Sunday, 21 August 2011

Redesigning the Architecture of Greek Local Government

The ongoing European debt crisis has singled out the peripheral economies of the European South by shedding light on their latent pathologies and malfunctions. Often viewed as an epitome of a ‘Mediterranean’ model of political and economic organization, Greece gave utmost expression to those ills pertaining to a weak and inefficient social contract. The Greek post-dictatorial political economic system has been marked by an explosive mix of statism, welfarism, and popular distrust of public institutions that eventually gave way to a downward spiral of state degradation and social degeneration. The country has thus been trapped in a self-enforcing vicious cycle of low state (fiscal and legal) capacity, high policy implementation costs, and depreciating social capital.

The most severe repercussion of such turmoil has been to discredit or even dismantle the social contract of state-society relations that forms an integral part of any stable and prosperous polity. Furthermore, the erosion of trust in state and public institutions has sapped them of their so-called fiscal and legal capacity, i.e., their ability to extract societal resources for the common good, to protect property rights, and to enforce the laws of a democratically elected government.

The exigencies of the current crisis have brought all these issues to the fore and placed them at the center of social discourse. Notwithstanding the excessive social and economic disruptions of austerity and internal devaluation, efforts to overcome the crisis can arguably serve as a springboard for deep-cutting and far-ranging reforms bearing fruits in the medium and long run. Escaping the suboptimal trap of eroded public trust, depreciated social capital, and low fiscal and legal capacity necessitates measures that enhance the public sector’s capacity to generate public value and more specifically to deliver in terms of public services. This should be regarded as one of the preconditions for the long-term political and economic sustainability of structural reforms.

The debt crisis has heightened general demand (both home and abroad) for the retrenchment and the regeneration of the Greek state, both in terms of its size, its reach, and its internal organization. Although it has long since formed part of political rhetoric in Greece, the project of ‘reinventing government’ has yet to take off and deliver any tangible results.

There are two elements to state regeneration: public sector reform and structural consolidation of local government. Although much can be said about the former - drawing on the experiences of other countries -, I choose to focus on the latter issue: more specifically on the constitutional redrawing of local, municipal, and peripheral boundaries and the interjurisdictional allocation of policy prerogatives. The successive projects of administrative decentralization and jurisdictional reconsolidation under the code names of ‘Capodistrias’ and ‘Callicrates’ have constituted steps in that direction.

Greece has always been a unitary state with high levels of centralization. The predominance of centripetal forces agglomerating discretionary power and authority at the administrative center (e.g., Athens) can be explained through a path dependent argument: following its liberation from foreign occupation, the gradual territorial expansion of the state and the ensuing need to assimilate motley cultures and populations into a homogeneous modern nation-state led to the concentration of political and economic power at the center and away from the periphery. The porousness and instability of borders ended up thwarting any tendencies towards decentralization of policy formation and public goods provision. The resulting architecture of Greek government featured such territorial units of local government as municipalities, prefectures, peripheries, and decentralized administrations, each with varying degrees of organizational capacity, discretion, and political accountability. Overhauling this fragmented administrative system of Greece has been the subject of grand reform plans under the code names of ‘Capodistrias’ (1998) and ‘Callicrates’ (2011). These were essentially projects of administrative decentralization and municipal consolidation that aimed at the simplification and streamlining of local government operations and the enhancement of the quality and efficiency of public service provision; yet, their implementation has often met with strong resistance at the local level. The remainder of this memo will first assess the effectiveness of local government reform in Greece against a certain set of principles and then put forward a list of proposals that can help take the reforms one step further in achieving their desired outcomes and objectives.

The optimal constitutional design of government in a unitary state like Greece refers to the allocation of public goods provision at either the central or the local level (centralization vs. decentralization) and the assignment of policy prerogatives as part of shared or self- rule. The optimal size and scope of policy jurisdictions should be guided by the following set of principles and objectives: i) they should primarily aim at achieving economies of scale in the provision of public goods as well as administrative (budget) efficiency (especially in light of the fact that municipalities are also subject to the conditionalities of the Memorandum), ii) they should minimize diseconomies of scope in term of organizational capacity and human resource management, iii) they should capture positive externalities and spillover effects generated by the consumption of public goods and services across geographical units, and finally iv) they should account for interjurisdictional mobility and its effects on the local tax base and the local labor market. With respect to financial consolidation and fiscal decentralization, the size and policy scope of local jurisdictions should correspond to their tax-collection powers and revenue-raising capacity, matching revenues to line-item expenditures, ensuring the transparency of budgeting procedures, and enabling the effective monitoring and enforcement of fiscal discipline (and external conditionality imposed by the Memorandum).

In practice, the task of having the central administration redraw municipal boundaries and jurisdictions is hampered by several factors, such as i) severe informational asymmetries with respect to the center’s knowledge of local preferences and needs, ii) the lack of administrative capacity at the level of central government, and iii) the frequent display of public dissent at the local level. To that effect, local government reform needs to be simplified and administrative decentralization needs to be injected with more flexibility in its implementation, both however on the basis of a clear delineation of policy jurisdictions and prerogatives between the central and the local level.

Another dimension of optimal constitutional design that merits attention refers to the role of local elections and the designation of either elected politicians or centrally appointed officials to different tiers of government. Having local public officials elected serves the main purpose of holding them accountable to their constituents. The electoral mechanisms of accountability operate in two ways: i) elections have a moral-hazard-correcting function by means of disciplining and/or ousting officials engaging in corruption, wastefulness, or slack and ii) they also play an adverse-selection-correcting role by way of screening politicians deemed unfit or unqualified for the position. Naturally, there is a trade-off insofar as the positive benefits of having local officials elected may be outweighed by the adverse effects, namely the possibility of capture by special interests or the incentives to pander to public opinion.

In the case of Greece, the question that arises is how the above trade-off plays out under a fuzzy framework of interjurisdictional allocation of prerogatives between central and local government. It is quite debatable whether the introduction of elections at the local level has led to an improvement in the quality of services provided, in light of the fact that the jurisdictional scope of local policy functions has been quite malleable and subject to the fickle whims of the government of the day. The result of this is that elected local officials are often prone to confront public criticism and blame by deflecting jurisdictional responsibility for particular services and public functions to other tiers of government.

In light of the above guiding principles for optimal constitutional design, the need for municipal consolidation and policy decentralization became quite evident in Greece in the late 90s. Clearly the size of local jurisdictions and their scope of policy prerogatives have in general been ill-suited for the efficient and socially optimal provision of public services geared towards the complex needs of modern society. Furthermore, the pre-reform demarcation of Greek local jurisdictional boundaries essentially undermined the role of local elections as an effective mechanism of accountability and selection of local officials. However, even if a more efficient architecture of local government can be devised, the question remains how it can be more effectively implemented. While ‘Capodistrias’ and ‘Callicrates’ constituted centrally administered projects of municipal consolidation at a grand scale and high level of complexity, the lack of accurate information about local needs and preferences rendered some of the realized mergers mutually undesirable and socially inefficient, as evidenced by frequent instances of local protest and resistance to implementation.

Because of the inefficiencies stemming from asymmetric information between the center and the locality, other countries (e.g., Finland, Japan) chose to decentralize the implementation of municipal consolidation projects. In other words, municipal mergers were locally and voluntarily effected by mutual consent, often subject to subsidy and fiscal transfer schemes aimed at overcoming local conflicts of interest and opposition by municipal councilors. In yet other countries, plans of local government reform followed a different approach. They set the legal framework for more flexible forms of intercommunal cooperation, such as the Établissements Publics de Coopération Intercommunale (EPCI) in France and the Mancomunidades in Spain. These constitute local legal entities, such as schooling and hospital districts, joint waste-collection authorities or corporations, to which participating municipalities delegate some of their functions and powers. Local goods and services thus provided are financed either through municipal budget transfers or service-specific user fees. Therefore, the degree of fiscal autonomy of such intermunicipal entities varies depending on their composition, functions, and the national legal framework in place. Public finance theory and practical experience hence both dictate that the demarcation of jurisdictional policy-specific boundaries should be subject to locally decentralized, flexible, and unrestricted mechanisms of implementation.

Therefore, what I propose is the decentralization of such decisions of jurisdictional demarcation and reallocation by means of incentivizing municipal mergers, promoting interjurisdictional labor mobility, and designing a clear framework for policy-specific intercommunal cooperation (e.g., through joint waste-collection authorities). While in principle previous reforms have laid out the rules for the consolidation of local jurisdictional boundaries, Greece needs a clear institutional framework for i) the delineation of policy prerogative across different levels of government, ii) the promotion of regionally balanced growth and the removal of impediments to interjurisdictional mobility, iii) the implementation of effective and transparent monitoring and enforcement mechanisms, and finally iv) the enhancement of the institutional role of appointed administrative officials and secretaries in monitoring fiscal outcomes and overviewing municipal mergers and cooperation agreements. During such dire times of economic crisis and social turmoil, sound public policy should take precedence over politics, in order to restore trust in state institutions and rekindle popular involvement in the public sphere.

Nikitas Konstantinidis, Fellow in Political Science and Public Policy, London School of Economics and Political Science, Department of Government

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