. This problem grew since the accession of Spain to the

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European Union, since the State took all the responsibilities in transposing all EU legislation to Spain, even in the case of matters exclusive of the AC’s (see, e.g., Börzel, 2000).

As a result of this, the spending power of AC’s is now considerable. This government tier, born at the beginning of the 80’s, represented in 2003 the 42% of Spanish public expenditure (spending on pensions aside), a number higher than the 41% of the central government (and of the 17% of local governments). In addition to this, most of the funds received by the AC’s are unconditional, so this spending is managed rather freely. This pattern may be reverting actually, since the central government is making use of its responsibility on guaranteeing social rights to pass new laws that impose spending mandates on the AC’s (e.g., elderly care, housing, etc.). The AC’s complains about unfunded mandates have been successful in forcing the State to partially finance the costs imposed by these laws. This procedure has also been criticized on the grounds that the State is using its spending power to put strings on matters that are the exclusive competence of the AC’s.

The arbitrating role of the Constitutional Court is very important, since the court has capacity to decide in legal conflicts between the State and the AC’s, or even in case of conflicts between AC’s. Most of the conflicts have been related to the delimitation of the competences between one AC and the State. The high degree of conflict experimented in the past is due to various facts: the vagueness of the Constitution, the huge proportion of concurrent and shared matters but also to the fact that, the existence of both centripetal (the State) and centrifugal forces (historic AC’s) that try to influence the interpretation of the law.

86 The Constitutional Law of 28 Mars 2003 and the Law on local freedoms and responsibilities of 13 August 2004.

87 The communes have general responsibilities within their territory, in addition to their specific responsibilities for providing local services (assistance to individuals, communal roads, police, environment - waste management, water treatment etc.).

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