Local government in the postcommunist era



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LOCAL GOVERNMENT IN THE POSTCOMMUNIST ERA

By Donald Fuller, American University of Armenia





  1. Local Government During Postcommunism1




    1. Background

The central question with which this paper is concerned is whether or not local government in postcommunist countries is real, virtual or cosmetic. The core of our observations concerns the interaction of the political and administrative systems.2 It will be argued that local government in postcommunism, while possibly somewhat real in Central and Eastern Europe, is cosmetic in the Former Soviet Union, excluding Russia which is a separate case and transcends the intent of this paper. In essence, the FSU is being governed from the center. Naturally, Russia is an exception (though a very complex one). There, the “center” is yielding to the periphery though Putin’s actions are attempts at recentralizing. Russia spans 11 time zones, encounters fractious ethnic forces, and concentrates on sorting out central problems nationally. Local government in Russian regions wrested portions of control from former President Yeltsin through power sharing agreements, which he deemed necessary in view of election tradeoffs. Analysis of Russia, however, will only be included in this paper when postcommunist comparisons are helpful. Reference to Central Europe (Hungary, Poland, Czech Republic and Slovakia) will be included, should it illuminate similar problems in the FSU. Others3 have delineated central European differences, acknowledging some similarities.


B. Central Argument
It will be the central argument of the paper that a culture of mistrust exists in the FSU between the citizens and their politicians that will initially affect the success of local government; second, from a political and economic standpoint, there are reasons to centralize rather than decentralize; third, it will be argued that the nexus of the politico-administrative relationship will determine the form and process of local government.
C. Centralization/Decentralization

The focus in deciding the reality of local government is typically argued with respect to the degree to which government is centralized or decentralized.4 Decentralization requires devolution of authority to the local government level. This level may be thought of as first tier: cities, towns and villages, or second tier: provinces, departments, districts, republics, regions, or in the case of the U.S., states. The concept of deconcentration is a separate one. Deconcentration occurs when the central government co-locates one of its functions at the local level (first or second tier). Thus, the French, for years, had the prefect. The prefect was a representative of the national government. The prefect carried out national functions while at the same time exerting influence within the prefect’s geographical jurisdiction. Deconcentration is not decentralization. The pattern of deconcentration may be found not only in the FSU but also, extensively, in Latin America. While there are exceptions, deconcentration is not prevalent in the U.S. Even the French have vacillated in employing the practice. The West seems more comfortable with federal and unitary governments. It is likely that the FSU will experiment with the prefect for some time. It may eventually revert to the unitary state. Despite this, western advisors and technical assistance assume that decentralization is the road to democracy and economic development.



D. Economies
Economics of the FSU suggests (again, the Russian case is more complex) that only a drastic change in foreign direct investment could bolster macroeconomic development to permit more assistance to local government (leading problematically to unitary government) or direct investment in local areas to resuscitate lost or moribund state enterprises, or conceivably, housing markets. Unlike Central Europe, it is not viewed pragmatically that such investment will be forthcoming for years to come in the FSU. If such economic development were to occur at the local level, one would assume that the total economy of the country would increase. At present, funds provided at local government levels must largely originate from the central budget, thus decreasing that which might enhance macroeconomic development. There is a conflict between trying to strengthen both macroeconomic and microeconomic development at the same time (it is not impossible though the dearth of foreign direct investment is unlikely to permit this to happen).
E. Politics
1. Westerners might argue that without decentralization and local government, democracy is impossible. Of course, this becomes a self-fulfilling prophecy. If you turn it on its head, then democracy is not possible without decentralization. Can one say that the Netherlands or the U.K. or Taiwan are not democracies? They are significantly centralized. Switzerland is probably one of the most decentralized governments in the world. Is this a true democracy? The women of Switzerland would be willing to argue with you. If decentralization seems unlikely in the FSU, is there no chance for democracy? Not necessarily. A unitary government may be democratic. Contract cities in the U.S. are units of the state government. Few of them would argue that they are not democracies. Thus, one can argue that it is not the form of government that will necessarily determine democracy. It is not even the economic development. One may need to measure democracy in other ways. If the west persists in pushing for local government while the supreme courts of the national governments are deciding cases for political or corrupt reasons, it will not make much difference to measure the extent of decentralization at national and local levels.5
2. Though political parties are just emerging in the FSU, they are aware of political trends at local levels. Any sharing of funds from national coffers must be seen realistically as attracting partisan, political attention. Release of national funds to assist a city outside the capitol city, will be subjected to partisan scrutiny. Thus, flows of funds to assist impoverished or needy cities will encounter partisan bickering over which cities or locales are the most “needy.” Both the executive and legislative branches of governments prefer to provide aid to “friendly” political environments. Thus, unless formulae are developed which provide aid on the basis of population, unemployment rates, per capita income or other “non-political” measures, one can expect partisan allocations.6


  1. Complications of the Transition Period

A. Employment




  1. Privatization, whether or not it was forced upon national and local politicians seems to have reduced the number of jobs rather than increased it. Despite a one-time cash windfall to FSU governments, the result has been, with a few exceptions, to create a buyout of state enterprises by enterprise managers and employees, particularly in privatizations occurring by vouchers. Politicians have found greater favor in selling off whole enterprises that previously held a state monopoly such as electricity, telephone, and telecommunication. Exceptions were enterprises such as Armenian cognac, which already had an international market. Countries with significant commodities such as gas or oil (Russia, of course, and Kazakhstan, Azerbaijan and Turkmenistan) tended to maintain government ownership in order to reap the profits. In many cases, enterprises located outside capitol cities and in decentralized areas were left to rust while the windfall to the government was only that which vouchers could produce after being discounted for expropriation of most things of value. Thus, from a political-administrative perspective, privatization tended to create unemployment, reduce local income, obliterate the local tax base, and create significant social welfare needs including the need to maintain housing, education and health facilities in the absence of former state enterprise responsibility. Consequently, the center-periphery mix created local dependency on national largesse while at the same time shifting jurisdictional responsibility to local government and ruining its ability to finance required services.




  1. At the same time that local economies were collapsing, national governments, by law, shifted functions to local governments that had previously been provided by state enterprises (now unable to provide such functions). Thus, while employment in the former enterprises dropped drastically, the newfound local government functions did not generate replacement jobs. Local governments became responsible for regulation of private utilities such as water supply and water systems, maintenance of streets, roads, public squares, parks,7 primary education, primary social and health care, housing and public works.8 Finally, the percentage of workers continuing in agriculture, either as privatized or non-privatized, constitutes an excess, which lowers per capita productivity. In Armenia, 41.3% of the workforce is employed in agriculture and forestry (now privatized) as of 1998.9 Non-farm employment tends to concentrate in construction, services and industry. Outside capitol cities, such opportunities vary widely.




  1. Blanchard (1997) identified two significant outcomes in Polish unemployment that have been replicated in Armenia and, presumably elsewhere in the FSU. Despite the high levels of job destruction during 1989-91, (p. 89) and the low levels of job creation, employees reduced their normal quit rates to compensate for layoffs. Those hirings that did occur, occurred directly from among those already employed, rather than among those unemployed or non-participating (p. 90). Therefore, a “stagnant pool” of unemployment continued. This phenomenon was paralleled in Hungary (71% came directly from employment). One might assume, then, that active workers are continually searching for either additional employment or new jobs with higher salaries. Thus, the “stagnant pool” of unemployment creates a dilemma for both politicians and administrators: the capitol cities cannot absorb this group plus struggling farmers (China has, perhaps, the most serious problem in this respect); while local politicians and administrators must cope with an expanded social safety net not bolstered by higher tax collections.




  1. Armenia has a very high mobility coefficient. In 1997, 57.6% of employed changed their workplaces as opposed to 23.1% in 1994 (UNDP1998). Official employment figures throughout the FSU can hardly be believed. Swelled by underemployment, large portions of workers struggle economically on a daily basis. In Armenia, women constituted 70% of official unemployment; 56% of whom had secondary education and more than half of whom were 31-50 years old (UNDP 1998). To show the disparity with the capitol city of Yerevan in Armenia, the official unemployment rate for Shirak District was 24.8%, as compared to 11.1% in Yerevan. The national average is published officially at 10.8% (UNDP 1998). Thus, regardless, of the political persuasion of national and local politicians, there are no quick fixes for imbalances in macroeconomic and microeconomic prosperity. As a result, local government functions have evolved toward shared national-local responsibility. In some respects, local politicians have more in common with their own administrative staff than with their national politicians. The public reminds them of this daily. Appendix A contrasts Kazakhstan, Tajikistan, Georgia and Armenia with respect to the complex devolution of authority from the center to the periphery. For the most part, the center predominates.

B. Politico-Administrative Relationship


1. It is possible to view national politicians as serving only themselves. Corruption may lead to this conclusion. An attempt to maintain control may further this. Survival may contribute to this observation particularly among communist and postcommunist politicians. It may not be surprising that postcommunist politicians have viewed the administrative wing as subservient and subsidiary to national political interests. National politicians have not easily shared or diffused power. Macroeconomic uncertainty as well as fractious ethnic unrest or military threats from outside may also serve to excuse a reluctance to diffuse power to local levels. The concept of a neutral, objective, rational civil service serving the nation or the locales seems very foreign to former communist officials. It is not particularly coherent to POSTcommunist officials. Thus, if power, particularly funding and expenditure power is to be decentralized, it is possible to argue one of two likely causes: first, as elections become accessible, free, honest and fair, national politicians will see the need for votes. Secondly, western aid-giving-pressure may force national politicians to consider some forms of local decentralization. Of course, most often, such designs become structural.
2. The process of national and local negotiating seems foreign to most postcommunist officials. Whereas market economies build relationships upon exchange principles, representative democracies do not stop at the ballot box. Negotiating (exchange) occurs vertically and horizontally among politicians in most democracies. If this does not come about, the debate will deconstruct to power that will, at present in the FSU, reside with greater advantage to the center rather than the periphery. Secondly, the politico-administrative nexus will be one sided in that the political side will dominate “technicians” despite conceivable expertise developing among the latter. If the fragility of the relationship is not dependent upon one-sidedness, that is, politicians stifling dissent, as well as technical astuteness, there can be hope that political exchange may actually occur. At the moment, the status quo seems to predominate over movement forward, as well as backward.10



  1. The Tradeoff of Equity and Equality




        1. Arthur Okun (1975) described the Big Tradeoff, which creates a dilemma for all governments: the tradeoff between equity and equality. The tradeoff for FSU countries constitutes the tradeoff between developing a market economy versus entitlements to which most citizens of the FSU have become accustomed. Citizens at the local level are particularly vulnerable since their economies are far from robust. As Straussman (1999) observes:

“Structural reforms, which over the long term are supposed to produce growth, are causing unemployment. Cuts in subsidies, price liberalization, tax reform, and the restructuring of social security systems are further reducing the standard of living…reductions in social protection are contributing to disillusionment with the transition.”11




      1. Straussman asks, “Is it reasonable to expect innovation to take place in this political, fiscal, and social environment?”12 And, if innovation is to take place, it is appropriate to ask, what kind of innovation? State involvement in western democracies, particularly those seen as “welfare” democracies, hovers around 50% (Koenig, 1992). The transformation from a Soviet command economy to market capitalism may require innovations far beyond the imagination of western technical advisers. Populations may be unable to wait for health insurance, defined contribution pension plans, unemployment insurance and capital markets. Politicians may seek mixed approaches that protect some level of entitlement to ensure tolerable life as markets and jobs develop. Protection of these entitlements will impede, to some extent, funds available for internal investment. Thus, local governments, struggling to maintain vulnerable populations, faced with flat or declining tax bases, coupled with increased responsibility and little prior experience in such tradeoffs, may find areas for experimentation to be very few.13 The natural tendency will be to seek help from the national government. Such help will only be forthcoming if centralized macroeconomic policy is successful and political choices are made to redistribute income to citizens at the local level,14 a choice which will be made more difficult by partisan considerations in addition to skepticism regarding local corruption and expertise.15

D. Trust
1. Trust in government and in institutions in postcommunism has been measured at a low level.16 While the household surveys show low levels of trust in government institutions, the figures drop even more in the Eurasian countries of Russia, Ukraine and Belarus. These three, part of the FSU, probably most reflect the remaining members of that group. A second set of questions queried household opinions regarding civil society, the private sector and even “other people.” While the FSU countries showed a bit less variance than Central and Eastern Europe, the degrees of confidence were still at less than one third (31% average). Even the church received low levels of trust except in Romania. While one can only speculate, USAID points out that crime, corruption and the mafia may have influenced attitudes toward private enterprise. What is striking, however, is that there is very little difference in the average ratings for Central and Eastern Europe when compared with the three Eurasian countries. In fact, with the exception of Russia and the Ukraine, there are rather modest differences only in Table 4, which measures trust in governmental organizations.17


2. One of the concepts of western local government, particularly in the U.S., centers upon citizen participation. People participate when they believe their opinions will make a difference. Trust, while not acting as a pre-condition to participation, will require some level of motivation. Unfortunately, citizens have shown a slow tendency to rate the post- communist regimes with greater degrees of approval. Only in the northern tier of countries18 did the CSPP surveys show greater approval for the current regime than the “pre-transition regime.” For the remaining eight countries, primarily the FSU (except Hungary, Croatia and Yugoslavia) there was preference for the pre-transition regime.
3. A further measure of trust may be connected to national rankings of “Democratization Disaggregated.” This survey, performed by Freedom House attempts to measure “democratization at the macro level across six variables: political process, civil society, independent media, government/public administration, rule of law and corruption. The scale was from 1 to 7, seven being the worst.19 The Eurasian countries, which tend to correlate with the FSU, on the average, scored worse than all other postcommunist countries. The worst average was for corruption (5.0). Turkmenistan scored an overall average of 6.9; scoring 7.0, the worst score in four categories. For the variable “government/public administration,” Eurasia again scored the worst: 4.9. The definition for this variable included, “…Legislative and executive effectiveness, and on government decentralization, including the effectiveness of local and regional government (emphasis mine).20 These observations, to some extent, parallel the household surveys, indicating a substantial problem for the politico-administrative mix as it attempts to deal with the exigencies of local government.21


  1. Revenue and Expenditures




    1. Revenues

Local government in the FSU is substantially dependent upon national transfers. The percentage of dependency hovers around 80-85%. The revenue dependency is not only a function of relative impoverishment of cities, towns and villages, but is related to the tax structure. To a large extent, the tax structure is influenced by the comparative advantage of various taxes as well as the economic potential for creating effective tax bases, tax rates, and collections at the national and local levels. While governments may be tempted to engage in public enterprises or joint ventures in order to earn revenue, many will necessarily, rely on taxes and transfers to provide necessities. Lacking a history of voluntary tax compliance, countries will need to rely on involuntary compliance executed by tax authorities, and in the case of the income tax, deductions by employers. Politicians, therefore, are particularly reliant on the administrative structure to collect taxes that have been enacted. Since the tax collection rate seldom reaches more than 20% of potential collections, this politico-administrative relationship causes continuing grief on both sides. Legislators are often tempted to raise the tax rate in order to obtain missing revenue. Naturally, this causes even further loss of compliance and sets a higher floor beneath which tax collectors may engage in rent seeking, that is accepting bribes at lower levels than the tax rate. This conundrum is one of the most perplexing in the politico-administrative relationship. Further it causes deep distrust and antipathy of the public toward tax collectors in particular and politicians in general.22




    1. Tax Comparisons

1. Neither the property tax nor the sales tax, particularly popular in the U.S., will contribute significantly to local government revenues. The property tax requires a sophisticated assessment system, non-corrupt execution, reliable records and voluntary compliance unless the tax collector is willing to visit each piece of real property on a regular basis. The real estate market has developed slowly during the transition period due to lack of capital markets, financial instruments, reliable records, file and registration (cadastry). With the exception of the relatively well to do, most others have received real property from the government, through inheritance or at little cost. Unless the government wants to repossess apartment dwellings, collections from low-income families will produce minimal levels of revenue for the effort required. The sales tax is impeded by the paucity of automated cash registers. Nevertheless, some opportunity exists for collection of a local payroll tax (income tax), user fees, industrial and commercial license fees.


2. VAT
The value added tax (VAT) is unsuitable for local government (Bahl, 1999). Unlike the national government, local governments seemingly could not set local VAT rates without causing chaos throughout the country. Inter locale activity, in particular, would complicate tax administration. Such a tax, if levied locally, could mitigate against foreign purchases, reducing revenue within the home locale. An exception might be if the local VAT was to be uniform with the national VAT and derived from the same tax base. At present, however, national politicians enjoy deriving VAT revenue from enterprises having plants outside the capitol city, thus, depriving local jurisdictions of earning revenue from such a tax even though local government must provide limited service to the plants within their boundaries. This places national and local politicians at odds with one another. Perhaps, more significantly, the collection of all taxes by the national tax inspectorate, even at the local level (it must rebate a certain percentage locally after tax distributed expenditures have been rectified) puts significant strain on the politico-administrative relationship since national tax collectors are, essentially, dictating the amount of local revenue that will be rebated to local politicians and their administrators. At the same time, national politicians are expecting a maximum return from their tax collectors. This phenomenon has had a very strong negative impact on the development of robust local government as well on improving the overall mix of politicians and administrators.


  1. Excise Tax

Bahl observes that countries of the FSU often share at the sub-national level in the proceeds of excises on production of such goods as liquor, i.e., on the basis of where the tax is collected by the retailer.23 Nevertheless, typically one would expect excise taxes to be collected nationally. A local argument might focus on the cost of “housing” such industries.24 A second factor, however, is the correspondence test which relates to the “correspondence between the benefit zone of public expenditure and the burden of the tax, i.e., no exporting; further the ease of administration is important.” 25 For this reason, the income or payroll tax better meets the criteria. It is easily collected by employers; may be linked to the central government’s tax base; since the resident is locally based, the burden of levying falls appropriately on the local jurisdiction; namely, one can see the link between where the tax is paid and how the revenue is applied to local expenditure.26 Illustratively, the national budget for Armenia for FY 2000, derives its revenue from the following taxes:


VAT 36.8%

Profits tax 8.8

Personal income tax 5.4

Excise tax 14.8

Property tax 0.1

Land tax 0.1

Customs duties 4.7

Presumptive tax27 1.4

Natural Resource and

Environmental Pro-

tection Taxes 7.9
Other revenues make up approximately 20.2% of the budget: state duties; non-tax revenues; capital transactions; official transfers.28


    1. Expenditures

1. The primary expenditure problem in transition economies is that of “repetitive budgeting” or rebudgeting (Guess, 1992). Repetitive budgeting occurs when revenues do not match projections and/or the budget deficit cannot absorb such losses of revenue. Thus, the political nature of rebudgeting reduces timelines typically to very short time periods; may delay payments in order to create reserves (Guess, 1992, p. 377); may create conditions for corruption (Caiden and Wildavsky, 1974, p. 72); introduces fiscal control and may result in special fund status (Naomi Caiden and Aaron Wildavsky, 1974,29 Further, budgeting on the basis of cash flow creates uncertainty and may cause drastic reductions in planned, program expenditures. Special fund status (off budget), e.g., will reduce the “ability of central government to account for and control all expenditures (Guess, 1992, p. 378).


2.The politico-administrative mix is once again subjected to severe strain. First, FSU governments typically require that local budgets be approved by central governments; second, expenditure norms at the local level are typically set by the central government.30 Again, the politico-administrative team at the local level is set against the national team, in rectifying expenditure allocations to local government. This strikes at the heart of local control. It is decentralization with “strings attached.” It can have two debilitating effects: first, it may cause local team members to seek national exemptions or changes to their local allocations or, second, it may set local politicians and their administrative counterparts in direct conflict with the center. The public will hardly digest this continuing debate yet it will typically place the blame on local government. It is geographically closer. It is impossible to overstate the impact of the case of national decision makers deciding to forego or drastically reduce national revenue transfers, typically set out in formulae, upon the anguish (leading to antagonism) of the local politico-administrative team. This conflict underscores the helplessness of local government’s revenue position vis-à-vis its expenditure responsibility. It is as though the politico-administrative mix has been set up to fail, both nationally and locally.


    1. Dilemma

The dilemma for national and subnational governments is to resolve to what extent should government be decentralized. It is analogous to the public choice question as to what should be private vs. public. Neither of the two questions is rhetorical, though some may think so. Efforts toward democratic development have concentrated on enhancing the prospect for “home rule” cities (which can legislate their own taxes). Nevertheless, from an expenditure standpoint, transition economies are unlikely to generate sufficient revenues to provide services to the public. Functional responsibilities, which are national by law, may be poorly administered and poorly funded at the local level. Citizens may properly eschew any loyalty to government at the local level, not understanding the difference between national functions, poorly developed, and co-located at local levels (deconcentrated) vs. local government functions, equally poorly designed and executed. Most citizens in the world have primary contact with functions performed at the local level: some mandated by the national government; some directly provided by national ministries; and some provided by municipal governments. Assuming intergovernmental management had any currency during Soviet days, today’s citizen must question the efficiency and effectiveness of functions performed at the local level. The stranglehold which the politico-administrative mix has permitted to emerge does not augur well for vibrant local government. In fact, there has been a steady, if not dramatic increase in the percentage of citizens who have expressed support for a return to the Communist administrative state.31 Naturally, they forget about the political abuses. To some extent, the current politico-administrative mix needs to perform more adequately or face “backsliding” in reform of representative democracy and, perhaps, the market economy.




    1. The Structural Tradeoff

1. It is not enough to recall Okun’s equity vs. equality tradeoff. Similarly, it is not enough to point out the preferences for federal, unitary and prefect intergovernmental models. There IS a real dilemma for transition governments in distributing functions and expenditures between the center and the periphery. Western preferences for decentralized government notwithstanding, one can argue that transition governments consciously prefer not to shift national expenditures to local governments for rational reasons. First, there is very little funding to transfer. After dealing with macroeconomic stabilization, and the military, transition governments typically prioritize national functions such as education and health as legitimate local expenditures. Yet, national governments, particularly postcommunist governments, cannot conceive of shifting these functions to local government.32 The concept of a local school board is entirely counterintuitive to former communist countries. Health care, left to local governments and threadbare revenues, similarly seems to offer very little preventative capabilities, danger for epidemiological failures, poor maternal and child bearing care and the prospect of idiosyncratic public health responses. Thus, education and health seem, from a postcommunist perspective (as well as former Communist perspective) to require standards or normative requirements for delivery of services. That such normative standards may derive their formulae from prior Communist days, and may need to be revised, does not dissuade postcommunist planners from dealing locally with education and health expenditures through national transfers. Similarly, one can hardly expect local governments to finance unemployment benefits, welfare payments, pensions and housing allowances. While these are of direct consequence to local citizens, they are conceived of as national entitlements. Again, national transfer payments will be necessary. Thus, considering the quantity and quality of education and health care nationally, one can surmise that shifting such expenditures to local government is quite premature.


2. Postcommunist governments have national police forces. Without debating the propriety of national police forces (Americans would disdain such a design) it is unlikely that postcommunist governments will soon see any wisdom in local police, due to a lack of local funding, as well as a propensity toward corruption that might ensue (not to say that national police cannot be corrupt; rather, to say that postcommunist countries want control over police at the national level since they do not differentiate among the U.S. model of federal crimes, state crimes, local crimes and, to some extent, counter intelligence). If, as seems the case, postcommunist countries will eschew local police (Europe seems to follow the national police model without abandoning civil rights; Germany differs, having opted for provincial police after experimenting with the U.S. installed local police following World War II) then local governments may well have a good bit less to fund than the American model.
3. If one considers only the military, police, education and health, the national government in Armenia spends (officially) 14.7% on the military; 5.7% on public order, protection and state security; 11.6 on education; and, 7.5% on health care. In addition, the national budget calls for a transfer of funds to local government of approximately 15% (seemingly for general expenses since pensions and social safety net expenses are included in other allocations).33 Thus, local government is relieved of these expenditures and the local citizens do not particularly ask themselves who is paying for these services, unless of course, they are terrible. Local governments in the FSU are described as having too many responsibilities, an impoverished population and miniscule tax base. Thus, there is an assumption that it is hopeless for them to become democratic or to provide adequate local services. Nevertheless, it is at the margin that local services fall through the crack. Because of the tendency to share the responsibility locally for numerous functions between national and local governments, the margin becomes significant. Thus, the inevitable conflict between the politico-administrative mix at the national level and that at the local level creates a barrier between efficient and effective delivery of services. At the moment, the advantage in the mix seems to reside with the political component, particularly that which resides at the national level.34


  1. Conclusion

The politico-administrative relationship in the FSU appears to be affected by

the confluence of centralization/decentralization, trust/mistrust, shared center/local responsibilities, political utilization of the administrative core and the fragility of the macro/micro economic circumstances. Western advisors have favored the big bang theory that includes a number of tenets for political and economic theory; rule of law; liberalized prices; macroeconomic stability; free and fair elections; market economy. It is not clear that the necessary institutions exist to support these prescriptions. If that is the case, the prescriptions for local government may need evaluation. Citizen participation makes sense when its influence can be observed. Local responsibility makes sense when local governments can borrow and have sufficient tax bases. The important nexus of politico-administrative relations may well center upon resolving national political and macroeconomic questions in periods of geographic, political and economic uncertainty. Both politicians and administrators must work toward consensus of the role of local government in maintaining standards of living and social justice. Operating within extremely low levels of public trust, the politico-administrative nexus may face its biggest challenge in carefully building and maintaining public trust. This will require significant attention to structure and process.

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Blanchard, Olivier. (1997). The Economics of Post-CommunistTransition. Oxford: Clarendon Press.
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Okun, Arthur M. (1975). Equality and Efficiency The Big Tradeoff. Washington,, D.C.: The Brookings Institution.
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APPENDIX A
Annex 1 – B: Comparative Assessment Requirements for Effective Decentralization

Benchmark Kazakhstan Kyrgystan Tajikistan Georgia Armenia

Local elected yes yes/no yes yes yes

Officials All are elected: region Of 21 cities, only 12 All: region, Municipal & Not at district level;

district, city have local govt. status; district, district; not at yes at community

rest under central govt.; city highest level: level: both mayor

village only has complete region and council

local governance
Locally no no no yes yes

Elected Apptd. by Pres. Apptd. from top- Apptd. from Apptd. at local Pres. Appoints district

Chief Law permits down top-down level; above this, head; local officials

Officials election but none top-down elected

held
Locally yes no yes yes yes

Approved At all levels. Yes, only at village Done locally Done at local After apprvl of

Budget level; other budgets then central level central budget;

submitted upward budget apprvd. initially submitted

for approval by mayor
Absence of no no no no no

Mandates on Very little own Only at village level; Generation and Little local rev. Local levies small.

Local Govt. source revenue; rev. collection is utilization done Mostly shared Share of transfers

Re: employ- little control over bottom to top by exec. Office rev. To change more than 50%

ment and how shared rev. of central govt. ratios must be

salaries distributed in locality initiated by Parlia-

ment
Borrowing yes no yes yes yes

Power of From banks or No law. Most No law but Central govt. will Reserve fund for

Local higher levels of funds from central bankruptcy guarantee loans capital expend.

Govt’s. govt.; no provision govt. applied. from the state Can’t exceed 20%

for default/bailout or intl. org’s. of budget.

Transparent no no no no no

Inter-govtl. Done by Min. of Top to bottom. Transfers apprvd. Some negotiation. System not

Transfers Finance. in natl. budget. Otherwise, comes efficient; complicated

Some negotiation. from center in dis- and frequently

organized fashion. amended.

Clear yes yes yes yes yes

Expend. Decided by center; Clear. Clear. Clear but compli- Clear but cannot

Assignment varies across local cated by shifting manage too many

govts. devolution of responsibilities;

responsibility needs grants/transfers

Capacity of no no no no no

Local govt. to Fees too small. Can only collect No capacity. Mainly Rev. collected

Collect taxes Delivery of funds 2-3 of 16 local centralized. Centrally, then

And deliver and service deter- taxes sent back to local

Services mined by center govts.


Adequate no no no no no

Books of Adequate acctg. Not I.A.S. Only Not I.A.S. Done Introducing Audited by Min.

Account mostly not avail. audited by central by hand. Audited I.A.S. Most Finance & other

govt. by local and audited by central govt.

central govt. agencies
Central govt’s no no no no no

Ability to

Monitor progress

Of effective fiscal

Decentralization

Source: “The Concept of Fiscal Decentralization,” Intergovernmental Fiscal Relations and Local Financial Management Program. World Bank Institute, 2001. http://www.1.worldbank.org/wbiep/decentralization/topic01.1.htm.

Appendix B
Tables 5A and 5B: Expenditure Shares of Central and Subnational Governments in Unitary and Federal Countries (%)
Unitary; Table 5A: (C=Center;L=Local)
Defense Educ. Health Housing Police Recr. Welfare Subs. Other

C L C L C L C L C L C L C L C L C L

Albania 100 0 20 80 70 30 68 32 100 0 65 35 81 19 63 37 75 25

Azerbaijan 100 0 17 83 16 84 2 98 100 0 56 45 99 1 100 0 84 16

Estonia 100 0 45 55 97 3 1 99 99 1 61 39 91 9 56 44 62 38

Belarus 98 2 18 82 21 79 0 100 81 19 42 58 97 3 92 8 74 26

Kazakhstan 86 14 22 78 57 43 0 100 75 25 55 45 73 27 66 34 79 21

Moldova 100 0 32 68 40 60 23 77 85 15 64 36 95 5 93 7 57 43


Federal: (5B)
Russia 100 0 14 86 15 85 7 93 73 27 15 85 90 10 89 11 64 36
Table 5 “Provides an overview of expenditure patterns across countries reported in GFS (Government Finance Statistics Yearbook), 1998. Functions with a high degree of spillover externalities (e.g., defense and welfare) are exclusively performed by central governments and functions which require a high degree of political accountability (e.g., education) are performed by subnational governments in both federal and unitary countries.”

Source: The table has been abridged. See “The Concept of Fiscal Decentralization.” Intergovernmental Fiscal Relations and Local Financial Management Program. World Bank Institute. 2001. http://www1.worldbank.org/wbiep/decentralization/topic01.1.htm




1 Much of the in depth analysis of this paper emanates from interviews and document review in Armenia. It is clear that the South Caucasus and much of the Former Soviet Union (FSU), with the exception of Russia, differs from Central and Eastern Europe. Nevertheless, the difficulties of postcommunist reconstruction exist throughout the FSU and Central and Eastern Europe. Where comparisons can be made, they will be made. Essentially, the FSU is further behind than those countries west of the Baltic. However, there are more similarities than differences. Unfortunately, western analysts continually err in assessing the transition in postcommunist countries. A recent observation of these errors may be found in Reddaway and Glinski (2001).

2 Occasionally referred to as the “politico-administrative” relationship.

3 For example, Horvath and Kiss (2000).

4 Impetus for concern with local government developed rapidly as international funding agencies sought evidence of national resolve for decentralizing. As countries sought accession to the Council of Europe, they were mindful of Article 9 of the European Charter, “Autonomous Exercise of Local Power,” which provides that member countries will consider the right of territorial communities (through a law on local finance) to own sufficient resources to be able to utilize them freely within the exercise of their competencies. Carvajal asserts that “…there are universal tendencies in favor of decentralization. These are called ‘megatrends,’ and prominent among them is the new scientific and technological revolution, which, it is considered, will affect the spheres of production, information and transport and is likely to give rise to a new kind of industrial geography which will have some of the following characteristics: replacement of the Fordist model, the end of the trade union system based on the unionization of big companies, replacement of traditional material inputs with inputs consisting basically of knowledge, and the emergence of industrial structures in which location and concentration are no longer so important, resulting ultimately, in decentralization. (1995).

5 Petro argues that “…In transition economies, economic and political reforms seem inextricably linked to a revitalized sense of identity…Local governments and elites can forge common values and priorities to lead their communities. The key to success is minimizing the disruption of old institutions where they continue to serve public needs while simultaneously embracing new institutions and values. This can be done by placing them within traditional cultural values.” (2001). Of course, this requires leadership.

6 Sceptically, William Dillinger observes, “Decentralization may be a series of reluctant concessions by central governments attempting to maintain political stability.” (1994).

7 Vanags, Balanoff and Llauletta (1999).

8 Bennett (1997).

9 UNDP (1999).

10 In reviewing OMRI’s Annual Survey of Eastern Europe and the Former Soviet Union 1996: Forging Ahead, Falling Behind, J.F. Brown comments: “There is now a need for state intervention to stem the pain of reconstruction…The interconnectedness between social degeneration and political stability: ‘The need is to balance political savvy, genuine concern, and economic necessity.’ “…Most of the countries in the region are not becoming Western-style democracies…instead they are choosing semi-authoritarian rule and a controlled market…”

11 Straussman is speaking of Hungary, though its application to the FSU is germane.

12 (1999), p.15.

13 Shumavon observes about Armenia, “Despite constitutional and statutory foundations for local government and the rudiments of a “strong” mayor system, the central government’s control: authority to remove the mayor and establish tax rates, constrains local control over local issues; local tax authority will be further limited by a weak tax base and impoverished citizens. (1998).

14 Hobbes comments, “The crux (of the governments’) difficulty is in attempting to sustain expected levels of pension and other benefits in a period of rising unemployment and declining revenues, and at the same time attempting to move toward funded pension programs and need-based welfare systems.” (1991, 1, fn. 17).

15 Naturally, many at the local level assume corruption to exist at the central level. The topic of corruption requires extensive analysis. While it may be a central factor in politico-administrative relationships, it goes well beyond the scope of this paper. Although much has been written about corruption, there is a need to conduct careful research in verifying the paths of corruption and how these influence local government and the politico-administrative interaction. We know that corruption exists. We know that indicators of corruption have been constructed. Yet, one of the most perplexing aspects is the interactive effect. What is the impact of one official on another; what is the “shared” responsibility of permitting corruption to exist without prosecution; and, what is the impact of corruption on the performance of local government?

16 Survey data are taken from household surveys done by the Centre for the Study of Public Policy (CSPP) at the University of Strathclyde in Glasgow in collaboration with the Paul Lazarsfeld Society in Vienna, Richard Rose, Director. Two illustrations appear as appendices, Table 4, “Trust in Formal Institutions” and Figure 1, “ Trust in Institutions in 1998,” both of which appear in USAID/E&E/PCS, Office of Program Coordination and Strategy, Bureau for Europe and Eurasia, U.S. Agency for International Development, May 2000, “Appendix II: Household Surveys,” Monitoring Country Progress in Central and Eastern Europe and Eurasia.

17 Table 5, Freedom House, Nations in Transit 2000. May 2000, and cited in USAID/E&E/PCS, Office of Program Coordination and Strategy, Bureau for Europe and Eurasia, U.S. Agency for International Development, May 2000, “Appendix II: Household Surveys,” Monitoring Country Progress in Central and Eastern Europe and Eurasia.

18 Poland, Romania, Estonia, Bulgaria, Czech R., Slovenia and Slovakia.

19 Freedom House, Nations in Transit 2000 (May 2000, forthcoming) in USAID, (May 2000).

20 Ibid. p. 20.

21 Also see Horvath and Kiss, op. cit. pp. 10-11.

22 See Appendix B for a comparative view of local dependency upon the center in Albania, Azerbaijan, Estonia, Belarus, Kazakhstan and Moldova.

23 Bahl (1999) comments, “The VAT has a very high threshold and typically excludes most enterprises. There are good reasons for this exclusion from the tax base. Most VAT revenues are collected from a very small number of firms, and it is administratively inefficient to focus heavily on the ‘hard to tax’ for the little revenue they generate. However, these high thresholds for central taxes leave a significant taxable capacity unreached…the revenue gains from bringing small taxpayers into the net are small.” (p.62).

24 Ibid, p. 70.

25 Ibid.

26 Ibid.

27 The presumptive tax is a substitute for the VAT and profits tax primarily for small scale businesses including shops of less than 30 square meters, photo laboratories, auto repair shops, parking lots, barber shops, casinos and other. For each type of business, there are specific calculations for determining the presumptive tax. Implementation of cash registers causes some businesses to pay VAT rather than the presumptive tax. USAID Tax and Fiscal Reform Project Team (1999).

28 USAID Tax and Fiscal Reform Project Team (1999).

29 Planning and Budgeting in Poor Countries. New York. John Wiley.

30 See the World Bank Institute’s observations re: “The Concept of Fiscal Decentralization and Worldwide Overview,” Intergovernmental Fiscal Relations and Local Financial Management Program. 2000. (www1.worldbank.org/WBIEP/decentralization/topic01.1.htm)

31 See paragraph II.D.2, above.

32 Bennett comments about Poland, “First, most of the communes are too small, have too few resources, and can employ too few personnel, especially those with specialist skills, to be able to administer many local services. Secondly, their size has made it difficult to develop further decentralization of real responsibility for services and autonomous income at the local level, with the consequence that decentralization within the state as a whole has been slowed. (1997).

33 USAID Tax and Fiscal Reform Project Team (1999).

34 Russia’s case, though different, may be instructive: “Putin’s attempts to rely on the Russian bureaucracy are doubtful and expedient. It has yet to go through that evolution that turned the Western ‘court servants’ into a professional public or civil service, with codes of behavior and honor as well as the criteria of professionalism. Russian bureaucracy remains an element supporting the monarchy (emphasis mine) with all the consequences this implies: susceptibility to corruption as a means of survival, gravitation towards shadow relationships, conservatism and fear of change, servility. Turning this type of bureaucracy into a regime’s foundation would render all hopes for modernization doomed.” (2001). Lilia Shertsova, “Elective Monarchy Under Putin: Perspectives on the Evolution of the Political Regime and its Problems.” http://pubs.carnegie.ru/briefings/2001/issue01-01.asp, in Johnson’s Russia List, #5080, 8 February, 2001.

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