Proceedings Governance: Efficiency and Participation

The workshop examined the consequences for governance of the replacement of command or closed economies by market economies. The state's new role involves establishing clear rules and institutions that best allow markets to flourish—from the nitty-gritty of the budget process to overall procedures that reduce corruption.

Participants reviewed the progress of political decentralization within the region, concluding that the state can best facilitate development when organized as a partnership of national, regional and local authorities. This in turn necessitates a clear division of responsibilities and powers with regard to both expenditure and taxation.

Criteria of good governance

The political turmoil in Southeast Asia has shown that good governance is a necessary ingredient for sustainable growth. In his keynote address to the workshop, Professor Bernd Spahn, of the University of Frankfurt am-Main, put forward criteria of good governance: a legitimate government, stable and reliable political institutions, an accountable and responsive bureaucracy, and a market-oriented economy. An important aim of MDF2 was to promote debate about good government practices—including ways in which the state can build partnerships with regional and local authorities, establish and enforce incentives for integrity, and ensure a transparent and an accountable budgeting procedure.

Fiscal decentralization

Decentralization is a key means of achieving good governance. Sixty-three of the 75 developing and transition economies have begun transferring fiscal power from central to sub-national government. Robert Ebel of the World Bank outlined the advantages of decentralization—by which he meant the devolution of power to locally elected bodies, giving them responsibility for public services and the authority to impose fees and taxes. Such decentralization widens participation in decision making and legitimizes state institutions; it encourages more balanced investment around the country, less urban-rural migration and more sustainable growth. Effective local government enhances economic efficiency by using knowledge of residents' preferences to correct market failure, and it is more successful than central government in raising revenue from small taxpayers because it is better able to identify them and has a clearer incentive to bring them into the net.

Ebel addressed four challenges in designing and implementing fiscal decentralization: assigning functions between central and sub-national government; assigning taxes; setting up transparent grant transfers; and deciding the kinds of borrowing that local government should be permitted to undertake.

Decentralization in the Arab world

Many Arab countries have recognized the importance of local participation; but, argued Paul Salem of the Lebanese Center for Policy Studies (LCPS), the level of decentralization and local government remains among the lowest in the world. The concept of decentralization has not been well understood, and the political elite may see no advantage in initiating it. Decentralization has taken place only under political, financial or social duress. In general, governments have refused to abandon fiscal control, meaning that local government in the Arab countries is responsible for only 5 percent of total state expenditure, compared to at least 20 percent in the OECD countries.

In reality, central government grants a long but ineffective list of taxes and fees to local authorities, who in most cases lack the manpower to identify taxpayers or collect the taxes. Worse still, most expenditure is devoted to salaries and running costs at the expense of capital investment. Many municipalities in the Arab countries face central control, a narrow tax range, irregular elections, lack of clarity in delineating services, and a shortage of expertise and material resources.

The workshop highlighted the need for further research into the role of regional government; into methods of allocating expenditure and revenue-raising between regional and local governments, and into the managerial capacity of institutions and personnel in both; into the technical efficiency of the use of budgeted resources; and into methods of identifying, assessing, and collecting taxes, and ways of identifying citizens' needs. Four case studies were presented: Morocco and Tunisia by Professor Francois Vailliancourt of the University of Montreal, Egypt by Professor Sayed Ghanim of the University of Cairo, and Lebanon by Michele Touma of LCPS.

Morocco has 65 provinces responsible mainly for rural investment and development. They are headed by a centrally-appointed governor assisted by a provincial council chosen by 1,544 directly-elected municipal councils. Provinces and municipalities have been increasingly active in the 1990s, benefiting from a more open central government policy, increasing revenues, and encouragement from their European partners. Since 1997, municipal and provincial councils have elected two thirds of the new upper house of parliament, allowing them better representation nationally. Municipalities are responsible for local roads, lighting and garbage; they share service responsibilities for urban transit, water and sewerage. Their revenues come from a variety of taxes assessed and collected both locally and nationally: an important source of revenue since 1988 has been a 30 percent share of national VAT (value-added tax).

Tunisia is divided into 23 regions, each headed by a centrally-appointed governor assisted by a consultative assembly composed of the region's deputies, its mayors, and central government appointees. Within each region are urban municipalities and villages. There are 256 urban municipalities whose councils are popularly elected, and whose councils, in turn, elect their mayor. Villages have only consultative councils.

Tax revenue for local government comes from built real estate and business taxes, plus tariffs and taxes on hotels, restaurants, markets, slaughterhouses, and the like. Central government transfers amount to 35-40 percent of local revenues and, unlike Morocco, this fund is not linked to any particular tax. The regions assist the villages and rural areas, while the urban municipalities are responsible for services and small public investment projects in towns and cities. Local government in Tunisia may also borrow at favorable rates from the national lending agency. Although the overall situation of local government in Tunisia is not as advanced as Morocco, there are areas of marked success.

Egypt is divided into 26 governorates, each headed by a centrally-appointed governor assisted by an appointed executive. Below the governorates are 126 markaz or districts also headed by a centrally-appointed official. Below that level are 4,496 village municipal executive councils and 199 city municipal executive councils—all appointed. At each level of administration (governorate, district, municipality) there is an elected People's Council whose powers are consistently overshadowed by the powers of the appointed official and the executive council.

Local and regional authority budgets are not autonomous but part of the annual state budget that requires the approval of government and parliament. Although spending on the governorates, districts, and municipalities in Egypt has gone up, four-fifths is consumed by current expenditures such as salaries and interest on loans. Governorate and district revenues include taxes on urban real estate, agricultural land, motor vehicles, driving licenses, and entertainment, while central government revenues partly diverted to the regions include taxes on imports and exports, and mobile capital. People's Councils draw on limited resources: the bulk of spending is in the hands of officials who are more responsive to their central government bosses than to local demands.

Lebanon has six governorates, each headed by a centrally-appointed governor. Below the governorate level are 26 cazas (districts) also headed by appointed officials. Below the cazas are over 700 municipalities, whose councils are elected by registered inhabitants. Municipal revenues are all set centrally and are of three types: locally collected taxes; revenues collected by central agencies on behalf of each municipality; and centrally collected revenues. But most of the funds collected supposedly for the municipalities have been rerouted to the Council of Development and Reconstruction and the Ministry of Municipal and Rural Affairs. After long years of war and an absence of elections for 35 years, most of the municipalities are dilapidated in human, material, and financial terms. After the recent elections, which were quite free and fair and witnessed a high level of participation, municipal activity will probably increase.

Corruption and its causes

Daniel Kaufmann, of the World Bank, presented recent research showing that corruption lowers investment, increases business costs, and ultimately reduces growth. According to rating agencies, eight Middle Eastern countries face an almost 50 percent likelihood of losing investment because of corruption. Libya tops the list with 75 percent probability, followed by Syria and Egypt with 65 percent, Algeria and Turkey 55 percent, and Jordan 50 percent. The judiciary's uncertain role in enforcing property rights and settling commercial disputes deters foreign investment. One survey found that 40 percent of firms in Egypt reported judicial corruption, and that bureaucratic corruption occurred in 45 percent of cases in Egypt, 40 percent in Jordan, and 35 percent in Turkey. Corruption is not confined to the public realm; research has found it rampant in the banking sector in Syria, Libya, Yemen, Turkey, Kuwait, Egypt, and Jordan.

Corruption takes place where regulatory intervention is high, where bureaucrats have regulatory discretion, where economic incentives are poor, and where the judiciary is weak. Civil service professionalism, credibility of government contracts, civil liberties, and women's rights all have a negative relationship with bribery. There seems to be no relationship between corruption and the government's ideology, GDP per capita or religion. The picture is not static: according to one assessment, corruption in Lebanon improved between 1992 and 1995, reaching an index of four out of ten, but rapidly bounced back by 1998 to a score of ten (the worst). Another survey has found corruption declining in Egypt, Turkey and Jordan over the last five years.

How can corruption be eliminated? In Palestine, said Azmi Shuaibi, a member of the Palestinian Council (Ramallah), the parliament has attempted to fight corruption by exposing the behavior of certain officials but the weakness of institutions, the Palestinian Authority's lack of resolve and incomplete laws have prevented any serious attempt to eradicate the problem. Ali Belhaj, of Maroc 2020, explained how a group of business associations in Morocco have formed an alliance to penalize corrupt operators through economic action.

Workshop participants argued that a strategy for reducing corruption should emphasize the reform of government agencies including customs; civil service reform including pay scales and restructuring; strengthening judicial independence: economic deregulation and tax simplification; financial controls including audit, financial management, and procurement reform; and wider measures such as public education. The workshop concluded that there is a serious need to conduct country case studies, through which time series analysis can be utilized to understand the causes of corruption.

Budget process

Many developing countries have suffered high budget deficits in recent years, leading governments to reduce public spending. The issue of how to use resources efficiently has become a serious concern. Hadi Esfahani of the University of Illinois analyzed the management of public expenditure, examining how the institutional arrangements governing the budget process affect the allocation and use of resources.

In analyzing the budget process in Turkey, Itzak Atiyas of Budget Institutions in Turkey, highlighted the lack of formal constraints. He identified off-budget spending, non-cash borrowing to finance accumulated off-budget spending, and quasi-fiscal deficits. As a result, Turkey is suffering from a high budget deficit while simultaneously experiencing underprovision of public goods and services. Research on Iran by Farzad Taheripour, of the Iranian Institute for Research in Planning and Development, also confirms the importance of institutions: the legislature, which dominates preparation of the budget, feeds overspending through allocating resources outside budget provision without accountability and transparency.

Rapporteurs: Sami Atallah and Rana Houry
Co-ordinator: Lebanese Center for Policy Studies (LCPS)

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