ChapterPDF Available

Why opinions Matter for Financing Local Economic Development in Latin America: An Analytic Survey on Incentives

Authors:
1
CAN LOCAL GOVERNMENTS BE USED AS AGENT FOR GROWTH?
EXPLAINING LOCAL ECONOMIC DEVELOPMENT IN LATIN AMERICA
Heidi Jane Smith
1
Florida International University
Prepared for delivery at the
2009 Congress of the Latin American Studies Association
Rio de Janeiro, Brazil June 11-14, 2009
Track Code: DEV
Session Name: Development from Below
Day: Friday
Time: 5:00 pm - 6:45 pm
1
Heidi Jane Smith is a second year doctoral student in public management at Florida International
University’s Public Administration program. She is also a research associate for the Institute of Public
Management and Community Service (IPMCS), a local government think-tank within the university.
Please do not cite this paper without prior authors’ permission. Contact at heidi.smith@fiu.edu with
questions and/or comments.
2
Abstract
Recent local economic development initiatives in Latin America are a
consequence of the decentralization processes currently underway in the region. Specific
efforts to promote these policies are driven by a complex set of political and economic
factors facing local areas. Some Latin American countries, such as Mexico and
Argentina, have started to offer incentives as a way to attract foreign investment. Others
have provided promotional advertisements to retain or encourage manufacturing and/or
foreign enterprises into their areas. Still others encourage small and medium enterprises
to grow by creating a positive policy environment within which to work.
The key issue is how Latin American countries can learn to foster local economic
development through the appropriate government structure and incentives practices. Latin
American national governments can promote competition by engaging state and local
levels of government to create the appropriate programs that are effectively able to retain
and expand their economic activity (Wiesner, 2003). This study uses a statistical model to
evaluate which factors influence the number of businesses and new business created in a
local area. It uses a survey of mayors, city council members and executives from thirteen
countries in Latin America to gauge whether they implement pro-business policies to
improve their local areas, considering fiscal, administrative and political autonomy, and
finally, controlling for municipal environmental factors.
This paper is organized into the following sections. First, it briefly summarizes
the development attempts in Latin America and describes why entrepreneurship is key for
equitable growth. Second, it will provide a theoretical perspective as to why
decentralization is best to promote business friendly policies and ultimately economic
development. Finally, this research paper tests the proposed theoretical perspective and
provides tentative conclusions.
3
Background Information
The promotion of economic growth is the mission of various International
Financial Institutions (IFIs), such as the International Monetary Fund, the International
Bank for Reconstruction and Development (now called the World Bank), and the General
Agreement on Tariffs and Trade, which was expanded to become the World Trade
Organization (Milner 2005). Starting with financing for reconstruction projects to rebuilt
Europe after World War II in 1944 there have been many development strategies that
have attempted to help countries promote growth. For example the International
Development Association (IDA) in the 1960s was established to assist the least-
developing nations. Yet, the World Bank’s message has changed from exclusively
economic development to incorporate not only growth, but also fair growth, which
consists of the elimination of inequalities and promotion of poverty reduction (Birdsall et
al. 2007).
This is exceptionally necessary for Latin America, often cited as one of the most
unequal regions of the world (Birdsall et al. 2007). Although recently the region has seen
high growth rates, not everyone has benefited. Particularly over recent years, the statistics
on poverty elimination has not improved drastically as the growth rates would predict.
For example as Kliksberg (2005:1) suggests that Latin America has “44 percent of the
population in poverty. One of the causes is inequality: whereas 10 percent of the richest
possess 48 percent of the national income, 10 percent of the poorest possess only 1.6
percent.”
4
Also illustrated in Figure 1, the World Bank’s 2008 development indicators show
Latin America and Caribbean along with the Sub-Saharan Africa as having the most
unequal income distributions in the world. The richest 20 percent earn more than fifteen
times the earnings of the poorest 20 percent. Consequently, even a modest development
strategy that promotes wealth creation and a long-term increase in the income of the poor
could reduce local income inequalities and improve the general quality of life of low-
income community inhabitants.
SOURCE: World Bank 2008 World Development Indicators
A short review of the history of development strategies in Latin America will reveal
several top-down attempts to promote growth. For example attempts at centralized
planning in the 1950s, the green revolution using technology within the agriculture sector
of the 1960s, infrastructure development and import substitution in the 1970s, to strict
application of neo-liberal policies stressed by the Washington Consensus in the 1980s
and the luring of Foreign Direct Investments (FDI) of the 1990s, have all been examples
5
of failed policies to promote fair growth (Stiglitz 2003, Easterly 2006). Although all of
these top-down strategies account for the economic growth, they certainly have not
helped to balance out the inequalities within the region. Moreover, through the World
Bank’s assistance policies one can decipher the various ways development has been
encouraged within the region. They include trade, human, capital development theories,
endogenous growth theory, or classic economic base theory, among many others. The
problematic theme of inequalities became intensified in the 1990s as civil society
criticized the IFIs for the lack of “trickle-up” that was so promised by the Washington
Consensus. Furthermore, efforts to promote bottom-up and local knowledge have
intensified as a new strategy for development is discovered.
Increasing research has focused on the role of small and medium enterprises
(SMEs) as a bottom-up strategy for developing an economy. It is suggested that new firm
creation is one way to advance growth that encourages the strengthening of a middle
class, provides equity between classes and helps to maintain a healthy and peacefully
stabile society (Malizia and Feser 1999). Although much research has focused on SMEs
effects on development, little attention has highlighted the policy role for municipalities
to assist in their creation. For example a study done by Kuwayama et al. (2005) cite that
according to available data from 17 Latin American countries micro-, small, and
medium-sized enterprises make up 77 percent of employment in the region and nearly 65
percent of the proportion is due to micro-enterprises alone. SMEs in OECD countries also
account for a large share of employment, for example in the US, small businesses account
for 68 percent of jobs. However, SMEs contributions to GNP are less than 50 percent in
6
Latin America (Angelelli et al. 2003). This highlights the potential productivity gap,
which could be improved with healthier policy recommendations.
In recent years, international donors have advocated the support for SMEs to
accelerate growth and reduce poverty. For example, between 1998 and 2002 the World
Bank provided more than $10 billion and the US provided an additional $1.3 billion in
2003 alone for SME support programs (Juckett 2008). Such policies encourage
competition and entrepreneurship; prove to be more efficient, innovate and productive
than larger firms; and have the potential to add many more jobs to the economy (Beck et
al. 2005). The problem still arises that if this aid is not targeted into specific geographical
areas, then it could be unable to make significant headway into eliminating inequality
within a specific region.
Moreover, recently the World Bank has offered another possible solution. One
such strategy is local economic development (LED), which they define as “building-up
economic capacity of a local area to improve its economic future and the quality of life
for all. It is a process by which public, business and non-governmental sector partners
work collectively to create better conditions for economic growth and employment
generation” (WB website). Specific program areas to implement LED strategies,
according to the World Bank, include: “improving the local business investment climate,
investment in hard strategic infrastructure, investments in sites and premises for business,
investment in soft infrastructure, encouraging local business growth, encouraging new
enterprise, promoting inward investment, sector (and business cluster) development, area
targeting/regeneration, integrating low income or hard-to-employ workers” (LED
website).
7
In order to evaluate LED’s strategies in Latin America, this paper focuses on
encouraging local investment climate, business growth and new enterprise development
while offering incentives as the primary function for local governments. In
entrepreneurship theory, a key component for economic development highlights
individuals as the first to respond to market pressures. Under this view, they are the
“visionary who attempts to marshal resources in unique ways to bring new ideas for
products or services to economic fruition” (Malizia and Feser 1999:195). Studies of
entrepreneurship have often been synonymous with small business development. The
effort for entrepreneurs to create small businesses demonstrates a tangible measure of
their success.
According to Malizia and Feser (1999) research on entrepreneurship has been
divided into studies of economic growth and change, while others focus more on factors
that promote motivation and entrepreneur behavior. Of interest to this study is the first.
Environmental factors are important. For example Bruno and Tyebjee (1982) suggest that
there are twelve factors for a location to support entrepreneurs: venture capital
availability, presence of experienced entrepreneurs, technically skilled labor force,
accessibility of suppliers, accessibility of customer or new markets, proximity of
universities, favorable government politics, availability of land or facilities, access to
transportation, receptive populations, availability of supporting services, and attractive
living conditions. Particularly in this list of important factors is favorable government
politics. Since it is the government that is able to promote or change these environmental
factors, we look at the administrative structure of Latin American countries in their
efforts to promote local economic development as a way to encourage entrepreneurship.
8
Because local governments need to be evolved, and may be better-equipped then
centralized governments, to provide this essential favorable policy environment. Efforts
starting in the 1980s by many Latin American governments to decentralize could provide
some indicators as to how to create these favorable policy environments at the local level.
Fiscal Decentralization
Theories of decentralization derive from the premises of public choice and
federalism. Decentralization is suggested to be more efficient for development because it
first, allows local governments the appropriate level of service delivery, and two, creates
competition between local governments, allowing voters to move with their feet to obtain
optimal preferences of service provision (Tiebout 1956, Mansgrave 1959). This is
contrary to centralization, which argues that national governments should control state
resources and target development into specific areas, providing high fixed costs for
infrastructure, which will inevitably, create spillovers (Manor 1999, Smoke 2005).
What’s further defined in public choice theory, local governments are equipped to
design and administer development programs because market forces and political
processes discipline them (Mansgrave 1959). It is the marginal resident and marginal
businesses that determine the market value of property in a locality. Therefore local
governments give citizens a choice in the level and type of basic government services.
Municipalities are better equipped to facilitate information about how to organize public
services. Although local level citizens are likely to eschew income tax and rely on
property taxes, user fees and misc. taxes to pay for public goods, political pressure is
minimal.
9
These arguments have infiltrated into the political economic literature. For
example, Peterson’s (1996) functionalist theory suggests that modern federalism has
meant precisely that—the appropriate level of government should manage its appropriate
function. Peterson identifies distinctive areas of comparison for each level of government
definable by developmental vs. redistributive. For him, developmental funds are used for
infrastructure, roads, mass transit, sanitation systems, public parks, and institutions to
protect the public, health and education and should be allocated through state and local
governments. Redistribution aid, which assists the elderly, disabled, unemployed, sick
and poor, and indirectly helps economic development, should be managed by the national
government. Oates (1995) argues that decentralization plays an important role in the
efficient production of services leading to more rapid economic growth. Therefore, it is
hypothesized for this study that decentralized government is the best way to equip
municipalities with the appropriate level of economic policies.
Scholars argue that the process of decentralization is sequential, starting with
devolving administration (authority), then its political framework (local elections) and
finally, by establishing autonomous municipalities with fiscal capacity to manage their
own resources (Falleti 2005). Most recently within Latin America, specific attention has
been focused on fiscal aspects of decentralization (Willis, Garman and Hagard 1993;
Bahl and Johannes 1994; Escobar-Lemmon 2001; Gibson 2004; Rodden 2004). The
World Bank defines fiscal decentralization as “the transfer of expenditure responsibilities
and revenue assignments to lower levels of government” (WB website).
Scholars have suggested that fiscal decentralization in Latin America is
incomplete for two reasons. First, some have focused on moral hazardthe likelihood
10
that municipalities borrow more money than they can pay back, forcing the national
governments to bail them out and jeopardizing the state’s macro-economic stability.
Second, others have suggested a problem of institutional power—similar to the mal-
appropriation of representatives from localities into congress—creating disincentives for
politicians to stay local, be faithful to their constituencies and manage their own
resources. Yet the balancing of national priorities and local autonomy is a politically
challenging task. To complete the process, the central government would need to permit
the new entities the right to tax its population to pay for is own public programs. This
final element, setting up decentralized financial reforms, promoting fiscal incentives and
encouraging revenue systems to emerge from below, has provided to be very difficult to
implement (Willis, Garman and Hagard 1993; Bahl and Johannes 1994; Escobar-
Lemmon 2001; Gibson 2004; Rodden 2004; Falleti 2005).
Because of this complexity, many scholars emphasize fiscal federalism or “a
system of transfer payments or grants by which a federal government shares its revenues
with lower levels of government” (Wiesner 2003; Samuels and Montero 2004; OECD
2007). Whereas fiscal federalism is this management of budget constraints and allocation
of public finance at the local level, fiscal decentralization is local people collecting their
own-source revenues and identifying specific policies and plans. Both are driven from the
central governments and IFIs. But only decentralization allows citizens to manage their
own initiates, which is the key for local economic development. It is hypothesized that
once local governments are decentralized, establishing the correct output of public goods
for their tax rates, they can apply techniques of local economic development.
11
As mentioned earlier, recent attention has been placed on these bottom-up
mechanisms to promote growth in a particular location within the global economy
(Friedman 2005; Porter 2005; Florida 2007). Scholars are evaluating whether local
economies can grow by providing policy recommendations to encourage development in
a particular locality. Methods such as providing tax incentives, issuing bonds, collecting
property taxes, and ultimately, appropriately managing national appropriations can
encourage local development (Delahite 2005; Feiock 2007). Therefore this paper
empirically tests whether (government) structure matters. Do fiscal, political or
administrative decentralization and the increase in business friendliness policies affect
SMEs production, and ultimately, help create more entrepreneurs?
Contribution of the Study
The study focuses on the policy environment to help establish entrepreneurs. The
unit of analysis is the perception of mayors. The study looks at governmental structure.
Therefore the research questions and design are the following: 1) Can local incentives
impact economic development? and, 2) If so, does the government structure matter?
Chart 2: Research Design
Model 1a
Number of Businesses = (a1+a2 Business Friendliness + b3 Autonomy + b4 Political Autonomy+ b5
Administrative Autonomy + a… Controls )
Model 1b
Number of Businesses = (a1+a2 Business Friendliness + b3 Budget Autonomy + b4 Political Autonomy+
b5 Administrative Autonomy + a… Controls )
Model 2a
Number of New Businesses = (a1+a2 Business Friendliness + b3 Autonomy + b4 Political Autonomy+ b5
Administrative Autonomy + a… Controls )
Model 2b
Number of New Businesses = (a1+a2 Business Friendliness + b3 Budget Autonomy + b4 Political
Autonomy+ b5 Administrative Autonomy + a… Controls )
12
Data
The data comes from the Inter-American Conference of Mayors and Local
Authorities, which are annually organized by the Miami-Dade County government and
Florida International University. For more than a decade, the event has brought some 500
mayors and local officials from all over Latin America to discuss municipal level
problems and solutions. The first event, co-sponsored by the United States Agency for
International Development, the Inter-American Development Bank, the World Bank, and
the Organization of American States, was held in Washington, D.C. in 1996 and
approximately 100 people attended. The second conference was held in Miami and
almost 200 individuals participated. Since that time, the event has grown and is
considered one of the primer gatherings of local leaders throughout the hemisphere to
occur each year.
Beginning in 2005, the Inter-American Foundation (IAF), an independent agency
of the US government that promotes economic development though grants, sponsored a
survey of government participants. The IAF desired to understand the current climate for
their grant making at the local level as well as the perceptions and challenges the mayors
of the hemisphere faced. Each year since, they have implement different surveys related
to the theme of the conference. The 2007 conference theme was Building the Competitive
Municipality: Promoting Collaboration for Development, which yielded valuable
responses to understanding mayors’ perceptions of growth and economic development
policies.
The survey was conducted using a convenient sample of mayors, city council
member and executives from thirteen countries in Latin America. Thus, potential bias
13
should be considered for randomization and self-selection. Since the survey was
implemented at the conference, the mayors and local officials were self-selected to
participated at the event and therefore filling out the survey. Their participation was
already predetermined because they sought out the learning opportunity to improve on
skills and techniques in the field. Some local officials paid their own way, while others
had their municipalities fund their trips. This was not calculated in the analysis. However,
the sample, although not randomized still can be considered a learning tool for the
specific knowledge base mayors have on their local environments.
Furthermore, all questions are the perceptions of the local officials, which can
provide biased in the responses. For instance the actual number of the total budget or the
populations are estimate figures for those who knew, and other who did not, simply left
the response blank or guesstimated. The lack of specific knowledge from the respondent
could be a potential for serious measurement errors. Additionally, some may have been
mistrustful of the data collection model and did not disclose accurate amounts. Since a
number of Latin American countries do not have a culture of transparency—there are
questionable accounting records, non-frequent audits and few sunshine laws—that could
also soil the results.
Main Variables
The model’s dependent variables are first, number of business cited to have
within the municipality, and second, the number of new businesses the municipality
increased over the previous year. These variables demonstrate the relative strength of the
local economy. They are count variables, which estimate the number of business (as a
14
proxy for measuring entrepreneurship). However these variables do not disaggregate the
size of the firms. Therefore each count variable describes an additional entrepreneur.
Some independent variables of importance are business friendliness, budget,
political, and administrative autonomy. Business friendliness was created as an index of
questions asking respondents to indicate yes or no if they had implemented pro-business
type policies in their municipalities. They include setting up local economic development
promotional offices; advertising local products in fairs and events; registering
commercial plants and productivity activities; organizing business connections with the
local business community; developing support programs for new small businesses, etc.
These responses were summed to create an ordinal variable.
In order to operationalize the local authorities’ political relationship to the state, I
created a variable for political autonomy to describe the nature of their local political
movements and determine their influences on efforts to create more autonomy. It is
measured as an ordinal variable. Respondents’ answered questions on their perceptions of
budget autonomy for two variables. First, by ranking the percentage of own source
revenues—including either property taxes, user-fees or tolls and public debt—and finally
dividing it over the inter-governmental transfers and international philanthropic
donations. This creates a percentage of own-source revenue to define fiscal autonomy.
Next a series of questions to rate the mayor’s fiscal decentralization and administrative
capacity were gathered, similarly to that of political autonomy as a likert scale (measured
as a 1-3 ordinal variable). Therefore there were two measures for fiscal decentralization:
1) as the percentage of own-source revenue and 2) as the respondents perception
measured as an ordinal value.
15
Furthermore control variables that evaluate the type of municipality are also in the
data set. Questions ranged from the country of origin to the typical socio-economic
qualifiers, such as municipal total budget, administrative territory (whether the
respondent works in a capital city government or local municipality) and the perception
of poverty level. This last variable is the respondents’ perception of poverty in the
municipality relative to other areas and is measured an ordinal value. This is particularly
interesting because participants, and people in general, often believe they are relatively
“poorer” than their neighbor and therefore need more national assistance. As mentioned
above within the decentralization literature, a municipality with a higher perception of
their poverty may be more likely to request transfers from the national government and
be less reliant on their local economies. Furthermore they may be less likely to cite job
creation by SMEs within their areas.
Statistical Techniques and Results
The dependent variables used to test for my hypothesis are the number of business
and new business developed within a municipality. After creating a log to correct for the
dispersion of the dependent variable, the outcome of the linear regression (BLUE)
resulted in positive outcome of political autonomy and the control variable administrative
territory reported to correlation. Because of so few correlations with the logs, several
additional tests were conducted.
Tests to evaluate multicollinearity, heteroskedasticity and model misspecification
found a potential for serious errors in the preliminary results. First, a pair-wise and VIF
tests (VIF=1.16) found a low problem with mulitcollinearity (see graphic 2 below). But
16
after a Breusch-Pagan / Cook-Weisberg test for heteroskedasticity the results indicated
chi2(1) = 103.87 and Prob > chi2 = 0.0000. Since the chi2 is less than .05 there is a
heterskedasticity problem. Suggesting that there is a problem with the standard error and
the use of the T and F test may report to be statistically significant, even if they are not.
The graphics (see graphic 2) also depicted similar results. Additional tests of model
specification confirmed that there are serious errors in the results. For example, the
RESET Ramsey test using powers of the fitted values of newbiz outputted F(3, 165) =
8.09 resulting in that the model can not reject the null hypotheses (Ho: model has no
omitted variables). Further tests are needed to regress opinion data on factually accurate
secondary sources for better indicators of decentralization, job creation and promotion of
business friendliness policies.
Because of these model specification errors, a new model was proposed. By
using a Negative Binomial model, the number of businesses and additional new
businesses resulted in statistically significant variables for business development on
the number of business friendliness policies, political, administrative and % budget
autonomy. Therefore, it tentative can be found that to have a strong vibrant economy,
municipalities must have a highly developed local government and strong local industry
to engage in pro-growth policies. Governmental structure does matter when reporting job
creation. Strongly significant variables show the inter-relatedness of the number of
business to political and administrative autonomy.
The results show the likelihood of responsiveness to report higher number of new
businesses added last year leads to a more likely (positive) to have business friendly
policies, more political autonomy to make their own decisions. The negative binominal
17
model was statistically sound at a 95 percent confidence rate; the decentralized
municipalities were more likely to create and sustain larger numbers of new business.
Therefore, it can be tentatively concluded, that decentralized regions will be more likely
to engage in setting up new business and encouraging them to grow. Additionally,
mayor’s reporting higher poverty rate were more likely to report they had high number of
business and new business development. But one should questions why not promote
business friendly policies?
A simple explanation for this would be to suggest the lack of training for
municipal leaders within the hemisphere. The newly found decentralization established
within Latin American countries gave municipalities political and administrative
autonomy between the late 1970s and 1980s. The Mayor’s conference participants simply
might not know of the types of pro-business policies that they can provide for their
municipality. For that reason they would be attending a learning workshop/training
sessions like the mayor’s conference. The perception that they should be implementing
these types of policies by today’s economists does not shape the political realities that
many people face.
Conclusions
This study addresses various perspectives of the decentralization movement,
focusing on the regions political and economic trends. It attempted to determine if
decentralization process and, in particular, in regards to fiscal decentralization has helped
to promote economic growth through the establishment of more SMEs. It is hypothesized
that decentralized municipalities, or the higher percentage of government revenue is
18
generated at the local level, would promote more SMEs, pro-business type governments
programs, which ultimately induce economic development.
This research calls into question other outcomes, which suggest that decentralized
structures do not help for growth. Although the results in the study are only nuanced at
best that institutional structure does matter. It does call into question for more research in
this area. Future research should analyze whether the decentralization process has yield
better macro economic national outcomes. Specifically within regional analysis are
necessary.
Furthermore, more studies are needed determined what factors influence how
authorities may various policy tools to provide increase public benefits to their citizens.
Additional training programs could be the key to the success. Ultimately, this paper
argues that it is no longer a strictly economics argument but a political one, where
mayors and local officials need to begin to realize that if they are major players in
the their local economy, they will also be helpful for the economic development of
their countries.
19
Table 1 Variable Description
Variable
Description
Strength of Local Economy
Measured by the # of businesses in
municipalities
Increasing Strength of
Local Economy
Measured by the # of new registered
businesses in municipalities over the last
year
Budget Autonomy
Defined budget, creating and calculating
taxes and expenses
% of Budget Autonomy
(aka Autonomy)
Measures of the budget by inputs of local
taxes (property, fees and fines), and public
loans/debt minus inter-governmental
transfers and international or philanthropic
aid
Political Autonomy
Level of decision making authority,
originating internally
Administrative Autonomy
Level of capacity to define municipal
authorities, processes, and purchases, etc.
Business Friendliness
Composite of Question #13 which asked
what a series of questions to determine
what pro-business policies the municipality
has implemented in the past year.
Control Variables
Total Budget
Estimated in US dollars, measured in
thousands
Population of Municipality
Ranges between Less than 20k to More
than 1 million
Administrative Territory
Respondent from National Capital,
State/Provincial Capital, City, Town
Poverty in Municipality
Measured in 25% increments
*Italics are dependent variables
20
Table 2 Business Friendliness Questions
Please indicate the interest in the following:
Yes, we
have
1. The municipality has a local economic development promotional
office
2. The municipality organizes annual fairs and carnivals to advertise
local products
3. There are prizes and annual acknowledgement of best business and
entrepreneurs
4. The municipality has up-to-date maps and locations of local
businesses
5. The local government is open to free access of information to open
businesses: access, roads, and productive infrastructure, among other
things?
6. The local government has one-window to set up business activities,
commercial and industrial licensing?
7. The municipality has formal connections to the local business
community
8. The municipality has developed support programs for new small
business leaders?
9. The municipality has an updated plan of registered commercial
plants and productivity activities in your area?
10. The municipality receives of international cooperation?
11. The municipality has partnerships with local organizations: city
sisters, with local universities, international cooperation agencies
12. The municipality is a member of an inter- municipal association for
economic development
13. The municipality administers a micro-credit plan for small and
medium size businesses
14. Other (specify)
21
Table 3 Descriptive Statistics of Variables (obs=321)
Variable
Mean
Std. Dev.
Min
Max
Strength of Local
Economy (Numbiz)
891.01
4082.934
0
50000
Increasing Strength
of Local Economy
(Newbiz)
171.7
588.0923
0
4800
Business Friendliness
5.38
3.030404
0
13
Political Autonomy
2.03
.7548189
0
3
Administrative
Autonomy
2.03
.6934238
0
3
Budget Autonomy
1.899
.763812
0
3
% of Budget
Autonomy
41.46
36.19737
0
100
Control Variables
Total Budget
1.67e+09
1.72e+10
793
1.83e+11
Population of
Municipality
2.42
.6311043
1
3
Administrative
Territory
2.19
1.14439
1
5
Poverty in
Municipality
3.40
1.177602
1
5
*Italics are dependent variables
22
Table 4 and 5 Statistical Analysis Results
Results of Regression of Business Development on the use of business friendly policies
and decentralization variables Using Mayors and Authorities opinions.
Dependent Variable: Strength (Model 1 &2) and Increasing (Model 3 &4) of Local Economy (measure
of small business creation) using a log for number of businesses and new business created.
Regressor
(1a)
(1b)
(2a)
(2b)
Business Friendliness (X1)
.074
(.072)
.058
(.072)
.107
(.067)
.090
(.066)
Political Autonomy (X2)
.611**
(.283)
.630**
(.281)
.666**
(.280)
.685**
(.281)
Administrative Autonomy (X3)
.467
(.396)
.270
(.346)
.038
(.403)
-.218
(.367)
Budget Autonomy (X4)
-.220
(.310)
----------
-.300
(.288)
---------
% of Budget Autonomy (X5)
----------
.006
(.006)
----------
.006
(.005)
Intercept
-.171
(1.563)
-.290
(1.543)
1.645
(1.490)
Summary Statistics
R2
0.3231
0.3328
0.2694
0.2719
N
118
119
109
109
The regressions were estimated using data on mayors and local authorities from 13 countries in Latin
America. Standard errors are given parenthesis under coefficients. The individual coefficient is statistically
significance at ***0.01, **0.05, *0.1 levels using a two sided test.
Results of Negative Binomial of Business Development on the use of business friendly
policies and decentralization variables Using LAC Mayors and Authorities opinions.
Dependent Variable: Strength (1&2) and Increasing Strength (3&4) of Local Economy (measure of
small business creation)
Regressor
(1a)
(1b)
(2a)
(2b)
Business Friendliness (X1)
.118
(.076)
.139*
(.077)
.268***
(.076)
.256***
(.075)
Political Autonomy (X2)
.560*
(.300)
.316
(.300)
.791**
(.380)
.794**
(.386)
Administrative Autonomy (X3)
.293
(.475)
.661*
(.375)
-.213
(.462)
-.279
(.418)
Budget Autonomy (X4)
.366
(.360)
----------
-.500
(.368)
---------
% of Budget Autonomy (X5)
----------
.018**
(.008)
----------
.013
(.008)
Intercept
-1.522
-1.520
-1.330
-1.424
Summary Statistics
R2
0521
0553
.0669
.0693
N
122
123
118
119
The regressions were estimated using data on mayors and local authorities from 13 countries in Latin
America. Standard errors are given parenthesis under coefficients. The individual coefficient is statistically
significance at ***0.01, **0.05, *0.1 levels using a two sided test.
23
vif
Variable | VIF 1/VIF
-------------+----------------------
adminauton~y | 1.31 0.761797
politicala~y | 1.28 0.778980
poverty | 1.20 0.834529
autonomy | 1.17 0.852081
bizfriendl~s | 1.11 0.897336
adminterri~y | 1.09 0.914165
totalbudget | 1.06 0.944673
pop | 1.05 0.950975
-------------+----------------------
Mean VIF | 1.16
Graphic 1 Multicollinearity Tests
Graphic 2 Heteroskedasticity Tests
Test 2a: new businesses and business
Friendliness policies
Test 2b: new businesses and %
autonomy
1) High R2 (over .8) plus few stat sig variables
corr newbiz bizfriendliness politicalautonomy adminautonomy autonomy totalbudget pop adminterritory poverty
(obs=130)
| newbiz bizfri~s politi~y admina~y autonomy totalb~t pop admint~y poverty
-------------+---------------------------------------------------------------------------------
newbiz | 1.0000
bizfriendl~s | 0.2641 1.0000
politicala~y | 0.2256 0.0677 1.0000
adminauton~y | 0.0414 -0.0816 0.4355 1.0000
autonomy | 0.1493 0.1516 -0.0232 0.1086 1.0000
totalbudget | 0.3786 0.1616 0.1116 -0.0102 0.1114 1.0000
pop | 0.0361 0.0329 -0.0145 -0.0484 0.1828 0.0795 1.0000
adminterri~y | 0.2895 0.0698 0.0014 0.0639 0.1778 0.0665 -0.0272 1.0000
poverty | -0.1068 -0.2190 -0.0455 -0.1226 -0.2803 -0.0317 -0.0861 -0.2554 1.0000
24
Bibliography
Angelelii, Pablo, Carlos Guaipatin, Gloria Almeyda and Juan Jose Llisterri (2003). IDB
group support to the small and medium enterprise sector (1990:2002):
Achievements, Lessons and Challenges. Inter-American Development Bank.
Accessed Feb 12, 2008 http://www.iadb.org/Publications/
Bahl, R. and L. Johannes. (1994). Fiscal decentralization and inter-governmental
transfers in less developed countries, Publius, 24 (1): 1-19.
Bardham, Paranab (2002). Decentralization of Governance and Development. Journal of
Economic Perspectives 16(4): 185-205.
Blakely, E. and T. Bradshaw. (2002). Planning local economic development: theory and
practice, Sage Publications.
Birdsall, Nancy, Augusto De La Torre, and Rachel Menezes. (2007). Fair Growth:
Economic Policies for Latin America's Poor and Middle-Income Majority.
Washington, DC: Center for Global Development.
Beck Fenwick, T. (2007). Do municipalities matter? The politics of decentralized policy
delivery. Paper presented on the decentralization and federalism panel, Annual
Conference of the Latin American Studies Association, Montreal, Canada,
September.
de Mello, L.R. Jr. (2008). Public Finance, Government Spending and Economic Growth:
The case of Local Governments, University of Kent, UK working paper for the
OECD Development Center.
Delahite, Esteban (2005) “Promoting Economic Development with Tax Incentives: A
Primer on Property Tax Abatements” pp 265-286 in Public Financial Management,
edited by H. A. Frank. Middleton, Pennsylvania: Taylor & Francis.
Davood, Hamid and Heng-fu Zou (1997). Fiscal Decentralization and Economic Growth:
A Cross Country Study. Policy Research Department. Washington DC: The
World Bank.
Easterly, W. (2006) The white man's burden: Why the West's efforts to aid the rest have
done so much ill and do little good, New York: Penguin Press HC.
Escobar-Lemmon, M. (2001). Fiscal Decentralization and Federalism in Latin America,
Publius, 31(4): 23-41.
Falleti, Tulia G. (2005). A sequential theory of decentralization: Latin American cases in
comparative perspective. American Political Science Review. 99 (3): 327-346.
Falleti, T. (2005) Decentralization and democracy in Latin America (review)
The Americas, The Academy of American Franciscan History. 62 (1): 144-145.
Feiock, Richard, M. Jae Moon and Hyung Jun Park. (2008). Is the World Flat or Spiky?
Rethinking the Governance Implications of Globalization for Economic
Development. Public Administration in Review, 68 (1): 24-35.
Finot, Ivan, (2001). Latin American statistics on local level taxation. (working paper)
Santiago, Chile: ECLAC, accessible on line at www.eclac.org
Gibson, Edward L. (2004). Federalism and democracy in Latin America. Baltimore: The
John Hopkins University Press.
Giugale, Marcelo, Adam Korobow, and Steven Webb, “A New Model for Market-based
Regulation of Subnational Borrowing: The Mexican Approach” The World Bank.
25
Glaeser, E., Scheinkman, J., and Shleifer, A. (1995). “Economic growth in a cross-
section of cities.” Journal of Monetary Economics 36, 117-143.
Grindle, M. (2000). Audacious reforms: institutional invention and democracy in Latin
America. Baltimore: Johns Hopkins University Press.
Grindle, Merilee S. (2007). Going Local. Oxford: Princeton University Press.
Jin, Jing and Hen-Fu Zou (2002), How does fiscal decentralization affect aggregate,
national and subnational government size? Journal of Urban Economics 52.
Juckett, J. (2008). How can the poor benefit fro Trade liberalization? A comparative case
study of two exports promotion projects in Bolivia. Masters Thesis: University of
Texas, Austin
Kaufman, R. and J. Nelson. (2004). Crucial needs: weak incentives: social sector reform,
democratization, and globalization in Latin America. Washington, DC: Woodrow
Wilson Center Press.
Kettl, Donald F. (2000). Global Management Revolution. Brookings Institution Pres
Kliksberg Bernardo. (2005) Public administration in Latin America: promises,
frustrations and new examinations. International Review of Administrative
Sciences. Sage Publications 7 (2): 309-326.
Kuwayama, Mikio, Yasushi and Masatsugu Tsuji (2005). Information technology for
development of small and medium-sized exports in Latin America and East Asia.
Accessed Feb. 12, 2009 http://www.eclac.org/cgi-
bin/getProd.asp?xml=/publicaciones/xml/5/30115/P30115.xml&/comercio/tpl-
i/p9f.xsl&comercio/tpl/top-bottom.xsl
Light, Paul. (1998) Tides of Reforms: Making Government Work, 1945-1995. New
Haven: Yale University Press.
Litvack J. and J. Seddon, eds. (1998). Decentralization briefing notes. (Working papers)
Washington DC: World Bank Institute.
Malizia, Emil and Edward Feser. (1999) Understanding Local Economic Development.
New Brunswick, New Jersey: Center for Urban Policy Research.
Masgrave, Richard (1989). Public Finance in Theory and Practice. McGraw-Hill.
Melo, M., and F. Rezende. (2004). Decentralization and governance. In Democratization
and democratic governance in Latin America. J. Tulchin and A. Selee, eds.
Washington, DC: Woodrow Wilson Center for Scholars.
Montero, A. (2001). After decentralization, patterns of inter-governmental conflict in
Argentina, Brazil, Spain and Mexico. Journal of Finance.
Montero, Alfred and David Samuels. Decentralization and Democracy in Latin America,
Notre Dame Press From the Helen Kellogg Institute for International Studies
2004.
“Making Decentralization Work in Latin America and the Caribbean: A Background
paper for the Subnational Development Strategy,” Inter-American Development
Bank, Sustainable Development Department (sic 2001).
North, D., W. Summerhill, and B. Weingast. (2000). Order, disorder and economic
change: Latin America vs. North America. In Bueno de Mesquita and Root, eds.
Governing for prosperity. Harford: Yale University Press.
Oates, Wallace (1999). An essay on fiscal federalism. Journal of Economic Literature.
37(3): 1120-49.
26
Organization for Economic Co-Operation and Development’s (OECD) Web site on fiscal
federalism. December 1, 2007, retrieved from
http://www.oecd.org/department/0,3355,en_2649_22054704_1_1_1_1_1,00.htm
Oxhorn, P., J. Tulchin, and A. Selee, eds. (2004) Decentralization, democratic
governance, and civil society in comparative perspective: Africa, Asia, and Latin
America. Washington, DC: Woodrow Wilson Center Press.
Parry, Taryn, “The Role of Fiscal Transparency in Sustaining Growth and Stability in
Latin America” International Monetary Fund, IMF working paper (WP/07/220).
Perry, G., S. Javed Burki, W. Dillinger, (1999). Beyond the center: decentralizing the
state. Washington DC: World Bank.
Peterson, George, “Measuring Local Government Credit Risk and Improving
Creditworthiness,” World Bank, March 1998.
Peterson, Paul. (1995) The Price of Federalism. Brookings Institution Press.
Porter, Michael. (1995). The Competitive Advantage of the Inner City Harvard Business
Review, May-June.
Portes Alejandro and Brian Roberts, (2005). The free-market city: Latin American
urbanization in the years of the neoliberal experiment. Studies in Comparative
International Development (SCID). 40, no 1:43-82.
Rich, M. and R. Stoker. (2006). Governance and urban revitalization: Lessons from the
urban empowerment zones initiative. Prepared for the conference on A Global
look at Urban Regional Governance: The State-Market-Civic Nexus. Atlanta,
Georgia.
Rodrik, Dani. (2004). Rethinking Growth Policies in the Developing World. White paper.
Harvard University Web site.
Rodden, J. (2002). The Dilemma of Fiscal Federalism: Grants and Fiscal Performance
around the World. American Journal of Political Science, 46 (3).
Rodden, J. (2004). Comparative federalism and decentralization on meaning and
measurement. Comparative Politics. 36 (4): 481-500.
Rodden, J. and E. Wibbels (2002). Beyond the Fiction of Federalism: Macroeconomic
Management in Multi-tiered Systems. World Politics 54
Rondinelli, D. and G. Shabbir Cheema. (1981). Government decentralization in a
comparative perspective: Theory and practice in developing countries.
International Review of Administrative Sciences. 47: (133-45).
Rondinelli, D. and G. Shabbir Cheema. From government decentralization to
decentralized governance. (working paper) Washington, D.C.: The Brookings
Institute.
Rosenbaum, A. and Cristina Rodriguez Acosta (2006) “Chapter on Metropolitan
Governments in Latin America,” in De Vries, Michiel, P.S.Reddy and M. Samsul
Haque, Improving Local Government: Outcomes of Comparative Research.
Palgrave Macmillan. New York 2008.
Rosenbaum, A. (1997). Democracy, governance and decentralization. (working paper).
Presented at the United Nations Conference on New and Restored Democracies,
Bucharest, Romania, Sept. 2-4.
Santín, Leticia. (2004). Decentralization and civil society in Mexico. In P. Oxhorn, J.
Tulchin, and A. Selee, eds. Decentralization, democratic governance, and civil
27
society in comparative perspective: Africa, Asia, and Latin America. Baltimore:
Johns Hopkins University Press, (pp. 75-114).
Sassen, S. (1990). Economic restructuring and the American city, Annual Review of
Sociology, 16.
Smoke, Paul. (2005). “Fiscal Decentralization and Good Governance,” Decentralized
Governance 2005, United Nations Department for Economic and Social Affairs,
Public Administration and Development Management Division
Stiglitz, Joseph. (2003). Globalization and its discontents, W. W. Norton & Company, 1
edition, April.
Tulchin, Joseph, and Andrew Selee, eds. (2004). Decentralization and democratic
governance In Latin America. Washington, DC: Woodrow Wilson Center for
Scholar.
Taliercio, R. (2004). Administrative reform as credible commitment: The impact of
autonomy on revenue authority performance in Latin America. World
Development Journal. 32 (2): 213-232.
Tiebout, Charles. (1956). A pure theory of local expenditures. Journal of Political
Economy 64, 416-424.
Ward, Peter and Victoria Rodriguez. (1995) Opposition Governments in Mexico.
Albuquerque: New Mexico Press.
Weingast, B. (2006). Second generation fiscal federalism: implications for
decentralization democratic governance and economic development.
(commissioned paper) Washington, DC: ARD, inc and USAID.
Weingast, Berry. (1995). The economist role in political institutions market preserving
federalism and economic development. London: Oxford University Press.
Wiesner, Eduardo. (2003). Fiscal federalism in Latin America: From entitlements to
markets. Washington, DC: Inter-American Development Bank.
Willis, E., C.B. Garman, and S. Haggard. (1999). The Politics of decentralization in Latin
America. Latin American Research Review. 34 (1): 7-56.
World Bank’s Local Economic Development Website
http://go.worldbank.org/HL7UB4XIS0, retrieved April 1, 2000.
Williamson, John. (1990). Latin American Adjustment: How Much Has Happened.
White paper, Washington, DC: Institute for International Economics.
Zhang, Tao and Heng-fu Zou. (1998) “Fiscal decentralization, public spending and
economic growth in China.” Journal of Public Economics. 67: 221-240.
Article
Full-text available
This study uses a statistical model to examine which institutional factors influence the number of businesses created in a local area. It uses a survey of mayors, city council members and executives from thirteen countries in Latin America to gauge whether they implement pro-business policies. The analysis considers fiscal, administrative and political autonomy as influential factors and controls for municipal environmental factors. The outcome shows that whereas political autonomy and business friendly policies at the local level are important in attracting new businesses to the municipality, administrative and fiscal autonomy are less influential. The importance of this research lies in the theoretical analysis, which evaluates whether mayors and other local authorities see themselves as agents of growth. Specifically, the following questions are addressed. Does government structure matter to support municipalities with the appropriate level of economic policies? Does fiscal, political or administrative decentralization increase the production of small and medium size enterprises (SMEs)? This paper is organized into the following sections. First, it briefly summarizes the development attempts in Latin America and describes why entrepreneurship is key for equitable growth. Second, it provides a theoretical perspective as to why local government is needed to promote business friendly policies and ultimately economic development. Finally, this paper tests the proposed theoretical perspective and provides tentative conclusions.
Book
This book offers insights into the process and the practice of local economic development. Bridging the gap between theory and practice it demonstrates the relevance of theory to inform local strategic planning in the context of widespread disparities in regional economic performance. The book summarizes the core theories of economic development, applies each of these to professional practice, and provides detailed commentary on them. This updated second edition includes more recent contributions - regional innovation, agglomeration and dynamic theories - and presents the major ideas that inform economic development strategic planning, particularly in the United States and Canada. The text offers theoretical insights that help explain why some regions thrive while others languish and why metropolitan economies often rise and fall over time. Without theory, economic developers can only do what is politically feasible. This text, however, provides them with a logical tool for thinking about development and establishing an independent basis from which to build the local consensus needed for evidence-based action undertaken in the public interest. Offering valuable perspectives on both the process and the practice of local and regional economic development, this book will be useful for both current and future economic developers to think more profoundly and confidently about their local economy. © 2021 Emil Malizia, Edward Feser, Henry Renski, and Joshua Drucker. All right reserved.
Article
This article addresses the issue of fiscal decentralization in developing countries, and the use of intergovernmental transfers to achieve this objective. We find that developing countries have more centralized fiscal structures and argue that this is consistent with the theory of fiscal federalism. Economic development, however, does push the advantage toward decentralization. We also show that developing countries use a wide variety of transfer instruments to fund local governments, and that these instruments give the national government varying degrees of control over local government finances.
Article
This article uses cross-national data to examine the effects of fiscal and political institutions on the fiscal performance of subnational governments. Long-term balanced budgets among subnational governments are found when either (1) the center imposes borrowing restrictions or (2) subnational governments have both wide-ranging taxing and borrowing autonomy. Large and persistent aggregate deficits occur when subnational governments are simultaneously dependent on intergovernmental transfers and free to borrow- a combination found most frequently among constituent units in federations. Time-series cross-section analysis reveals that as countries increase their reliance on intergovernmental transfers over time, subnational and overall fiscal performance decline, especially when subnational governments have easy access to credit. These findings illuminate a key dilemma of fiscal federalism and a more precise notion of its dangers: When constitutionally or politically constrained central governments take on heavy cofinancing obligations, they often cannot credibly commit to ignore the fiscal problems of lower-level governments.
Article
Recent scholarship on the political determinants of decentralization has been useful for explaining initial decisions by national elites to decentralize, but the electoral independent variables favored by these analyses are insufficient to explain the complex process of decentralization over time. Distributional conflicts involving national chief executives and subnational governments occurring after decentralization is initiated shape the process in ways that alter initial conditions. This study assesses change in the degree, pattern, and pace of decentralization in four countries: Argentina, Brazil, Mexico, and Spain.
Article
In contrast to years of centralization when the national government dominated the states and municipalities, fiscal decentralization is now taking place throughout Latin America. This study considers the reasons for this change. Fiscal decentralization merits separate attention because the financial independence of subnational governments ultimately determines their success and power. Competing political and economic explanations are tested on a sample of 17 countries between 1985 and 1995. While federalism is a significant predictor of greater fiscal decentralization, other factors such as presidential power, structural adjustment, level of development, and country size also determine the level of fiscal decentralization.
Article
Recent research on federalism is extremely divided. While some tout the benefits of "market-preserving" federalism, others point to the fragmentation and incoherence of policy in federal states. This research bridges the divide by analyzing the political and fiscal structures that are likely to account for the highly divergent economic experiences of federal systems around the world. To test these propositions, the authors use an original data set to conduct analyses of budget balance and inflation in fifteen federations around the world from 1978 through 1996. The empirical research suggests that the level of fiscal decentralization, the nature of intergovernmental finance, and vertical partisan relations all influence macroeconomic outcomes. The findings have broad implications for the widespread move toward greater decentralization and for the theoretical literatures on federalism and macroeconomics.