An Analysis of the Vertical Allocation of Public Sector Resources in Ten Developing Countries

PSI's recent study on the role of the Local Public Sector in achieving sustainable development outcomesrelies on Local Public Sector Expenditure Profiles to measure the size of the local public sector. As opposed to existing metrics of local spending, these expenditure profiles consider not only the spending of elected local and regional governments, but look at all different funding mechanisms that allow funds to flow down to the local level. For instance, the LPS Expenditure Profile also takes into account deconcentrated expenditures (made by regional and local administrative bodies or departments) as well as central line ministry expenditures made directly (or through delegation) in support of localized public service delivery. This means that-when compared to previous measures-the Local Public Sector Expenditure Profile provides a much more comprehensive measure of the resources that flow to the local level in support of front-line service delivery.

The comparative analysis of local public sector finances reveals that there is considerable variation in the size and composition of local public sector expenditures between countries. Based on the sample of developing countries analyzed, it appears that in a "typical" developing country (to the degree that such a country exists) roughly 30-40 percent of public resources is spent at the local level. Around this average, the share of local public expenditures ranges widely from around 20 percent (e.g., Bangladesh) to around 55-60 percent (e.g., South Africa, Nigeria). It is hard to imagine that such huge variations in expenditure patterns do not have an important impact on the respective countries' development and service delivery patterns.

The analysis of LPS Expenditure Profiles further reveals the size and composition of local public sector expenditures in predominantly deconcentrated countries which-until now-were hidden from view. The comparison in the figure indicates that a wide range of practices exist in the vertical allocation of resources among deconcentrated countries, ranging from 19.1% in Bangladesh to approximately twice that level (44.1%) in Mozambique.

The figure also confirms the importance of looking beyond the expenditures of elected local governments alone, and emphasizes that in reality, countries pursue a multi-level approach to service delivery and development. This is revealed in the graph by the considerable differences between the level of devolved (local government) expenditures on one hand (in dark blue) and the total size of the local public sector on the other hand: one would get an extremely incomplete sense about a country's local public sector by looking exclusively at devolved local government expenditures rather than by looking at the total size of the local public sector. While, as expected, we find this to be true for predominantly deconcentrated countries (where the existing metric for local government finance overlooks the majority of local public sector spending), we also find this to be true for predominantly devolved countries, where it is not unusual for non-devolved funding streams to account for 25% or more of local public sector expenditures.

The patterns confirms the notion that local government sector expenditures (as currently measured by the IMF (2001), and frequently used as a measure of expenditure decentralization) are unlikely to be a satisfactory measure of (fiscal) decentralization in the developing world given the wide variety of mechanisms with which local public sector entities and services are being financed. As a result, any empirical analysis that has looked at the question of fiscal decentralization and economic development exclusively on the basis of the devolved expenditures is at best looking at only part of the picture.

For the purpose of this analysis, Local Public Sector Expenditure Profiles were prepared for ten countries: Bangladesh, Cambodia, Indonesia, Mozambique, Nepal, Nigeria, South Africa, Sierra Leone, Tanzania and Uganda. Click here to download the Local Public Sector Expenditure Profiles for these ten countries (XLS; 60 KB). Please refer to the Local Public Sector Country Profile Handbook (PDF; 3.26 MB) for a detailed description of the LPS Country Profile methodology.