The economic and political impacts of top-down territorial reforms: the case of...

• Author(s): Tavares, António F. ; Rodrigues, Miguel ; Magalhães, Catarina ; Carr, Jered
• Date: 2012
• Persistent ID: http://hdl.handle.net/10198/8148
• Origin: Biblioteca Digital do IPB
• Subject(s): Fragmentation; Fiscal federalism
• Document Type: Conference Object
• Language: English

Description

The crisis of the sovereign debt forced the Portuguese government to reach out for joint financial help from the International Monetary Fund, the European Union and the European Central Bank. The Memorandum of Understanding (MoU) stresses the need for a major redefinition of the Portuguese local government system. Currently, the Portuguese local government is structured in two tiers (308 municipalities and 4259 parishes), both with an executive and deliberative elected bodies. The Portuguese government was asked to present a plan to amalgamate these local entities in order to enhance service delivery, improve efficiency and reduce costs. The main argument used is that excessive territorial fragmentation undermines efficiency and precludes scale economies. The main objective of the paper is to test two competing hypotheses regarding local government spending present in the consolidation/fragmentation literature. The Tiebout (1956) tradition argues that fragmentation induces lower spending through competition between local governments offering different taxes-services packages – the Leviathan model (Brennan and Buchanan 1980). This argument is in sharp opposition with the supporters of amalgamations arguing that territorial centralization can produce economies of scale and significant cost savings, reduce overlaps, and promote better accountability (Rosenfeld and Reese 2004). These hypotheses are tested with data collected from all 278 local governments of continental Portugal. We measure local government spending both in terms of total expenditures and grant transfers to parish governments and territorial fragmentation as the number of parish governments per 1000 individuals. Our findings show that higher levels of fragmentation lead to increased local government expenditures and transfers to parish governments, thus suggesting that the amalgamation proposed by the MoU and mandated by national legislation is likely to induce cost savings and improve financial sustainability.