Will Consolidation Improve SubNational Governments? William F Fox And

will consolidation improve sub-national governments? william f. fox and tami gurley* revised october 3, 2005 introduction =======

Will Consolidation Improve Sub-National Governments?
William F. Fox and Tami Gurley*
Revised October 3, 2005
Introduction
============
Governments throughout the world are seeking ways to deliver public
services more efficiently and effectively. Consolidation of local
governments is one option often discussed, although the expectations
frequently differ. For example, some expect service delivery costs to
fall, others hope for more even or equitable provision of public
services and others anticipate better planning across a metropolitan
area. Various political motivations may be reasons for the change as
well. This paper is intended to identify the issues involved in
deciding whether consolidation will on net yield positive economic
benefits. The basic conclusion is that no single policy advice can be
given on whether consolidation is a good idea, with the facts and
circumstances of each case determining whether consolidation or not is
beneficial. Many factors that are specific to the circumstances of
each place can affect the potential gains from consolidation including
the goals expected from consolidation, the structure of government
existing prior to consolidation, local demographics (for example,
population size and density), the set of responsibilities assigned to
local governments, and the homogeneity of preferences within the area.
The number and size of municipalities differs widely across countries
and the differences could have important implications for whether
consolidation would be desirable and beneficial. In many cases, and
particularly in some Eastern Europe countries, the number of local
governments has grown rapidly (see Table 1). Croatia had 120 cities in
1993, but the number had grown to 643 cities and municipalities by
1998, with an average size of 8,800. Excluding Budapest, Hungary's
more than 3,000 municipalities, many of which were formed during the
1990s, average only 2,800 people.1 Municipalities in some other
countries, such as Switzerland (average 2,100) and France (average
1,500) are also very small. As a general rule, the local governments
in these countries have very limited responsibilities. On the other
hand, local governments in countries such as Lithuania and Yugoslavia
average nearly 50,000 people up and in England and Wales, 126,000.
Compulsory amalgamations in Great Britain, Sweden and England led to
the larger local governments. The geographic size also varies from
less than 20 square kilometers in countries such as France, Slovakia,
and the Czech Republic to more than 1000 square kilometers in Sweden
and Lithuania. Similarly, the number and size of municipalities
differs substantially among developing countries (see Table 2).
Table 1
Average Population and Geographic Size of European Local Governments
Country
Average Population in Local Governments
Average Area (Km)
Great Britain
126,128
533
Lithuania
66,300
1,166
Yugoslavia
49,500
487
Bulgaria
35,000
432
Sweden
30,040
1,595
Netherlands
27,559
60
Denmark
18,760
150
Belgium
16,960
na
Poland
15,561
130
Macedonia
15,800
209
Slovenia
10,300
106
Albania
10,000
77
Finland
10,870
730
Norway
9,000
710
Croatia
8,800
104
Romania
7,600
81
Italy
7,105
38
Estonia
5,713
178
Germany
5,575
na
Spain
4,930
60
Ukraine
4,600
56
Latvia
4,300
115
Austria
3,421
na
Hungary
3.242
32
Switzerland
2,468
na
Slovakia
1,900
17
Czech Republic
1,659
13
France
1,580
15
Source: Adapted from WorldBank (2002) and Swianiewicz (2002).
Table 2
Average Population and Geographic Size of Selected Local Governments
Country
Average Population
Average Size (sq. km.)
Sudan
293,400
17,400
Ivory Coast
221,769
3,740
Nigeria
204,267
1,206
Kenya
191,916
3,344
Somalia
142,464
7,591
Uganda
86,222
775
Angola
77,822
7,510
Rwanda
76,700
236
South Africa
69,842
1,771
Ghana
26,410
301
Algeria
21,124
1,546
Mali
15,124
1,771
Source: en.wikipedia.org/wiki/wikipedia,
http://lcweb2.loc.gov/frd/cs/continent_africa.html
The level of government that is making decisions on whether to
consolidate can also differ across countries. In some cases the
national government is considering whether to mandate consolidation,
often across the nation, and in other cases a local decision is being
made that would only affect governments within a single local area.
These will reflect different decision-making processes, diverse
expected goals from consolidation and differing political motivations.
The decision of whether to consolidate may differ from the decision on
the optimal size of local government. An important reason is that
there can be significant transition costs in moving from the existing
government structure to the consolidated government, both in terms of
establishing a new political structure and in undertaking the
technical steps of broadening service delivery operations from a city
to a region. Thus, it is possible that a larger government would be
appropriate if government were being designed from a clean slate, but
the larger government would not be efficiency enhancing given the
costs of moving from the existing structure to the larger government.
Also, the decision of whether to consolidate differs from the decision
on whether and how much to create a devolved government structure in a
country. A relationship exists between these factors since the
potential cost side gains from consolidation depend on the set of
services that are devolved to the local level, but the deciding
factors need not be the same. No attempt is made here to address
devolution issues.
The paper is divided into six basic sections after this introduction.
The first section is a brief summary of recent government
consolidations in several different countries. The next four sections
address basic motivations for consolidation: effects on the costs of
service delivery, effects on the ability to deliver the services that
people demand, effects on the ability to engage in regional planning
and the equity implications. The paper ends with a brief summary and
some conclusions. The paper is written as though these various
elements of the consolidation decision are separable in order to allow
a tractable discussion. In practice, the issues may not be so easily
divisible.
Recent Experiences with Consolidation
=====================================
Many countries have either consolidated or considered consolidating
local governments during the past 50 years, but some have rapidly
expanded the number of governments as well. Essentially every Western
and Northern European country reduced the number of local governments
during the second half of the twentieth century in consolidations that
were generally forced by the national governments. More than
three-fourths of the local governments were eliminated in countries
such as Sweden, Denmark, and Great Britain, resulting in local
governments that are large on European standards. The Nordic country
reductions happened around 40 years ago and in Great Britain the
consolidations were around 20 years ago. The declines were more modest
in places like France and Switzerland, and Italy increased the number
of local governments. East European countries have had a more mixed
experience during the past 15 years, with countries like Hungary,
Croatia and the Czech Republic significantly increasing the number of
local governments. In some of these cases, such as in Hungary, this
represented a movement back to the many small local governments that
had existed until the 1970s. East European countries like Bulgaria and
Romania did not experience the same fragmentation, even though the
number of local governments had also been reduced in some cases.
The United States has had very limited experiences with consolidating
general-purpose governments and the number of these governments has
actually increased over the past 50 years. Lexington, Kentucky and
Nashville, Tennessee are two exceptions, where the cities inside the
county were combined with the county government in order to reduce
confusion about service responsibility and in hopes of lowering costs.
Neither the state governments nor the national government were heavily
involved in these decisions and the vast majority of local governments
in Kentucky and Tennessee have not followed by consolidating.
Consolidation of horizontally equivalent general-purpose governments
has been very uncommon.
U.S. States have been more aggressive in encouraging local governments
to combine school districts, particularly during the middle part of
the twentieth century. The number of school districts was reduced from
67,355 in 1952 to 14,851 by 1982 and has slowly declined in subsequent
years. On the other hand, the number of special purpose local
governments for non-education purposes has tripled during the past 50
years. In total, the number of U.S. local governments has risen since
1967.
A number of recent examples of government consolidations exist around
the world, including in Jordan, Sudan, Zimbabwe, Latvia and in the
greater Toronto area. The first four were mandated or encouraged by
the national government and the latter was the result of provincial
decisions. A brief description of these consolidations is provided in
this section. Also, the use of voluntary associations in Hungary is
discussed.
The New City of Toronto was created on January 1, 1998 by the
provincial government, despite strong opposition.2 Slack (2000: 14)
provides a preliminary assessment of the merger. It is clear from this
example that whether amalgamation is a success or failure depends
heavily on the intended goals. She observes “The stated rationale was
to save taxpayers’ money by replacing six lower-tier governments and
the metropolitan level of government with one municipal government...”
However, the author notes that a previous decade of government reports
indicates that the need for service coordination was a more pressing
issue.
Slack’s research indicates that cost-savings are not likely to result
and service coordination has not been accomplished because many
problems, such as transportation and poverty, extend beyond the
consolidated city’s boundaries. Evaluated on either the stated
objective or the need for coordination, the Toronto amalgamation
appears to be a failure. Nevertheless, Slack observes that
amalgamation has resulted in several benefits including equalization
of service delivery and a better bargaining position for Toronto at
the provincial and national level.
Mandated by 1988 legislation, the two types of rural councils in
Zimbabwe were amalgamated into 57 Rural District Councils in 1993.3
The reform was undertaken in the context of decentralization, as the
Rural District Councils were to take on additional responsibilities
not already assigned to the local level. Roe (1995: 833) uses the
thoughts of program implementers to define another objective; “...the
initiative is much more about reforming local government in a way that
promotes economic development at the district level by capitalizing on
the scarce administrative and technical skills within the local
authority.” Zimbabwe presents an interesting case from the perspective
of public choice as the two different types of rural councils
represent vastly different populations with varying needs and
resources. The rural councils represented primarily white, commercial
farming interests. Rural councils were also permitted to levy property
taxes and provide local services. The district councils represented
predominantly black, communal interests. District councils did not
collect their own revenues and most local services were provided by
central government agencies. Amalgamation of the two diverse
authorities presented opportunities for sharing scarce skills and
resources and for providing more equal levels of services between
commercial and communal areas.
In order to provide the new districts with the tools necessary for
success, the Rural District Councils Capacity Building Programme
(RDCCBP) was established to facilitate institutional, human resource
and capital development. With a well-established set of goals and a
“learning by doing” philosophy the RDCCBP operated from 1996-2001 and
“was largely successful in meeting the set objectives.” (Musekiwa,
1996: 12) In spite of the success, recent political and economic
problems experienced by Zimbabwe have placed added strain on the local
districts leaving “most local authorities...on the verge of
bankruptcy.” (Musekiwa, 1996: 12)
A Presidential Decree to consolidate local governments in Sudan was
issued in 2003, but it was never approved by Parliament. The number of
municipalities in northern Sudan was to be reduced from 309 to 80. The
goals were similar to those in Zimbabwe. Providing services more
evenly by combining urban areas with the surrounding rural areas was
one of the expectations. Also, 105 municipal responsibilities were
articulated in the Decree, though none are listed directly in the
Constitution. The new list could lead to additional municipal
functions. Limited cost savings were anticipated from the
consolidation because many of the existing local councils would have
been eliminated with the hope of saving the expenses from operating
the councils.
Jordan consolidated governments in 2001 and reduced the number of
municipalities from 328 to 99 plus Greater Amman. Cost containment was
a key factor in the decisions to amalgamate governments. Municipal
expenditures had been rising very rapidly, leaving a number of
municipalities unable to meet some of their expenditures, including
their payrolls. The lack of a hard budget constraint was allowing the
number of local employees to proliferate. The national government
provides most of the funding for local governments and hoped to slow
the growing demands placed on its budget by reducing the number of
local governments. At this point the consolidation appears to be
little more than renaming groups of three or four municipalities as
one municipality, even in some cases where the municipalities did not
have contiguous borders. Often the group was renamed using the name of
the largest municipality, but the subsumed municipalities frequently
serve as branch offices. The expected benefits have not been realized
thus far, given the nominal restructuring that has taken place and
given that local political structures have not been redeveloped.
Beginning in 1998, Latvia encouraged local governments to amalgamate
with the intent to reduce the number of local governments from 542 to
102 (see Dillinger, 2003). No local government would have had a
population under 4,500 and the average would have risen to about
23,000 people. The stated goal was “to establish administrative
territories with local (and regional) authorities able to develop
economically and provide quality services to inhabitants (see
Dillinger, 2003:11).” The central government offered local governments
grants equal to five percent of their budget if they consolidated
quickly, with the grants falling to four and then three percent in
later years. Local officials generally did not anticipate the benefits
espoused by the government and as a result opposed amalgamation, as by
2003 only 21 governments had been eliminated through amalgamation. The
government has since abandoned the amalgamation plan.
Rwanda is currently developing a plan to reduce the number of
districts from 106 to 30 and of sectors from 1545 to 416. The
districts will serve as the basic level of local government. They will
have an average population that is relatively large on international
standards (greater than 270,000) but the geographic area will be
modest, particularly on African standards. The consolidations will
occur in the context of a broad based decentralization of government.
Thus, the combined territorial reforms and consolidation are intended
to increase accountability of government, expand people’s
participation in government, and enhance planning and service
delivery.
Rampant fragmentation of local self-governments occurred in Hungary
beginning in the early 1990s (see Peteri, 2005). A total of 3115 local
government existed by 1991 and the number had risen to 3,177 by 2002
and the average size is only about 3200 people. Further, the local
government sector is large, expending about 12 percent of GDP.
Amalgamation of local government was not seen as a viable political
option given the memories of forced regional structures from the
1970s. Instead, legislation was passed to allow voluntary
associations, with careful protection of municipalities always a key
element. Associations can be in a variety of different forms including
local councils agreeing to deliver services jointly, one local
government delivering services for others, and commonly elected
councils. About 90 percent of local governments participate in some
type of association, though most are established for a single purpose
(most frequently for education).4 Multi-service municipal associations
are much less common, though at least 166 local governments
participate for more than one service. The central government has
provided some small grants to encourage associations, particularly for
education and childcare. The government has also supported
associations in other ways, such as by assisting local governments in
purchasing school buses.
Contracting out of services is also an alternative to direct
consolidation. French local governments often contract with private
companies to deliver water and sewer and German municipalities
contract with counties for private and secondary education (Dillinger,
2003:16). Hungarian local governments frequently contract with
companies that provide solid waste collection and disposal.
Contracting out and associations can be good options in many
countries, but have their disadvantages (see Swianiewicz, 2002).
Contracting out requires a developed market to deliver the services or
another government with the capacity to deliver services on behalf of
other local governments. Associations normally entail significant
political costs of getting agreement and ensuring cooperation.
Further, accountability and transparency are more difficult to achieve
through associations. Given these disadvantages, associations are less
likely to occur unless prompted by incentives provided at the national
level.
Consolidation and the Costs of Delivering Government Services
=============================================================
This paper follows the approach used by Dowding et al. (1994) in
dividing the discussion on the appropriate size of government into
supply-side and demand-side effects. This section is an examination of
the supply side issues and the following section addresses the demand
side concerns. The supply-side issues are primarily those associated
with the extent of size and scope economies.
One common argument in favor of consolidation is that larger
governments can provide services at lower unit or per capita costs or
deliver better quality services at the same cost by capturing
economies of scale. Alternatively, indivisibilities in production,
which are most likely to arise for very small units of government, can
be offset with a larger scale. The recent decision to consolidate
governments in Jordan was based heavily on the expectation that costs
could be reduced. For example, additional water may be treated at the
same plant for little additional total cost (that is, marginal costs
are lower than average costs), thereby permitting unit costs of
treatment to fall. Also, consolidation of municipalities may result in
more efficient administration and elimination of redundant employees.
This section examines the extent to which costs can be reduced by
consolidating local governments.
The concept of scale economies as used in economic analysis has a very
precise meaning. The extent of scale economies or diseconomies is
determined by examining how a proportionate increase in all inputs
affects output, while holding all other factors constant. Increasing
returns to scale exist when the output increase is more than
proportional; decreasing returns occur when the output change is less
than proportional; and constant returns are observed when the change
is exactly proportional. This concept, though useful for some
purposes, may be limited in certain applications, such as for
evaluating the effects of amalgamation, because all input factors may
not change proportionately. Labor and some forms of capital may be
scalable but key environmental factors such as land area, population
density, and geographical attributes may vary widely across
consolidated areas and cannot be (or will not be) scaled in
proportional amounts. Thus, the issue of whether consolidation will
lower costs must be examined in a broader context than what economists
mean by economies of scale.
Amalgamation by definition entails creating a larger service district
with more land and population and likely with somewhat different
service delivery conditions. Thus, the issue with amalgamation is
neither measuring whether providing additional services to the same
population lowers unit cost nor whether delivering the same service to
a larger population in the same geographic area entails lower per
capita costs. In the case of water provision, for example, the
treatment of more water may yield scale economies but these must be
balanced against the cost of delivering the water to a greater area
(which entails more piping or conforming to existing piping systems).
Thus, the potential for costs savings must be evaluated in the context
of all changes that occur. The likely result is that amalgamation in
some places and for some services results in lower costs and in other
places and for other services does not. This makes generalization of
the results very difficult.
Service delivery conditions, such as population density, can be very
important to the cost structure facing a community or the quality of
services that can be delivered and therefore to the potential for cost
savings from consolidation. Suppose a government goal of short
response times for police and fire services exists when governments
are consolidated. Achievement of lower cost service delivery is more
feasible in a more densely populated area where fewer service
locations and staff are needed relative to a more sparsely populated
area with the same number of people.5 Also, mountainous areas may
require different service methods and costs than flatter areas or
along the shore. Differing service conditions are less likely to be a
concern when densely populated areas with relatively little land are
combined but could be very important to service delivery when
relatively large amounts of land with different attributes are
consolidated.
In light of the scaling difficulties, a more relevant measure is
economies of size. Although economies of scale require proportional
scaling of all factors, economies of size are evaluated by examining
changes in the size of the jurisdiction (which entails population and
geographic changes) and proportionate increases in inputs. Based on
thinking in terms of size economies, researchers can answer whether
large local governments are able to provide services at lower costs
than small local governments using some input factor, such as
population, as the determinant of size. Although there is no longer a
need to scale all input factors with this measure, land area,
population density, and geographical attributes must still be
accounted for in considering the effects of consolidation on costs.
Conceptual Measurement of Size Economies
----------------------------------------
Both conceptual and empirical analysis can be used to examine whether
size economies can be expected to result from consolidation. Hirsch
(1968) provides a useful categorization of local government services
according to their potential to reap size economies. Horizontally
integrated services are ones that use separate production plants at
the same level of the production process to produce the same service,
and include education and police and fire protection. Once a
municipality has reached the size where it can use the individual
plants efficiently, economies of size are limited for these services,
as increases in population and land area simply require more
production plants. For example, if the target student-teacher ratio in
a primary school is 25 students per teacher, adding a small number of
students may produce very small size economies as more students are
added to existing classrooms, but ultimately more teachers must be
hired and new classrooms must be procured and few economies result.
Hirsch thought that 80 to 85 percent of government expenditures are
dedicated to horizontally integrated services but an analysis of 1999
U.S. local government data suggests that the share may be 65 to 70
percent today.
Vertically integrated services are those that require production at
several different stages, and these appear to represent about 15
percent of government expenditures. Vertical services include water
and electricity, both of which require production of a service and
distribution of the service to users. Economies of size are more
likely in production of the services, as treating more water at the
same facility could result in lower per unit costs. However, it is
important to keep in mind that amalgamation not only creates a larger
population but also a larger land area and gains from treating more
water may be offset by the added cost of distribution over a wider
geographic area.
Circularly integrated services are goods and services that complement
each other in production, and are therefore best produced in close
proximity. These services can be complementary in the sense that
resources can sometimes be shared in their production. Central
administration is a good example of circularly integrated services and
these services in total account for slightly less than 10 percent of
municipal costs in the U.S. Size economies from consolidating
administrations are possible as long as it is politically feasible to
discharge redundant personnel and the added costs of managing a larger
administration do not offset size gains.
In a test of the Hirsch hierarchy, Ladd (1994) recently argued that
those services entailing large capital costs (often vertically
integrated services), such as sewage plants or transportation systems,
are more likely to benefit from greater size. Services that are more
labor intensive, such as most horizontally integrated services
including fire protection and education, are apt to have constant or
even increasing per capita costs as the number of people served
increases. Ladd examined the effects of population growth in the U.S.
and found evidence that per capita spending rises with population in
the city, but primarily because of effects from increased population
density. Increased density causes higher costs because of the
horizontally integrated services, greater congestion of public goods,
and changes in environmental factors such as poverty levels and age
distribution. Also, there is a tendency for local spending to rise as
a share of total provincial and local spending, meaning larger cities
tend to take on relatively more responsibility. This represents a
shift in the responsibility for service delivery rather than an
increase in the cost of producing government services. Thus,
increasing demand for services, rather than higher costs of producing
services, explains much of the effect reported by Ladd. Further,
Ladd’s work is not directly useful for analysis of size economies
since she studies the effect of population growth in a city rather
than changes in both city geographic size and population size, as
occurs with consolidation.
Empirical Measurement of Size Economies
---------------------------------------
This section uses two approaches to summarize selected literature on
the gains from economies of size. The first approach is to evaluate
the extent of size economies for selected individual services. A
single service approach is appealing because most research is
conducted service by service. This is possibly because, as noted by De
Borger and Kerstens (2000), it is often easier to determine
appropriate input and output measures for individual services than for
the government as a whole. Further, analysis of individual services
allows realization that most size economies will be service specific.
Service-specific information can be useful for purposes such as
designing the cost minimizing service district. Size economies could
be exploited with the creation of special service districts or could
be completely captured by perfectly mapping each service to its cost
minimizing size. It seems plausible that the preferred size for a
school district would differ from the preferred size for a fire or
waste management district, and the services could be produced at lower
costs by selecting a district that is mapped to each service. However,
perfect service mapping is unlikely to be an achievable or desirable
goal for policymakers. One reason is that the cost minimizing size is
likely to change over time with the cost characteristics for producing
a particular service, causing the political and administrative costs
of redrawing districts and resizing service production to be
prohibitive. Also, a different size jurisdiction for delivering every
service would be confusing for service recipients. Nonetheless,
special service districts to capture economies of size from selected
services, such as water and sewer, may be useful in some cases.
The second approach compares local governments as a whole using a
global measure of efficiency. This approach contributes to the size
discussion as it is used to determine if size economies can be
expected across the entirety of government. The presence of size
economies or diseconomies provides a good starting point for inquiries
into whether resizing local government can capture cost gains.
Unfortunately, the empirical research on the relationship between
government size and costs has primarily been conducted in developed
countries and the results may not be perfectly transferable to
developing countries. For example, the potential lack of skilled
managers in developing countries could make larger local governments
relatively more efficient because the most skilled people are only
available for the largest areas. There is no way to test such
hypotheses given the existing state of the literature so results from
developed countries are provided here. Empirical research is provided
for one horizontally and one vertically integrated service as examples
of the extent of economies and then for global efficiency.
Size Economies in Education
---------------------------
The relationships between school district and school size and costs
will be examined as examples of the issues surrounding economies of
size for horizontally integrated services. As noted previously, large
economies of scale are not expected with the consolidation of
horizontally integrated services and literature in this area suggests
that there are definite bounds to efficient size. In addition, when
economies of size are determined to exist, important considerations
such as increased travel costs for students and parents have often not
been taken into account.
Researchers have been examining size economies in education for over
30 years. Early evidence, summarized in Fox (1981), estimated cost
minimizing size for high schools to be over 1000 pupils and for school
districts to be as many as 30,000 pupils. However these studies
suffered from methodological problems that have been at least
partially addressed by more recent literature. A summary of size
literature for US schools since 1981 can be found in Andrews et al.
(2002). The authors determine the usefulness of research based on how
a series of factors are taken into consideration including 1) unit of
analysis, 2) outcome measures, 3) whether the influence of demand was
taken into account, 4) factor price measures, 5) correction for
omitted variables, and 6) functional form.
Selection of the correct model for estimating size economies is
necessary to producing results that can be used as a basis for making
policy decisions. Cost functions are commonly used in the recent
education size literature to estimate the minimum expenditure level
necessary to achieve a certain level of student performance given
environmental, physical, and input quality factors. Economies of size
are determined by observing the percentage increase in costs for a
particular percentage increase in student population.
A series of methodological issues arise in estimating cost functions
and several of these are presented here.6 The proper unit for analysis
depends on the question being asked. School districts should be
examined if the issue is the lowest cost size government but many are
also interested in other issues such as the lowest cost size school.
Most of the recent literature is focused on determining the lowest
cost district; meaning district level data are analyzed. Enrollment or
average daily attendance is normally selected as the measure of
district size.
A number of factors including outcomes, voter demand, and input
quality must be taken into account when the cost function is
estimated. An outcome measure must be included in the cost function so
that it is possible to address the costs of delivering education while
holding outcomes constant. Average test scores are commonly used;
however, Duncombe et al. (1996) find that demand is more correlated
with outcome measures at the upper (advanced achievement) or lower
(basic proficiency) end, suggesting the average test score measure is
not the best outcome measure. Graduation rates and dropout rates are
also possible measures.
Accounting for voter demand when estimating cost functions can be
important because actual expenditures made by school districts need
not represent the cost of delivering services. Voter demand may lead
to greater or lesser expenditures, and these expenditures may be for
items that are not reflected in higher test scores (such as nicer
buildings). Substituting a demand equation into the cost equation to
get a reduced-form expenditure function is one means to ensure that
demand is properly considered in the analysis (Ratcliffe et al. 1990;
Downes & Pogue 1994). Studies have also treated outcomes as endogenous
using demand variables as instruments (Downes & Pogue, 1994; Duncombe
et al, 1996; Reschovsky & Imazeki 1997, 1999).
Input quality must be included since both the quality and quantity of
teachers could be important to determining the costs of achieving a
certain set of outcomes. This is commonly accomplished by including an
input factor price, such as teacher’s salaries, to proxy for quality
of education. Recognizing the possibility of omitted variables has led
the literature to several different approaches including panel data
methods (Downes & Pogue, 1994), efficiency frontiers (Deller &
Rudnicki, 1992; Duncombe et al., 1995), and linear programming
(Duncombe et al., 1996). Finally, functional forms range from simple
linear and log-linear to translog cost functions.
Four studies (Duncombe et al. 1995, 1996; Reschovsky & Imazeki 1997,
1999) are identified as most closely meeting methodological criteria.
Results from these studies suggest that total expenditures fall until
there are about 6000 pupils in the district and operating expenditures
fall until there are about 3500 pupils. The cost minimizing sizes for
instructional and transportation expenditures are significantly lower,
ranging from 1200 to 1800 pupils. It should be noted that none of the
above studies takes into account opportunity costs of increased travel
for parents and students, which can be substantial (Kenny 1982).
Failure to include these costs probably leads to an overstatement of
the gains from larger size when all costs are taken into account. As
might be expected, economies of size over all ranges were found only
for school administration.
As with all consolidation decisions, factors other than the potential
for lower costs play an important role in decision-making. Even in the
case of school administration, where the size gains are fairly
apparent for larger sizes, issues associated with managing a larger
administration (for example, depleted employee morale because of a
perceived lack of access to management) may offset the gains. In the
case of overall school or school district size, the issues are even
more complicated. Indeed, diseconomies of large size can set in as the
size of schools and school districts rise.
Another consideration presented in Andrews et al. (2002) is the effect
of size on student achievement. For example, parents are often more
involved in neighborhood schools, and parents are a very important
input in education. Thus, consolidation could lower the quality of
education if it effectively eliminated neighborhood schools. On the
other hand, larger governments may be able to deliver services that
are not cost effective in smaller places. The ability to offer more
specialized courses in the schools is an example. Although there are
many methodological issues to address in this literature, there seems
to be a general consensus that smaller schools and districts lead to
better outcomes, especially for minorities and those from low
socio-economic backgrounds. Lee and Smith (1997) estimate that optimal
achievement occurs in high schools with between 600 and 900 students.7
But, the results suggest that the effects of consolidation on service
quality must be addressed based on issues that are likely to be very
country and culture specific.
A related issue is whether school inputs influence education
performance, and particularly whether schools and school resources are
more important in predicting future success than are families.8
Hanushek and Luque (2002) analyze the role of schools on performance
using data collected from more than 40 countries. The research
suggests that providing students with more resources generally
increases performance, with the relationships being similar in
developing and developed nations.
Size Economies in Water Services
--------------------------------
Local public services that can be categorized as vertically integrated
normally have two separate dimensions: production and distribution.9
For example, water is treated and distributed to consumers through
pipelines. Production may also involve several steps, such as
collection and treatment of water, and normally occurs at a small
number of production facilities. The impact of consolidation on costs
depends on the relative size of these factors, which can often have
offsetting effects. Size economies are likely to exist for production,
as more water can be treated at the same plant at declining marginal
cost. However, distribution costs, which depend heavily on population
density and terrain, tend to increase with size.
Consolidation of water districts can increase distribution costs in
two ways. First is the need to expand the infrastructure including
piping, water towers and other parts of the distribution system, and
to make infrastructure compatible across systems. Second are the
operational costs of pumping water through the system. Both costs can
rise with increased distance from the water source. Boisvert and
Schmit (1997) weigh production economy gains with the diseconomies of
distribution for rural water systems.10 They note that distribution
costs, not treatment costs, account for the largest share of
expenditures and as a result conclude that cost advantages from
consolidation only exist in the most densely populated areas.
Kim and Lee (1998) in a study of urban water service markets in Korea
find that consolidating the water districts of the Seoul Metropolitan
Region would lead to substantial cost savings. However, the authors
note that such gains would not be expected in low population density
and lesser-developed areas. The authors conclude that flexibility in
designing the best-sized water district and the means of service
delivery is a key to low cost provision of water services. They
caution that the large potential savings from consolidation in the
Seoul region would be substantially eroded if there were significant
costs of integrating the water districts or if changes in economic
resources such as population or employment occurred. Kim and Lee also
note that integration may cause conflict among localities if benefits
are transferred without compensation.
Using panel data for French local communities, Garcia and Thomas
(2001) find gains to consolidation among 53 privately operated and 3
publicly operated municipal water systems. The marginal gains from
consolidation are found to be highest when two systems are merged,
with the additional savings diminishing until the optimal level of
five is reached. Beyond this point there are diseconomies from
consolidating districts, although the cost increases are not
significant. Density is an important consideration as creating a
combined service district is less profitable in low population density
areas. The authors conclude that their model provides evidence that
merger of water districts is generally profitable. Interestingly,
Garcia and Thomas find that it is more cost effective to produce and
pump additional water in response to an increase in demand rather than
to provide the water by fixing losses through repairs and maintenance.
Provided that water conservation is an important local goal, an
alternative to the market mechanism is needed to reduce water losses.
Government planning to achieve local environmental goals is discussed
further in the regional planning section below.
The above evidence indicates that caution should be exercised when
consolidating vertically integrated services for the purpose of
realizing cost savings. Economies of size, although likely to occur
over a much broader population range than in the case of horizontally
integrated services, are not a given. Size economies in the production
of vertical services are very probable but distribution costs are
nearly as likely to rise. As a result, the potential for economies
from consolidation must be examined on a case-by-case basis. The best
candidates for consolidation are areas with high population densities
and short distances from the service source to consumers. Indeed, at
times the distribution costs are so sizable that a proposed merger can
be disregarded with little analysis. For example, a recent report on
the merits of amalgamation in Latvia (World Bank, 2002) observes that
large distances separate the water supply and sewage networks of many
small Latvian municipalities. As a result, it is argued that the
distribution costs from consolidating these systems outweigh any
potential savings from larger scale production. The report also notes
that cost savings for purchasing large quantities of inputs, such as
chemicals, could be realized through cooperation, and do not require
consolidation.
Government-Wide Economies
-------------------------
The potential costs savings from consolidating governments extend
beyond the size economies for each service to include the potential
for economies of scope (or diversification). Scope economies refer to
the economies, to the extent they exist, from delivering multiple
services together. Such economies, or diseconomies, could arise for a
variety of reasons such as shared inputs in the production of some
services or one service being partially a byproduct of another. For
example, information obtained through collection of utility fees could
be used in enhancing police and fire protection or in collecting
taxes. Also, computer and engineering capabilities may be useful for
numerous functions. The expected economies from circularly integrated
services may be scope economies as well as size economies.
Scope economies are important to a consolidation decision if they grow
with the size of government or if larger local governments can be
assigned a greater set of responsibilities (perhaps because a certain
size must be attained before it is reasonable to consider transferring
some responsibilities to local governments) that would add additional
cost savings. Both Zimbabwe and Sudan appear to have assigned greater
expenditure responsibilities to the new, consolidated governments,
perhaps suggesting an implicit notion of economies of scope.
Unfortunately, very little research has been conducted on the presence
of economies of scope and there is nothing in the empirical literature
on scope economies that adds any light to whether consolidated
governments will gain even greater scope economies. Grosskopf and
Yaisawarng (1990) provide one rare piece of literature in this area.
The authors found scope economies between police and fire protection,
evidencing that it is lower cost to produce these services together
than to produce them independently.
Two other types of research have directly sought to determine whether
costs are lower across all government services. First, a relatively
limited set of work has focused on the costs of delivering all
services across different sized governments. One likely reason for the
paucity of research in this area is that it is difficult to separate
demand side and supply side effects. For example, larger governments
may potentially choose to deliver higher service levels than smaller
governments because the need for police, fire, water, sewer and other
services grows with population size and density. These demand side
effects should not affect decisions on whether consolidation will be
cost reducing.
Burnham et al. (1993) provide one example of research across multiple
government services. The study based on UK data finds that population
size was not an important factor compared with others in affecting
government performance. Some services were found to have economies of
scale while others had diseconomies. The same study found that larger
units in Germany (though still small by UK standards) were more
effective.
Second, the question of cost minimizing size has also been approached
using global performance measures. Selection of a measure of
government performance is the first step in such an analysis. Blank
and Lovell (2000) identify three possible measures. Efficiency is
providing the maximum amount of service at a given level of resources.
Effectiveness requires matching service delivery with the government’s
stated objectives. Productivity change measures the improvement or
decline over time of the ratio of service provision to resource use.
Efficiency is the most common measure of performance evaluated in the
literature. The reasons are that measures of efficiency do not require
the same degree of interpretive subjectivity, as effectiveness and
productivity measures are susceptible to operating environments such
as climate or topography.
At first glance performance measures may appear to have little
significance in the amalgamation decision. However, identifying the
governments that are operating efficiently as well as the underlying
causes of inefficiencies enables decision-makers to evaluate whether
or not amalgamation would improve the situation. If government
inefficiencies exist because size or scope economies are not being
exploited, amalgamation is likely to improve performance. Conversely,
combining poorly performing governments may only aggravate the
situation if inefficiencies are caused by under-qualified staff or
lack of citizen participation.
The general approach has been to investigate the relationship between
efficiency and size of the local government unit, where efficiency is
providing the maximum amount of service at a given level of resources.
Efficiency measures are a comparison between ideal and current
performance.11 The ideal is normally established as the best practice
and governments are assigned an efficiency rating relative to this
best practice. There are two caveats to measuring efficiency in this
manner. First, efficiency is a relative measure with governments
assigned an efficiency level relative to others in the data. Second,
it is difficult to include measures of service quality in the
analysis. For instance, consider a case where the number of students
being served at a particular school is used as the output measure and
the number of students increases by an amount that is small enough
that input costs do not rise. The school now appears to be more
efficient because it is serving more students at the same cost.
However, the additional students in the classroom may lower the
quality of education, and this effect is not captured in the
efficiency measure. A book edited by Blank (2000) provides an overview
of the methods used and challenges faced in assigning efficiency
measures.
Efficiency is measured by costs in the studies presented below. If a
government is not producing at the efficient level, it can improve its
performance in two ways: reduce the amount of waste (technical
efficiency) or improve the allocation of inputs (allocative
efficiency). Efficiency rankings can be used to inform the discussion
of economies of size in two ways. First, one can evaluate whether
smaller governments operate as efficiently as larger governments,
given resource and service levels. For example, it is possible that
salary limitations prevent small governments from hiring qualified
personnel resulting in lower efficiency. Conceição Sampaio de Sousa
and Ramos (1999) find that technical efficiency is indeed lowest among
small municipalities. One might also suspect that government officials
in small localities are subject to stronger political pressure from
individuals that might cause them to alter input allocations. Second,
a direct measure of scale efficiency can be used. Scale efficiency is
the ratio between efficiency measures calculated using constant
returns to scale and variable returns to scale technology (De Borger &
Kerstens, 2000).
Empirical evidence on the relationship between size and efficiency is
sparse. Using data for 589 local governments in 1989, De Borger &
Kerstens (2000) find that Belgian municipalities, with an average
population of 16,700 and a maximum of 485,000, are generally too
large. The authors note that this result is consistent with most past
Belgian studies.12 Conceição Sampaio de Sousa and Ramos (1999) find
that Brazilian municipalities are too small. Given the limited amount
of evidence, continued research in this area is necessary to provide
reliable insights for policymakers faced with the question of whether
or not to amalgamate.
Results from De Borger and Kerstens indicate that income level, local
government financing, political indicators, and citizen participation
are significant indicators of efficiency. Efficiency was lower among
municipalities with higher per capita incomes. The authors argue that
this might be because government officials and taxpayers in higher
income municipalities have lesser incentives to monitor spending.
Given a greater fiscal capacity, it is not as difficult for government
officials to increase revenues. Also, the opportunity cost of
monitoring expenditures is higher for taxpayers as they forfeit a high
wage by taking time to observe government activities.
Intergovernmental grants are found to decrease efficiency and
imposition of a local income tax contributes positively to
performance. De Borger and Kerstens note that previous literature
provides an explanation for these findings. Citizens are likely to
notice comparatively higher local tax rates and seek an explanation.13
In addition, people will hold local officials more accountable for
resources that are directly raised in the community. With the use of
block grants, the costs of inefficiency are distributed across a
broader population.14 Further, local voters may be unaware that block
grants have been provided so they are less effective at holding
officials accountable.
Political indicators such as number of coalition parties or presence
of the socialist party were found to have negative and positive
effects respectively. Little evidence for the significance of
political factors is found in Greek or US studies.15 Using education
level of adults as a proxy, De Borger and Kerstens find citizen
participation to have a positive effect on efficiency.
Several other studies have been conducted on local government
efficiency though these may not be used to directly address the
relationship between size and efficiency of government. A study of 172
Greek municipalities found that high fees and charges as a percent of
income improve efficiency while more grants, greater population
density, and political parties that are similar to the central
government party decrease efficiency.16 Technical efficiency was found
to decrease with high levels of median income and increase with
education and suburban location in a 1998 study of United States
municipalities.17
Fried and Klein (2000) use both statistical analysis and case studies
to apply efficiency measures to policy.18 The authors begin by using
inputs and outputs to determine the performance of 290 regions in the
United States relative to their region of interest,
Albany-Schenectady-Troy, New York. Five different model specifications
were used to determine efficiency ratings. Using the best practice
methods the same services could be provided in this region for less
than half the cost.
From the five specifications a set of five potential “role model”
regions was ultimately selected. These regions were identified as
operating sufficiently more efficient than Albany-Schenectady-Troy to
provide valuable policy insight. From the five regions Fried and Klein
sought to identify the reasons for superior performance by examining
operating practices that might be transferable. In particular, using
the “role model” region of Indianapolis, Fried and Klein identified
several practices that make the city more efficient including: 1)
privatization of city functions spearheaded by a private sector
advisory board, 2) activity based costing for operations such as road
repairs, 3) shifting responsibility to the neighborhood level through
organizations such as crime watch groups, and 4) a commitment to
improving infrastructure.
In sum, the role of efficiency in questions of amalgamation is
twofold. First, efficiency studies can be used to determine if
increasing size is likely to improve performance. Unfortunately, at
this point the research has conflicting results that fail to evidence
whether larger governments have greater or lesser efficiency than
smaller governments. Second, discovering the causes of inefficiency
allows decision-makers to observe problems that will not be solved
through amalgamation. In this case, complementary changes in
operations may be needed to ensure that the objectives of amalgamation
are accomplished.
In addition to informing decisions on cost reduction, the efficiency
literature is valuable in that it seeks to explain other possible
reasons for inefficiency at the government and service level. These
causes of inefficiency must be taken into account when evaluating
whether or not amalgamation will improve government performance. The
way in which local governments are financed, income and education
levels, and political structures have implications for efficiency, but
may also impact other objectives of consolidation. Political and
equity issues are considered below.
Transition Costs
----------------
The economies of size literature can be useful for establishing a
reasonable expectation of the costs before government is consolidated
and the costs that can be expected after a consolidated government has
fully transitioned to an operating structure. The problem is that
there may be a significant transition between these two and there may
be significant transition costs that must be borne in moving the
existing governments to consolidated governments. The obvious point
must be made that consolidation only reduces costs if expenditures of
the combined governments are lowered. Local governments are frequently
very labor intensive, meaning the number of staff must be reduced if
consolidation is to have a significant effect on expenditures. The
number of employees can be reduced through layoffs or by attrition.
The latter is politically less difficult but means the cost savings
will only accrue over a significant time (the transition is long) and
the staff losses may be inconsistent with where redundant people are
located. Layoffs are faster but much more politically difficult to
undertake and more likely to engender political opposition to
consolidation. Also, significant costs of eliminating staff may exist,
such as the need to pay severance or retirement benefits.
The transition may also include many new costs. For example, office
systems must be combined. This includes the monetary costs of merging
systems (computer, phones, filing, etc). The physical costs can be
large in some situations, such as if there is need to link sewer and
water systems or new government buildings. The costs of new elections
for city council are another example.
A more subtle and difficult task is to take two (or more) groups of
people in each of the many offices of government with different
working cultures and move them to where they work as one coherent
team. Significant time and monetary costs may be borne to develop a
government that operates as a coherent single unit. The mergers of
many large businesses have demonstrated the difficulties of combining
office cultures.
Do Consolidated Governments Meet Service Demands?
=================================================
The effects of amalgamation on the ability to deliver the services
that people demand must also be understood. A loss in economic
efficiency exists to the extent that the services provided are
inconsistent with the services that people want. Proponents of more
fragmented governments argue that smaller governments and governments
that are closer to the people should be better able to provide the
tax/service delivery package that citizens want. Further, the
existence of many local governments seems more likely to allow for the
differentiated services that a heterogeneous population demands since
each government can deliver a different set of services.
Alternatively, corruption may be more important for small governments
because the person allocating the benefits is closer to the person
receiving them (see World Bank, 2002).
A reasonable expectation is that the service levels demanded by the
median voter will be produced if service levels are decided by voting.
If individual demands exist along a continuum, everyone except the
median voter will be dissatisfied, with some wanting more of the
service and some wanting less. Assuming that everyone in the
government receives the same services, small local governments offer
the potential for provision of different tax/expenditure packages,
thereby reducing the degree of dissatisfaction by people, relative to
large governments. 19
Thus, the expectation of many has been that the efficiency losses from
people receiving the wrong set of public services can potentially be
kept smaller through disaggregated governments – consolidation would
increase efficiency losses. Also, the hope is that the competition
between many small local governments, for people, tax base, economic
development and so forth, could bring the same market forces to bear
in the delivery of public services that exists in provision of private
sector goods and services. The potential for residents to move is
expected to place pressure on local governments to deliver the
services that people demand, to deliver them efficiently and to reduce
taxes to benefit charges. The ability of people to move around the
region may be much more limited in many developing countries than in
countries like the United States.
Of course, people are not without some options to alter their service
delivery package even with a consolidated government. Those wanting
more can often supplement their receipt of government services with
more private services. For example, more locks and burglar alarms can
be placed in houses where better safety is demanded and fire alarms
and fire extinguishers can be added in houses where additional fire
protection is sought. Children can be provided tutors or sent to
private schools if more education is demanded. Fewer options are
available to reduce service levels if government is delivering more
services than are demanded. Those wanting less must still pay the
taxes even if they do not want all of the services. Financing service
delivery with user fees is one means to lessen the dissatisfaction of
people who are demanding few services. Low services demanders can opt
out of buying the services.
Further, larger local governments may be able to provide more services
and this could increase interest in local governments and expand
participation in local politics, both by citizens and by prospective
council members (see Swianiewicz, 2002). The argument has been made
that Northern European local governments undertake more functions than
Southern European governments because of the difference in size. Of
course, national governments may use small size as an explanation for
not devolving more service responsibilities to local governments. On
the other hand, citizens in small communities have a greater incentive
to participate because their vote has relatively more weight and
because they are closer to the politicians (see Denters, 2002).
Denters finds that trust in local government is negatively related to
size of local government based on analysis using data from Denmark,
Netherlands, Norway and the United Kingdom.
Tiebout (1956) developed a conceptual framework based on the idea that
“consumer-voters” register their preferences for public goods by
choosing where to live. The chosen community would be the one that
most closely matches the individual’s preferences. It is anticipated
within this framework that a larger number of choices is necessary for
an individual to find an optimal or exact match for her preferences.20
Thus, consolidation could limit the competitive forces that would
otherwise come into play. Factors including moving costs, employment
opportunities and lack of knowledge regarding local government
revenues and expenditures may prevent a person from locating in the
optimal tax-service community and act as a limitation on the Tiebout
effect. A great deal of literature has followed Tiebout’s article,
exploring both the implications and testing them empirically.21
It is very difficult to empirically decompose the efficiency gains
that result from competition between local governments and determine
whether more local governments lead to greater competition that causes
enhancement of efficiency. Although there have been a number of
studies, the results have been mixed, causing Dowding et al. (1994: )
to conclude, “there seems no generalisable deduction that either
consolidation or fragmentation is always best.” A few examples of the
research are summarized here.
Relationship between the Number of Governments and Consumer
Satisfaction
-----------------------------------------------------------
Two streams of research have been used to determine whether more local
governments causes service delivery to be more efficient on the demand
side: examination of service satisfaction and estimates of whether
populations with more local government options live in more
homogeneous areas. Survey data have been used to determine
satisfaction rates, with the evidence suggesting, though not strongly,
that satisfaction levels are higher in smaller jurisdictions, for
example, in police services.22 On the other hand, Derksen (1988) uses
Dutch survey data and finds that the proxy for local government
quality, administrative capacity, is trivial in determining
satisfaction. Newton (1982) also finds size to be irrelevant in terms
of effectiveness and democracy.
Lyons and Lowery (1989) argue that previous work is of questionable
usefulness because it makes use of aggregate data or data from surveys
that were designed for different purposes. The authors collect survey
data specifically for addressing Tiebout implications including
whether citizens in smaller jurisdictions are more satisfied. Surveys
were taken in matched pairs of communities in two metropolitan areas,
one with consolidated government and one without.23 The authors find
the evidence to be mixed. The mean dissatisfaction level was higher in
the five consolidated communities, but among matched pairs of
communities, individuals in the consolidated areas were more satisfied
in three of the five cases. In addition, citizens living in the
fragmented system were less informed about the scope of local service
provision, attributing almost three extra services to the local
municipality. The authors note that people have less capacity to hold
governments accountable by comparing tax levels and service provision
when there is a lack of knowledge of which government is responsible
for which services. Finally, Lyons and Lowery find that the feeling of
efficacy and levels of voice activity are higher in three of the five
consolidated communities. The authors note that results that appear
contrary to the Tiebout predictions might be driven in part by other
analysts’ misconceptions that consolidated governments provide a
uniform tax-service package to all individuals within their
jurisdiction. Lexington, the consolidated municipality, offers several
packages through “Partial Urban Services Districts” each of which has
its own tax base.
Mouiritzen (1989) uses Danish survey data and finds evidence in favor
of greater satisfaction with smaller governments. The increased
satisfaction was attributed to smaller communities being more
homogeneous and individuals feeling that democracy and participation
were better served. These are outcomes that would be expected within
the Tiebout model.
The issue of satisfaction with government services has also been
addressed by directly examining whether populations inside each
government become more homogeneous as the number of governments rises.
The expectation is that more homogeneous populations translate into
greater satisfaction because governments will be better able to meet
the more narrowly defined needs of residents. Dowding et al. (1994)
note that a greater number of governments almost certainly guarantees
more homogeneity of tastes within each government. Evidence is found
in the literature that homogeneity within each government, as measured
by populations that are more alike based on age, income, race, and
education, rises with the number of governments. Whether the greater
degree of homogeneity leads to more efficient resource allocation is
not clear from the literature reviewed by Dowding et al., but they
note that more efficient resource allocation seems to be a reasonable
assumption.
While the above research has sought to discover if there is greater
homogeneity with more government units, others have observed that in
many instances people with different demographics, and by assumption
tastes, choose to live in the same communities. Given the observed
heterogeneity, the question asked is whether this phenomenon is
consistent with the Tiebout theory. In other words, are measures of
age, income, race, and education appropriate for representing the
service demands of individuals? If these measures were appropriate,
amalgamation of vastly different populations would be expected to have
significant negative impacts on welfare. On the other hand, if
demographics are not strong indicators of service preference, the
negative impact of merger may be small.
Bradford, Malt and Oates (1969) suggest that a citizen’s production of
“things of primary interest” depends both on services received and
socioeconomic variables. Schwartz (1993) builds on this work by
developing a model in which citizens locate in a community based on
individual-specific commodities. The consumed commodities such as
safety or knowledge are produced at the household level. This
production depends in part on community characteristics that are
partially determined by the provision of government services. For
instance, a government service such as sanitation affects the
community characteristic of water quality. Water quality then enters
into the household’s production function of a commodity, health, and
the individual receives a given satisfaction or utility level. In this
model, individuals may differ in productive abilities or have
different production functions (due to demographic characteristics),
but demand the same level of government service. The model also allows
for “cross” effects, as the level of police service and education may
both contribute to the same community characteristic of crime safety.
The model has several important results. First, a community in
equilibrium may be composed of a heterogeneous population. This means
that research on homogeneity may not be a good indicator of whether
many governments are more efficient because homogeneity on the basis
of demographic characteristics may not be a good proxy for service
demands. Still, there may be widely different demands for public
services (on the basis of unobservable characteristics) and more local
governments may allow these demands to be met more efficiently.
Second, the community characteristics, which enter as inputs into a
household’s production function, may be affected by more than one
government service activity. Finally, a government service may have an
effect on more than one characteristic. Further empirical testing in
Schwartz (1997) finds that for a crime safety measure and high school
reading test pass rates, both the “own” and “cross” effects are
significant. Additional effects add complexity, as reducing one
service impacts multiple community characteristics. However, the
recognition of multiple effects allows policy-makers more flexibility
since the cost of increasing some services (police protection for
example) may be lower than increasing others (education for example),
but still achieve the same goal of crime safety.
A synthesis of the literature suggests that Tiebout arguments are not
as contrary to amalgamation as it might first appear, though the case
seems to lean towards smaller governments. First, the evidence is
mixed on whether larger consolidated governments or smaller fragmented
systems produce more satisfied populations, though it generally points
to greater satisfaction in smaller jurisdictions. Second, there may
not be a complete loss of tax-service choices under amalgamation as
many consolidated governments continue to offer more than one service
package. Finally, when government services affect community
characteristics, which in turn enter as inputs into household
production functions, it can be shown that efficient service provision
can occur in a heterogeneous jurisdiction.
Competition and Government Size, Service Level, and Productivity
----------------------------------------------------------------
Consolidation is expected to reduce competition between governments.
There is a sizable literature exploring the relationships between the
level of government competition and government performance. Research
has analyzed the extent to which competition has affected the size of
government, the quality of services delivered, and the efficiency with
which resources are allocated. This research is reviewed in this
section.
Theoretical research has suggested that competition could increase or
decrease the size of government. Research, such as that of Tiebout,
argues that competition between governments for tax base and residents
provides a discipline that limits the size of government, so the
expectation would be that more governments in an area would lead to
smaller government in total. Anderson and Tollison (1988) provide an
opposing argument, suggesting that governments not subject to
competition will act as monopolists. As monopolists they are expected
to reduce output and extract economic rents from interest groups.
Interest groups will seek fewer wealth transfers from the monopolist
government, which effectively reduces the cost to the taxpayers.
Taylor (2000) presents a well-organized survey of the empirical
evidence on how government competition affects the size of government.
She divides the size literature into two sections, size of the public
sector and size of individual governments. The overall effects on
public sector size are particularly valuable in the cases where
consolidation is undertaken at the national or state level. However,
the usefulness of this literature in decisions of amalgamation is
limited to the information on how competition, in this case vertical,
affects the size of government.24 In this research, central or state
government share of revenues is the most common measure of
decentralization, and by assumption, vertical government competition.
Evidence that competition between levels of government affects
government size is mixed. Studies applying cross-country data find no
evidence that competition affects size.25 Conversely, Grossman and
West (1994) find that government size is inversely related to the
level of decentralization, using Canadian time-series data.26 The
opposite is found in Grossman’s 1992 analysis of Australian data.
There is some evidence that more horizontal competition between
governments reduces the size of government. At the state or provincial
level, studies of total government find some evidence that competition
reduces the size of government when a distinction is made between
general-purpose and special-purpose government (Nelson, 1986).27
Competition has a dampening effect as state and local governments are
larger in states with fewer general-purpose governments per capita.
The relationship is not found for special-purpose districts.28 At the
county or metropolitan level, competition among general-purpose
governments decreases the local public sector but special-purpose
government competition increases government size.29 Several studies
focusing on the education sector find that per pupil spending is
higher in areas with less competition, which runs counter to other
research on special purpose districts.30
For evaluating more isolated consolidation projects, the unit of most
interest is the individual local government. In general, competition
does not appear to limit the size of individual local governments.
Forbes and Zampelli (1989) and Santerre (1991) find larger governments
in areas with more competition. Eberts and Gronberg (1990) find that
competition reduces spending on fire, police, parks and sanitation,
but the result does not hold when size is measured as local tax
revenues. Schneider (1989) finds a reduction in municipal employment
with increased competition; a relationship is not found for wages.
Consistent with the public sector results above, Brokaw, Gale, and
Merz (1995) find that competition limits per pupil education spending.
Taylor (2000:4) concludes, “the evidence on competition and government
size is best described as inconsistent.” Evidence that competition
affects the size of the overall public sector is found at the state
and local level. There is some evidence of an effect when the national
government or individual governments within the public sector are
examined, but it is far from consistent. The mixed results may be
attributable to the proposition that government size is a poor
indicator of performance.31
Competition could also have an effect through the quality of services
provided. Due to the difficulties in measuring service quantity and
quality, researchers have almost exclusively limited their studies to
education, where outcome data are more readily available. The evidence
in this area is consistent and convincing, with studies finding that
competition induces higher test scores, wages, graduation rates, and
years of education.32
Competition also could encourage governments to allocate their
resources more efficiently. Arguing that efficient governments
maximize property values, Grossman, Mavros, and Wassmer (1999) find
that US cities become more efficient as the number and population of
competing suburban cities increases. Hayes, Razzonlini, and Ross
(1998) find similar results for Illinois governments. The remaining
evidence from the education sector concludes that increased
competition, whether public or private, enhances efficiency.33
In sum, greater competition appears to offer some positive efficiency
benefits which could be lost if the governments in an area were to
consolidate. There are not consistent results indicating that
competition reduces the size of government, but this is at least
partly because expenditures and revenues are not adequate measures of
government performance. Competition does appear to increase the
quality of services, at least in the education sector. This
competition can be either from the public or private sector,
suggesting that amalgamated governments could consider privatization
of schools as a mechanism to increase the quality of primary and
secondary education. Finally, governments facing higher levels of
competition use their resources more efficiently. To the extent that
consolidation limits competition, one would expect to find less
effective use of resources.
Tiebout and Public Choice
-------------------------
The Tiebout literature generally envisions government taxation and
service provision under the assumption that the goal is to maximize
citizen wellbeing. In this case, governments simply provide the
services that people want in the most efficient manner to attract the
optimal number of citizens (assuming that there is a cost-minimizing
size). However, public choice theory indicates that a broader
perspective is appropriate. “The key innovation of public choice
analysis is to see policymakers as economic agents with their own
agenda and operating under a set of institutional constraints.”
(Chrystal 2000: 4)
In a public choice framework, the benefits and pitfalls of
consolidation are evaluated by allowing the government actors to have
individual preferences and agendas. Jackson and Garrett (2000) explain
that “...public choice focuses upon the processes through which public
policy decisions are made and the processes through which public
policies are supplied and implemented (118).” In the case of
amalgamation there are numerous potentially important processes
including research, political debate, policy formation, public
acceptance, and policy implementation. The order, timing, and
importance of the processes are likely to vary across situations but
some characteristics may consistently contribute to the effectiveness
of an amalgamation decision.
Before considering specific process outcomes, it is useful to define
the set of economic agents. These agents can be classified into four
broad categories: politicians, bureaucrats, public service providers,
and citizens. Public service providers include teachers and police and
fire personnel. Several process applications are considered below;
however, it is important to note that the purpose of this discussion
is not to provide an exhaustive introduction to public choice theory
and applications but rather to provide an additional framework for
evaluating amalgamation decisions. Understanding the perspectives and
motivations of the agents involved in the process of amalgamation
allows for a more precise evaluation of objectives (stated and real),
implementation (have the necessary resources been committed), and
outcomes (original objectives versus actual results). Public choice
also highlights the importance of bureaucratic incentives. For
instance, bureaucrats opposed to amalgamation might take actions
contrary to the stated objectives if they believe it is in their best
interest.
Within public choice literature, politicians are normally assumed to
have a preference for longevity in office and bureaucrats are
characterized by a desire to increase benefits, such as pay and
prestige, by enlarging the budgets they are responsible for managing.
For example, the consolidation of governments in Jordan appears to
have been based in part on the belief that local political leaders
were seeking to increase employment as a means of expanding their
political base. Taken together these characteristics, among others,
have led to the Leviathan/hegemonic public choice where the public
sector is seen as too large and generally inefficient (Cullis and
Jones 2000). However, Cullis and Jones (2000) present a ‘new’ public
choice suggesting that the application of public choice analysis need
not lead to a Leviathan effect. For example, institutions such as a
powerful media or political competition may create a strong system of
checks and balances. In addition, government actors may indeed value
the public interest.
Public choice helps us understand when consolidation will be viewed
favorably within the local political context. Stephens and Wikstrom
(2000) consider twentieth century city-county consolidations in the
United States and develop a list of fourteen factors important for a
vote in favor of amalgamation. In terms of citizens the important
factors are size, minority population, representation, relative
dominance of the central city, exclusion of “hot button” issues such
as education and zoning and differing tax/service districts.34 This
last factor is consistent with the Tiebout arguments presented above
as citizens are more likely to support amalgamation if they will have
choices between tax and service packages (urban versus general service
districts) post-amalgamation.
From the local politicians and bureaucrats’ perspective, consolidation
is more likely to be acceptable if there are a small number of
government units being merged, numerous official positions in the
amalgamated government, and opportunities to maintain employment and
political party positions.35 It is also important that the political
leadership be aligned in favor of amalgamation or at least support the
right of voters to decide the issue. For public service providers and
employees in general, the process by which jobs are eliminated is
important. Elimination through attrition is most favorable for
amalgamation since it means that no current employees lose their jobs.
But, of course, this means there is little potential for immediate
cost savings. Two general factors important in determining success are
the presence of a crisis situation (fiscal, in service provision, or
in the local economy) and the requirement for majority support. A
single area-wide majority is much more plausible than a requirement
for majority support in multiple jurisdictions. From the Stephens and
Wikstrom (2000) conclusions alone it is apparent that concessions made
to achieve amalgamation through popular vote (job elimination through
attrition, defining multiple service districts, avoiding controversial
issues such as education, etc.) may limit the immediate and long-term
benefits of consolidation.
These political and bureaucratic objections to consolidation could
lead to a less efficient consolidation than might otherwise occur. For
example, Wintrobe (1997) suggests that bureaucrats use strategies of
‘selective efficiency’ to influence government action; “...bureaucrats
control their [political] masters’ choices by being efficient at the
things they want to do, and inefficient at those they do not.” (431)
In these instances, alternative delivery mechanisms could be
identified in hopes of obtaining the same benefits that are expected
from consolidation, but without the efficiency losses. For example,
local governments might choose to deliver services by cooperating
together and potentially could generate benefits that are comparable
to those expected with consolidation.
Steiner (2001) considers cooperation and mergers between
municipalities in Switzerland. He finds that mergers tend to occur in
“poorly performing” small municipalities while cooperation between
local authorities takes place among all types of municipalities.
Possibly more important, cooperation does not appear to be a precursor
to amalgamation. Cooperation and merger decisions appear to be made
independently. In cases where merging governments is cost prohibitive
or politically undesirable municipalities may be able to more
effectively deliver services by cooperating. Of course, the structure
of the cooperative venture may also pose political problems and a
third party may reduce the ability of citizens’ to monitor activities.
However, cooperation is generally perceived as a less severe measure
and may be a more feasible option.
Amalgamation may be mandated at the national level rather than being
implemented as the result of local choice. For example, the recent
consolidations in Jordan, Sudan, and Zimbabwe were based on national
decisions and involved governments across the countries. Political
incentives are involved when consolidation occurs through mandate,
though at the national rather than the local level described above.
For example, political leaders at the national level had to make the
decision to reduce the number of local officials (at least over time).
The valuable lesson from public choice is the importance of different
economic agents and their incentives. The motivations and goals of
these agents must be carefully considered when the consolidation is
designed and the design must be intended to offset perverse incentives
and to build on positive incentives. For example, the Jordanian
consolidations may prove to be an unsuccessful means of limiting
growth in costs if the incentives to add employees are not changed for
the new political leaders. Amalgamation objectives are more likely to
be achieved if they are realistic, clearly stated, and given
appropriate support in the form of resources and personnel. Also, the
objectives of different actors in the public choice model may make it
desirable to identify means such as cooperation as options for
achieving consolidation-like benefits.
Political Competition and Government Performance
------------------------------------------------
Earlier, competition among governments was found to affect service
quality and resource allocation. Given the public choice argument that
politicians are seeking to maximize their own objectives, one might
expect political competition to have an impact on government
performance. Indeed, Grossman and West (1994) find that increasing
vertical government competition through greater decentralization leads
to more collusion among local governments. Transfers from higher
levels of government are used as instruments to punish local
jurisdictions that offer services at too low a tax price. In this
case, local governments are larger than they would be under
competitive circumstances, although the overall effect of
decentralization is to reduce government size. In the above scenario,
the actions of bureaucrats and political leaders do not offset all of
the benefits from decentralization and increased competition, but they
do limit the benefits.
Lassen (2001) presents an alternative view. His argument is that
citizens will be more willing to supply revenues for government
services and governments will be larger when governments are more
transparent and citizens can punish unwanted behavior. Applying 1995
data from 62 democratic countries, Lassen finds that greater political
accountability is associated with higher general government tax
revenues. In addition, more monitoring activity has been associated
with greater efficiency (cost, technical, and allocative) in police
departments and public schools.36
Theoretical studies have provided another argument for competition to
increase government size, as concentrated political power has been
associated with monopolistic behavior and smaller government.37
Amalgamation, in this case, would lead to inefficiently low levels of
government service provision. Despite this efficiency loss
amalgamation can be defended on other grounds. For instance, Baber and
Sen (1986) find that concentrated political power leads to smaller
increases in debt-financed spending prior to an election.
As with the case of government competition, there is not a consistent
effect of political competition on government size. More competition
may reduce government spending as jurisdictions compete for residents.
On the other hand, increased competition may create more transparency
and consequently cause citizens to vote for tax increases, as they are
more confident that money is being spent in a desirable manner. The
tendency for highly politically concentrated governments to behave in
a monopolistic manner may create disadvantages as government service
provision is reduced as well as advantages because there is less of an
incentive to spend excessively prior to an election.
Regional Planning
=================
Enhanced regional coordination provides another potential reason for
consolidation. Promoting economic growth, managing problems with broad
geographic effects, and increasing political influence are all
potential benefits from a larger, better coordinated area. There may
also be a desire to improve an area’s cohesion by including all area
residents in the same government unit and increasing the consistency
of the area on a set of objectives. From an economic growth
perspective, proponents of amalgamation argue that a firm choosing
between numerous locations would prefer to interact with a
consolidated government because of the uniform regulations and the
need to obtain information and negotiate with only one entity. Dealing
with environmental goals, such as air quality, water management, or
preserving wildlife habitat, is an example where the solutions are
normally best identified at a broad geographical level. Even the
consolidated government, however, is likely to be too small to
internalize many environmental problems. Also, a consolidated
government, representing a larger constituency, might increase
political influence at the national level relative to small
municipalities.
Regional planning benefits are potentially achievable through
cooperative efforts between municipalities and may not require
consolidation. As noted above, efficiently operating governments may
often be able to achieve the necessary coordination but there can be
significant political obstacles to the required degree of
coordination. Consolidation is a brute force means of getting smaller
areas to work together to accomplish the goals. But, of course,
consolidation means that the negotiations for various policy
objectives must take place within the single government rather than
between various governments. Alternatively, a regional government can
be established to deal with regional issues while more localized
concerns are handled with more fragmented local governments.
Nonetheless, this section examines some of the benefits from regional
planning through a consolidated government.
Economic Growth
---------------
Becker (1996) argues that regional governments might be better able to
manage for economic growth because of the larger tax base, increased
jurisdiction size and greater legal powers. Fleischmann and Green
(1991) note that consolidated governments often have a separate
department specializing in economic development. This one large
department has an advantage over several smaller governments without
an agency devoted specifically to economic growth.
Empirical evidence on the impacts of regional planning and
consolidation on economic growth is sparse. Domazlicky (1996)
considers growth at the regional level using state government
employment and gross state product as measures of size and economic
growth. He finds that at the aggregate state level government size has
little effect on economic growth. Carr and Feiock (1999) examine
economic development in nine US city-county consolidations from 1950
to 1993, using the attraction of new business as the measure of
economic development. They found no significant changes in the number
of business locations. Though not absolutely conclusive, these results
call into question the justification of amalgamation on economic
growth grounds.
Carr and Feiock (1999) provide several caveats to their results.
First, consolidation might enhance the benefits of economic
development even if it does not attract new firms. The reason is that
the consolidated government precludes small local governments within
the region from competing with each other to attract firms. The
competitive process could reduce tax revenues or create additional
expenditures. Thus, the benefits occur as lower costs of attracting
firms that were coming to the area anyway. Support for this
perspective can be seen in other research suggesting that local
business organizations play an important role in defeating or
weakening consolidation measures (Marando 1974).38 More recently,
Burns (1994) finds evidence that local manufacturers and real estate
developers have been in large part responsible for creating local
government fragmentation.
Second, the consolidations may not have occurred across a large enough
geographic area or a sufficiently large set of services. Durning
(1995) notes that concessions are often made in order to gain
political support for amalgamation. Examples of such concessions are
excluding existing municipalities and school districts from the
charter. Also, special service and tax districts may be created. The
resulting consolidated government may lack the authority or ability to
undertake planning and coordination efforts.
Internalizing Spillovers
------------------------
The delivery of some services creates geographic externalities that
accrue across areas that are much larger than individual
municipalities. Environmental, water, sewer, and transportation are
examples of such policy issues. Similarly, tax spillovers exist in
many cases. For example, people living in one area may pay wage,
sales, or excise taxes in places throughout the region. Both types of
spillovers cause officials to make poor decisions on the extent of
services to provide. The spillout of benefits causes governments to
underprovide services and the spill-in of tax revenues causes
governments to overprovide services. Coordination between smaller
governments, a consolidated government or a regional government above
the municipalities is necessary to address these concerns adequately
and ensure that service levels are set properly. The goal is to
internalize all externalities within the area making the decision.39
Alternatively, the situsing of tax revenues can be structured to
increase the likelihood that tax revenues accrue to the government
where the taxpayer is located. For example, local sales tax revenues
can be collected at the retail level rather than at the manufacturing,
import, or wholesale levels.40
Environmental policies are a case where a consolidated government can
help in internalizing the externalities. Carolan (1990), though not
arguing for amalgamation, presents five advantages to regional
planning: 1) consistency; 2) efficient management of resources; 3)
liability sharing; 4) political power; and 5) managing public opinion
and education.41 The notion is that regional level goals are much more
likely to be achieved with consistent laws and regulations designed to
meet a particular objective. Opposition to regional environmental
issues is contained within an amalgamated government whereas separate
governments must individually justify their involvement in
environmental planning. More efficient management of resources is
possible as information, expertise and resources are tapped for the
entire region. Further, establishing what resources are available is
likely to be a less costly task within an amalgamated area, as there
is one source of information and there is also no incentive to
misrepresent such resources. Sharing liability, costs, and resources
becomes advantageous in the event that the region’s environmental
management policy (such as siting landfills) generates legal
opposition. Also, legal considerations, such as whether one government
must take the lead or whether there must be “mutual authority” for all
entities are mute points in a consolidated government.
The effective use of political power to obtain project funding from
other levels of government increases as the number of people
influenced by the project rises. Regional planning also allows for a
coordinated public information campaign. Environmental planning
issues, such as siting facilities or requiring lower emissions, are
often controversial so one unified campaign, making use of area-wide
expertise and resources, is more likely to generate public support.
Greater Political Influence at the National and State Levels
------------------------------------------------------------
Consolidating governments and creating a larger constituency allows
for more influence at higher levels of government as officials now
represent more people and resources. The increase in political
influence is most effectively used when combined with careful regional
planning. As in the environmental case, a project intended to benefit
a region is often more likely to receive national funding than a
project benefiting a smaller jurisdiction. Furthermore, disagreements
over the appropriate course of action are settled within the
amalgamated government, allowing for one set of objectives to emerge
and be presented to national and state political leaders. This
regional plan is easier to evaluate at higher levels of government
than many fragmented, separate proposals. Of course, increased
political influence with higher levels of governments may come at the
expense of individual political influence for solving more localized
problems. Also, the role of intermediate governments may be
circumvented to some extent as the consolidated government grows and
internalizes more of the issues.
Equity Goals from Amalgamation
==============================
Consolidations in several countries appear to be motivated in part by
the goal of equalizing service delivery across an area – in the case
of Zimbabwe combining predominantly white areas with mostly black
areas and in Sudan combining areas that were primarily rural with
those that were mostly urban. Policy makers could have several
expectations from such changes. First, there may be recognition that
the areas with greater service delivery capacity could help enhance
service delivery in the areas with fewer skills. In this case,
consolidation is intended to allow the scarce managerial resource
available in the better serviced areas to be used across the region.
Second, the consolidation may be intended to redistribute financial
resources from the higher fiscal base community to the lower capacity
area. In both cases, the intent is to require the stronger community
to subsidize the weaker.
The basic issue is whether requiring local subsidies is good
government policy. And related to this, can higher fiscal capacity
areas be required to subsidize other places? Economists have generally
concluded that redistribution is better funded at the national than at
the local level. But, in the case of some consolidations, the national
government may be seeking to improve public services in the least
served areas without devoting national resources. When this arises,
the higher income area would need to raise taxes on itself or accept
lower quality service provision in order to have resources to enhance
service delivery in other parts of the consolidated area. The richer
areas may not choose to do this in a number of cases. A more likely
outcome is that the better funded area continues poor service
provision in other parts of the region, at least if the better funded
area maintains political control. The rhetoric may say service
delivery is improving when in practice it is not. Also, the better
funded parts of each region will have widely different capacities
across the country, so some will be able to raise services
significantly in the nearby poor areas and other will not. Again, the
national government will have a greater capacity to ensure that
similar levels of services are delivered across the country.
Alternatively, higher income residents may seek to avoid the cross
subsidies that are implicit in these forced consolidations. The better
funded area may seek to keep tax rates low in the consolidated area
and to obtain services through the private sector. For example, higher
income individuals may seek to underfund publicly available schools
and then send their children to private schools. Should this prove
difficult, high-income individuals may move out of the new,
consolidated government and form an enclave just outside the
consolidated area.
Conclusions
===========
It would be more satisfying and easier if a simple yes or no answer
could be provided on whether consolidation of local governments is
good policy. Unfortunately, as with many difficult, complicated
issues, there is no single prescription that fits all places. Many
factors that vary with the country and the region in question can
affect the decision on whether the outcomes will be positive. These
factors include the existing structure, responsibilities, and revenue
sources of local governments, the service delivery conditions
including geography and topography, the homogeneity and types of
service demands, the availability of skilled municipal workers, the
existing variability in service delivery across the country, the
political strength of local leaders and bureaucrats, and so forth.
We can assert that gains from consolidation are not a certainty, so
countries should not immediately leap to consolidation as the solution
to perceived problems. More careful analysis of objectives and
realistic outcomes is appropriate before this step is taken. The
potential cost savings must be carefully and realistically evaluated
in terms of the actual setting where consolidation will take place to
determine whether there will be real savings -- and if there will be
savings, how the redundant employees and other inputs will be
eliminated from government. These generalizations can be made. First,
the extent of size economies will be lower than may be anticipated –
bigger does not always imply lower costs and can imply higher costs.
The traditional means of producing many public services -- using many
small facilities near people (such as schools) and employing
labor-intensive technologies – do not lend themselves to economies
that extend to wide geographic areas. Some other services, of course,
offer a greater potential for economies.
Second, there are likely to be significant transition costs and time
spent in moving from the existing government structure to a new,
larger government. Some of these costs will be in terms of additional
expenditures and others will be in the form of poor service delivery
and citizen dissatisfaction that will arise in moving to an operating,
merged government. There may even be political implications of moving
to a larger government, such as fewer individuals being elected as
mayor and city council members.
Third, consolidation involves different actors with different
individual goals and motivations. Decisions to consolidate should not
be made under the assumption that the goals are altruistic and that
the various actors will do whatever is necessary to make the
consolidation plan succeed. The consolidated government will not be
perfectly efficient and focused on attaining the expectations of the
electorate or the national government. The involved people, local and
national bureaucrats, local and national politicians, and service
deliverers, may thwart or enable the consolidation, depending on the
design. They will to a very real degree determine whether it works or
fails.
The anticipated disadvantages of consolidation will not always be as
great as some have thought. A significant concern has been a loss of
satisfaction with the delivery of public services because government
will be less able to recognize what people want and will be less able
to provide the differentiated package of services that people seek. A
loss in well being is more likely to occur in an area with widely
different expectations from government, but, a properly designed
consolidated government that offers several different packages of
public services and finances many of the services with user fees will
be better able to meet the varying service demands than one that
offers a single set of tax financed services.
Competition between governments increases the quality of service
delivery and the effectiveness with which government delivers
services. Consolidation reduces these benefits and other means must be
found to offset these effects. Governments need to think creatively
about means to improve service delivery and government efficiency. The
set of options is much greater than either consolidation or fragmented
government. Use of the private sector to deliver services should be
carefully investigated. Privatization of public services has the
potential to offer cost savings because firms can deliver services to
multiple municipalities at the same time. The private sector is
already frequently employed to provide specialized components of
public services, such as construction and engineering, and in many
cases to deliver entire services.
A number of other public sector options exist. Governments can work
together in a variety of ways. For example, Bartone and Weist point
out that Monterrey, Mexico delivers sanitation services with a
metropolitan wide authority, Chile uses voluntary clustering of
municipalities and Turkey has a greater metropolitan model. These
experiences illustrate that countries can be successful with a variety
of different structural models. This set includes a consolidated
government, a cooperative arrangement between governments and a single
service delivery district. As noted above, perfectly mapping every
service may create considerable uncertainty and confusion on the part
of citizens, but specialized systems for services with area-wide
effects or for services with economies of scale should also be
considered when decisions on restructuring government are being made.
This may be preferred in some cases to consolidation.
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* William B. stokely Distinguished Professor of Business, The
University of Tennessee, and Economist, U.S. Governmental
Accountability Office, respectively.
1 The number of local governments did not expand rapidly in all East
European countries, as evidenced by Bulgaria and Poland.
2 As indicated in Slack (2000), politicians, citizen groups and local
municipalities (referenda in lower-tier Metro Toronto Municipalities
ranged in opposition from 70 percent to 81 percent) opposed the
amalgamation.
3 World Bank http://www.worldbank.org.zw/rdccbp1.pdf.
4 Single purpose districts are common in Slovakia for services such as
solid waste, water supply, sewerage, and tourism.
5 Of course, the high cost of delivering services in the less densely
populated area may exist whether it operates independently or as part
of a consolidated government.
6 See Andrews et al. (2002) for a more detailed discussion.
7 As noted in Andrews et al. (2002) this analysis does not include any
school-input data and the results should be treated with caution.
8 See Heyneman and Loxley (1983).
9 Note that horizontally integrated services, such as education, often
differ in that the user goes to the point of production to consume the
service, or the service is often produced at the user’s location, such
as with police and fire protection.
10 The analysis uses data from 37 rural water districts in New York.
11 An introduction to methods for measuring public sector efficiency
can be found in Lovell (2000).
12 Vanden, Tulkens and Jamar (1993) and Vanden(1997).
13 Spann 1977.
14 De Groot and Van der Sluis (1987), Silkman and Young (1982), and
Wyckoff (1990).
15 Athanassopoulos and Triantis (1998), Hayes and Chang (1990), and
Liner (1994).
16 Athanassopoulos & Triantis 1998.
17 Hayes, Razzolini & Ross (1998).
18 The case study approach is less technical in that it does not allow
for statistical evidence for the causes of increased efficiency; it
merely identifies those regions that are more efficient. The case
study method involves local officials more intimately as they are
called upon to narrow the list of perspective “role models.” This
involvement may be crucial for successful implementation of new
policies as officials have more input and may be less resistant to
change. Another advantage of the case study method is that it
specifically identifies existing “role models.” Those responsible for
writing policy and implementing change are then able to contact
counterparts for further information and advice. It appears that the
best approach may be a combination. Once the “role models” are
identified and evaluated by local officials, statistical analysis
should be conducted to determine the causes of the increased
efficiency.
19 In practice, service levels often differ inside many governments.
For example, higher quality services may be offered in the higher
income neighborhoods in the city.
20 It is also assumed that there is a cost minimizing size for local
government and that individual location decisions result in
municipalities of this size.
21 See Dowding et al. (1994) for a survey of the literature.
22 See Ostrom and Whitaker, (1973, 1974); Ostrom and Parks, (1973);
Ostrom et al., (1977, 1978); Ostrom, (1983a, 1983b, 1985); Parks and
Ostrom, (1981); Parks, (1985)
23 Telephone interviews were conducted in the urban Kentucky areas of
Louisville-Jefferson County (population 685,004 with almost 100
incorporated municipalities) and Lexington-Fayette County (population
204,000 with one city-county government). Education was not included
in the local services considered, as both municipalities had a
consolidated school system. Tests were preformed to determine if the
differences in means were statistically significant.
24 Results relating vertical competition to government size should be
treated with care as there are additional factors, including increased
accountability, that also have an effect on revenue and expenditure
decisions.
25 Oates (1985), Hell (1991), and Anderson and Van Den Berg (1998).
26 Also see Marlow (1988), and Joulfaian and Marlow (1991).
27 Also, see Oates (1985), Grossman (1989), and Di Matteo (1995).
28 Nelson (1986, 1987).
29 Eberts and Gronberg (1988), Zax (1989), and Eberts and Gronberg
(1990). The authors suggest that failure to capture economies of scale
account for public sector increases associated with competition among
special-purpose districts.
30 Bell (1988), Hoxby (1994a), and Kenny and Schmidt (1994).
31 Brown and Saving (1999).
32 Borland and Howsen (1992, 1993, 1996), Hoxby (1994a, b), Zanzig
(1997), and Dee (1998).
33 Husted and Kenny (1996), Grosskopf et al. (1999, 2000), Barrow and
Rouse (2000), Duncombe, Miner, and Ruggiero (1997), Dee (1998), and
Couch, Shughart, and Williams (1993).
34 Populations of about 200,000 are more likely to support
amalgamation with smaller jurisdictions approving the consolidation
about one half of the time and larger populations only approving
amalgamation in one out of four cases. Minorities are likely to oppose
amalgamation if it weakens their political position. District
representation is more popular than at large election, especially for
outlying regions.
35 More government units mean more elected officials concerned with
protecting their influence. Also, more government units increase the
likelihood of socioeconomic diversity, making it harder to garner
public support in wealthier neighborhoods.
36 Davis and Hayes (1993), Hayes and Wood (1995), Hayes, Razzolini,
and Ross (1998), Grosskopf et al. (2001), and Duncombe, Miner, and
Ruggiero (1997).
37 Anderson and Tollison (1988), and Rogers and Rogers (1995).
38 Existing business also often objects to attracting new business
because of the increased competition for labor and other resources.
39 Other options exist, such as national or state grants to account
for the geographic spillovers that occur between governments. For
example, see Inman and Rubinfeld (1996).
40 Of course, there are other implications to decisions on where to
collect tax revenues, such as administrative costs.
41 Also, see Roberts (1994).
63