DEVELOPMENT PRIORITIES IN AN EMERGING DECENTRALIZED ECONOMY: THE CASE OF ARMENIA’S LOCAL DEVELOPMENT PROGRAMS
Astghik Mavisakalyan*
Discipline of Economics, Faculty of Economics and Business, H04 MerewetherBuilding
The University of Sydney, NSW 2006, Australia
Abstract
Based on a data set including 217 communities in Armenia, this paper studiesthe choice of priorities of local development programs for the period of 2003-2005. Local development programs aim at improving public infrastructure and promoting local business development, the latter of which is documented to be having a relatively minute share. Faced with this evidence, the paper explores possible explanations in the institutional setting of local policy-making with reference to on-going discussions on the state of decentralized governance in Armenia. In addition, given the scope of local development programs, the degree of their responsiveness to community needs is explored for the case of drinking water infrastructurepriorities. The responsiveness is suggested to be higher in places where residents have better access to information on programs provided in newspapers.
Keywords:Local development, Local government, Armenia
1. Introduction
Decentralization to locally elected governments has been at the centre of policy experiments in recent years. A large number of countries across the globe have turned to decentralized approaches to public decision making[1].Differentpatterns of bottom-up governancehave emerged across countries with different degrees of involvement by local governments in deliveringpublic infrastructure services and local business development.
The main rationale behind decentralization is making governments more efficient and democratic by making them more responsive to local needs (see, for example, Oates, 1999; Shah, 1998).However, empirical evidence on the responsiveness of decentralized government to local needs has suggested mixed results.Whilein some casesit has been shown thatthere is a role for the institutions under decentralized systems to ensure that the preferences of citizens are reflected in policies (see, for example, Faguet, 2004; Rosenzweig and Foster, 2003) in others a negative evidence on responsiveness has been found (see, for example, Samoff, 1990; Slater, 1989).
The crucial importance of the institutional context and incentives in determining the scope and efficiency of local governments’ activities has been emphasized by many studies (see, for example, Andersson et al., 2006; Zhuravskaya, 2000).
Local development programs have been proclaimed as instruments for sustainable development by governments and donor institutions (see, for example, UN-HABITAT, 2005; World Bank, 2001).Since they represent a key component of decentralized governments,their scope and extent to which they reflect the local needs could be largely predictive of the success of subsequent stages of the decentralized governance and are thus an interesting subject for policy-oriented research.
This paper examines the local development programs in the case of an emerging decentralized economy: Armenia[2]. What do the local development programs target and what determines their scope? How important the local need for a given public good is in the process of determining its priority in the programs? Are there mechanisms in place influencing the degree of responsiveness of programs to local needs? These are the questions that are broadly addressed in the paper.
The first part of the paper is largely descriptive. It provides a general overview of the local development programs prepared by 217 Armenian communities for the period of 2003-2005. As documented, nearly 90% of the local development program options chosen by the communities are focused on improvingpublic infrastructures. This is not reflective of one of the “excellent” guiding principles in local development calling for a “holistic approach including social, environmental as well as economic issues” in development strategies (see World Bank, 2001). Faced with this evidence, the paper explores possible explanations in the institutional setting of local policy-making with reference to on-going discussions on the state of decentralized governance in Armenia.
The paper is based on asurvey data of Armenian communities where theheads of communities are asked to indicate, in order of priority, the 3 most important directions of the development programs in their communities. Local decision-makers have to make choices about how to employ their limited resources to meettheir objectives in the office. The paper next turns to providingbasic empirical evidence on the relative weight of the local need for a given public good in the process of decision-making of the head of community leading to the choice of the given set of priorities in the development program.
Having done this, the paper further exploresthepossible differences in incentives of local governments across communities that could lead to varying degrees of responsiveness of their development programs to local needs. The only explicit legal mechanism enforcing the public awareness on the development programs is the requirement of the law on local-self governance to make them accessible to the members of the communities by publishing them after they are approved by the representative body of the community. It is conjecturedthat the governments wishing to strengthen their positions in power may tend to put more importance in addressing the local needs of communities in theirdevelopment programs in places where the population has higher access to local newspapers, and thus will be informed about the programs once published. The information advantage in areas with higher newspaper circulation might thus lead to more responsive development programs[3]. The paperprovides a basic testing of this idea based onthe data on regional press circulation in Armenian communities.
Theempirical tests arecompletedon the example of the drinking water infrastructure priorities motivated by several considerations. First, it is one of the highest priorities in local development programs amongthe Armenian communities. As Table 1 demonstrates, 26.6% of communities in the sample have the drinking water as the first priority direction of their development, 15.58% as their second and 15.61% - third. In addition, being one of the most basic public goods in its nature being of primary necessity to everyone[4], the provision of the drinking water should have a minimum relationship to the identity of the leadership for which it is not possible to control in this paper due to data limitations[5]. Finally, the choice is motivated by the availability of data on the penetration rates of this public good: the share of population with safe water access[6].
While decentralization has been at the centre of the political and economic transformation reforms of Armenia, an empirical study to examine the scope and responsiveness of development priority choices by local governments using a relatively large sample of communities is non-existent[7]. This paper makes some initial input in that direction.
The remainder of thepaper is organized as follows. Section 2 presentsan overview of the scope of development priority choices made by the Armenian local governments in the institutional setting of local policy-making. Section 3 describes the data and provides some basic testfor responsiveness of development programs to local needs for the case of the drinking water. Finally, section 4 concludes the analysis with suggested options for policy.
2. Institutional Context and Scope of Local Development Programs
- The system of state governance
The process of decentralization in Armenia started in 1995 with the adoption of the constitution. The institutional basis of the decentralized economy was created during the subsequent years.
Based on the constitution and the 1996 law on administrative-territorial divisions, the republic was sub-divided into 10 administrative units named marzes (provinces), the capital Yerevan with the special status of a marz. The marzes in their turn were sub-divided into urban and rural communities (into district communities in the case of Yerevan).Despite the relatively small size of the country and its population[8], 931 communities were established out of which 12 district communities of the capital Yerevan, 48 - urban and 871- rural[9].
There are 2 levels of government in Armenia: central and local.
Marzes do not constitute a separate level of government as they do not have elected officials[10] nor do they have budgets of their own.Article 107 of the constitution stipulates that it is the responsibility of the marz administrations to implement the central government's territorial policy, and to coordinate the activities of the territorial branches of the national executive bodies.In addition, they possess the authority to supervise the activities of the local governments and act as a liaison between the central and local governments.
The system of local self-governance in Armenia was formed with the first elections of local self-governance bodies that followed the adoption of the law on local self-governance in 1996[11]. The communities are governed by the heads of communities (the executive body) and representative bodies called council of elders[12] who are elected locally every 3 years.
- Local responsibilities and resources
The functions and responsibilities of the communities are laid down in the law on local self-governance of 2002. The law entrusts the local governments with 2 types of powers: own (including mandatory and voluntary powers) and delegated by the state.
Table 2 presents the broad division of responsibilities between the central and local governments. Some functions are considered to be the concurrent responsibility of central and local governments. Local governments are assigned with roles and responsibilities in a number of areas, yet there is a certain degree of ambiguity in the language of the law and an uncertainty on how the local governments actually implement their functions. In particular, while certain responsibilities entrusted to the local governments within each of the broad areas are relatively clearly stated in the law, descriptions of others are quite vague.For example, the parts of the law related to the maintenance and improvement of public infrastructures in most cases clearly state the responsibilities of the local governments (e.g., the local governments are responsible for exploiting community roads and bridges, collecting garbage, renovating specialized schools and kindergartens, etc.)[13]. On the other hand, the law states, for example, that the communities “stimulate the implementation of the programs of those initiating economic activities and promote and assist to providing for their more effective operations in the community through the decisions made under their authorities” without statement of instruments that could potentially serve to that end[14].
The local share of public spending in Armenia is rather low. Tumanyan, 2005a, documented that only 5.7% of total public spending took place at local level in 2002. Table 3 illustrates Armenia’s composition of local public expenditures in selected years. The average annual per capita budget spending of a community in the sample was less than 6 US dollars. Nearly 99% of expenditures were made from the administrative budget with general community services comprising more than half of the total expenditures in all years.
To exercise their responsibilities, the local governments rely on their own sources of income and state transfers. The local own revenues in Armenia consist of (1) taxes[15] and duties[16]; (2) non-tax revenues. The state transfers include subsidies and loans. The relative importance of different sources of local revenues in Armenia is described in Table 3.Although the law provides for own tax bases for local governments, these were less than 40% of total local revenues as of 2001. Local governments in the sample are heavily dependent on state transfers that have reached up to 41.03% of all revenues in 2001[17]. Most of the state transfers are allocated to community budgets in the form of financial equalization subsidies on a free and discretionary basis.
- Preparation of local development programs: An overview
World Bank, 2001, points out that local economic development should always begin with the formulation of a strategy to be in accordance with“good practice”. Among the typical core choices of local development strategy options in use in many communities today,the reportpoints out the encouragement of new enterprises and support of local business growth, improvement of local business investment climate, promotion of inward investment, investment in hard and soft infrastructures[18].It contends that “the holistic approach including social, environmental as well as economic issues” is one of the “excellent” guiding principles in local economic development.
Local development programs are the main document reflecting municipal policy in Armenia. The law on local self-governance of 2002 mandates the head of the community to prepare the 3 year development program of the community and present it to be ratified by the council of elders.
Table 4 presents the directions and activities included in the local development programs in the sample. A quick look at the table shows that the current approach to the prioritization of local development activities in Armenia does not reflect the afore-mentioned “excellence” principle suggested by the World Bank - nearly 90% of 575 activities prioritized by 217 local governments in the sample present investment in different types of public infrastructures[19].
The largest share of the prioritized activities (40.34 % of the total number of activities) is planned in the communal services, particularly in drinking and irrigation water infrastructures (16% and 10.96% of total respectively). The other most popular choices of planned activities include road construction (16 % of total), investment in cultural facilities (10.96% of total) and schools (8 % of total), etc.
Only 8% of the prioritized activities in one way or another are aimed at encouraging businesses and promoting employment in the communities. 4.35% of the communities prioritized activities aimed at developing the agricultural sector, ranging from purchasing seeds to establishing agro-processing units. 2.09% of activities' share aimed at encouraging enterprises in general. Finally, “job creation” and tourism promotion took shares of 0.87% and 0.69% respectively.
Undeniably, the hard and soft infrastructure factors are the backbone of successful local economies (see, for example, World Bank, 2001). The quality of public infrastructures, in particular of roads, water networks, telecommunications, etc. may affect the overall attractiveness of the area for business establishment. In addition, investment in different social infrastructures including schools, health and sport institutions, housing, etc., may further enhance the attractiveness of the area through leading to higher productivity of labour. However, clearly the existence of public infrastructures by itself may not be sufficient for boosting the local business development and may need to be complemented with other measures aimed at improving business climate.
What could determine the given scope of local development programs in Armenia?
First, in light of the law of local self-governance mentioned earlier, local governments’ responsibilities on public infrastructure are stated relatively clearly. This goes in contrast to responsibilities on business encouragement and support, where vague and generalized formulizations prevail.The situation might befurther complicated by the lack of real instruments (e.g., business registration, licensing, etc.) delegated to local governmentscomplimented by a lack of experience on how to actually “do” business development[20].
On the financial side, the local governments may not have strong incentives for expanding the tax base (considering the fact that only land and property taxes are directed to local budgets). Moreover, given the existing system of fiscal equalization where higher tax revenue in a community reduces the amount of equalizing transfers received by it, certain local governments might practically appear in a position of being able to “afford” reducing the tax base as it may be partially compensated by higher equalizing transfers from the central government.
In addition, business development programs might in some cases prove too costly to be undertaken by the communities, given their limited revenue generating capacities. As can be seen in Table 5, business development programs are among the most “costly” ones in terms of allocated human and financial resources[21]. It is worthwhile noting that the communities in general rely heavily on non-own revenue sources (mostly other non-governmental sources) for financing their programs in all sectors[22]. This heavy dependence by itself could potentially introduce an additional limitation in the scope of the choice of development priorities by the communities[23].
An additionalobservation that can be made from the study of the choice of prioritized activities by the communities is the heterogeneity in the style and the scope of the planned activities. While in some cases the tasks are clearly formulated to be aimed at, for example, renovating the community school buildings, others vaguely suggest“job creation”, potentially leading to inherently weak programs[24].Among other reasons, this could be explained by the absence of any legally defined requirements or general methodological notes on preparation of development programs despite their crucial importance for the subsequent stages of the decentralized governance of the communities. As previously observed, under circumstances where the local elected bodies independently decide on the volume, structure and content of the information included in the program often a situation arises where the programs are a little more than a “wish list” reflecting local election promises(see Drampian, 2003). In addition, this could again be the result of the absence of experience in actually preparing development programs at local government levels.
Given the existing choice of local development program directions by the communities,this paper then investigatesthe degree of their responsiveness to the local needs. After all, the rationale behind introducing local development programs as tools of a decentralized governance of the economy largely relies on the condition that they have the potential to closely reflect the local problems. In the next chapter the paper tests whether this rationale works in the case of Armeniaproviding a basic teston the example of the prioritization of programs in the drinking water sector – one of the most widely chosen program options by the Armenian communities.
3. Responsiveness of Local Development Programs: Case Study of Drinking Water Provision Plans
- Local government mandates in drinking water sector
Under the centrally-planned regime, the national governments exerted tremendous economic control over the water management system. The situation changed dramatically after the collapse of the Soviet Union - as a result of decentralization reforms, the exploitation of the water systems under the community’s ownership became one of the important responsibilities mandated to local governments. The law on local self-governance of 2002 entrusts the local governments mainly with mandatory powers for the regulation of communal services, including the exploitation of water provision systems.