rural-urban dynamics_report.pdf - Khazar University

156 URBANIZATION AND THE MDGS GLOBAL MONITORING REPORT 2013
constitutes one of the “dangers” of decentralization
(Prud’homme 1995). Assume, for
example, a SNG whose total revenue is composed
of 10 percent in taxes and 90 percent
in transfers. All other things equal, financing
a 10 percent increase in expenditures requires
doubling the tax effort. That often exceeds
the institutional capacity as well as the willingness
to assume the political cost of raising
taxes. Transfer dependence is particularly
large for regional governments in many unitary
government systems where policy decisions
are channeled to subnational governing
units for implementation (such as Bangladesh
and Bolivia), because tax bases that are best
suited to regional management (automobile
taxes, for instance) have been given to municipalities.
For SNGs in rural areas, therefore,
the possibilities to engage in redistribution
through local taxation are limited.
Redistribution therefore needs to come
mainly from the expenditure side, which
depends critically on the level of expenditure
decentralization. More often than not, an
SNG manages only parts of the service delivery:
public investment and infrastructure.
Human resource management, particularly
in the social sectors (health and teaching personnel)
has long been a politically sensitive
area, and most management decisions remain
centralized in many countries.
Given these uneven advances and levels
of autonomy in expenditures, SNGs in rural
areas are often constrained in their ability to
provide packages of services to the poor and
to target the incidence of spending so that services
are directed where the needs are greatest.
In addition, the often low population density
implies higher per capita costs in providing
public services (Hon 2009; Kitchen
2006; McMillan 2007). Consider that the
marginal cost in service provision for water
and sewerage increases substantially in rural
areas, and it is particularly high for tertiary
education. Although education costs for primary
and secondary education are often less
affected by economies of scale than other
services, factors such as very small class size
can increase costs substantially even in rural
areas. Roads can facilitate access between
rural areas and economic centers, but, given
the limited possibility to establish user fees
and toll roads, financing by other entities or
higher levels of government is required.
These challenges have important consequences.
They require different levels of
governments to contribute with grant financing
to service delivery. These coordination
requirements can be particularly significant
at the regional or intermediate level of government,
where there may be dual authorities.
Investment funds can play a large role in
rural areas because they cofinance or execute
public works directly. Some of these entities
have been trying to substitute for weak institutional
capacity. But such efforts have also
led to a bypassing of rural SNGs in service
provision, creating an undesirable spiral of
weak accountability and capacity.
The financing challenge of the MDGs in
metropolitan areas
In contrast to rural areas, SNGs in urban
areas have greater fiscal capacity and hence
can influence outcomes much more through
their own revenue decisions. Nevertheless the
overall level of transfer dependence of metropolitan
governments can be substantial. Some
of the more financially autonomous metro
areas include Addis Ababa, Melbourne,
and Pretoria (Shah 2012). Cities like Berlin,
Bucharest, and London, however, are dependent
on central grants for about 80 percent
of their revenue. Absent any convergence
effects regarding how to structure revenues,
fiscal capacity will increase as agglomeration
unfolds. The tax incidence of revenue
decisions naturally depends on the particular
taxes and user fees applied. Common revenue
sources are land-related revenue (property
taxes, improvement levies, auctions, leases),
which can affect the locational decisions
and income of individuals; personal income
taxes (applied at the local level in 13 of 27
Organisation for Economic Co-operation and
Development [OECD] countries); and user
fees, which are usually applied at uniform
rates and therefore can have regressive effects.
Institutional changes often cannot keep up
with rapid urbanization and therefore usually
remain informal. It is no surprise then that
many informal local institutions are merely