Fiscal decentralization and the Efficiency of Local Governments in Central and Eastern Europe

Public Administration, Governance and Globalization (PAGG) is a series of publications aimed at advancing knowledge and understanding about public, nonprofit, private and nongovernmental organizations and institutions. The series covers governance, administration and management at local, national, regional, and international levels, focusing on the context of rapid change and globalization.

A book on Fiscal Decentralization Reforms: The Impact on the Efficiency of Local Governments in Central and Eastern Europe, published by Springer, is part of this series. Central-Eastern European (CEE) countries, where there was strong state centralism, experienced the transition to fiscal decentralization after the fall of communist regimes. However, the process has significant differences compared to other European countries. The authors use econometric methods and regression models to analyze the impact of fiscal decentralization reforms on local government efficiency and contribute to scientific explanations.

The book is divided into three parts:

  • The first part presents a theoretical framework for analyzing factors affecting local government efficiency in the framework of second generation theory of fiscal federalism. It identifies seven key economic and institutional factors: information asymmetry, bureaucracy behavior, municipal competition, fiscal illusion, intergovernmental grants, municipal size, and environmental and institutional environment. The authors conclude, that due to differences in fiscal and political variables their influence on local government efficiency is strongly country specific.
  • The second part analyzes local self-government in CEE countries (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia), focusing on their development, constitutional foundation, concept, scope, protection, administrative structures, resources, responsibilities, supervision, financial resources, associate rights, legal protection, and challenges for fiscal decentralization based on applying the principles of the European Charter of Local Self-government.
  • The third part of the study examines the impact of fiscal decentralization on the efficiency of municipalities in the Czech Republic. The Czech Republic was chosen due to its availability of data and its fragmented municipal structure, a typical characteristic of CEE countries. Beyond the main research question – “what is the impact of fiscal decentralization on the efficiency of municipalities in the Czech Republic” – the authors aim to answer other questions, such as effects by size categories, services provided, NUTS II units, regions and how efficiency changed over time? Technical efficiency of local governments was measured by the ratio of a complex set of service output indicators, population, built-up area and the major input factors (current expenditures, financing and political characteristics).

The study revealed that smaller municipalities produce the lowest efficiency values and the traditional U-shaped curve on average efficiency (increase of coordination unit costs with larger size) cannot be applied. The scope of state administration services is closely correlated with average municipal efficiency. Differences by NUTS II units and regions did not influence municipal efficiency significantly. Efficiency improvement over time was observed in small size municipalities, entities with state administration services and in some NUTS II units (but not the large regions).

This finding raises potential concerns about the transparency and accountability of public officials in larger municipalities, as their higher income seems to impede their efficiency in managing public funds. This suggests a need for stronger mechanisms to ensure that citizens can effectively hold politicians accountable for their use of public funds, regardless of the size of the municipality. The conclusion and proposal for public policy are to employ management strategies and accountability frameworks to enhance efficiency. The book studies  the unexplored issues of decentralization and efficiency in the Czech Republic, providing information on self-government development and factors affecting local government efficiency for Central-Eastern European and non-European readers.

Access the book:

Michal Plaček, František Ochrana, Milan Jan Půček, and Juraj Nemec. 2020. Fiscal Decentralization Reforms: The Impact on the Efficiency of Local Governments in Central and Eastern Europe. Springer.

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