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Cost Efficiency of Municipalities in Service Delivery: Does Ethnic Fragmentation Matter? © Institute for Local Self-Government and Public Procurement Maribor All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retriveal system, without permission in writing from the publisher. Title: Cost Efficiency of Municipalities in Service Delivery: Does Ethnic Fragmentation Matter? Author: Marjan Nikolov, Ph. D. First published 2013 by Institute for Local Self-Government and Public Procurement Maribor Grajska ulica 7, 2000 Maribor, Slovenia www.lex-localis.com, [email protected] Book Series: Intergovernmental Fiscal Relations Series Editor: Žan Jan Oplotnik CIP - Kataložni zapis o publikaciji Narodna in univerzitetna knjižnica, Ljubljana 338.5:352 NIKOLOV, Marjan Cost efficiency of municipalities in service delivery : does ethnic fragmentation matter? / Marjan Nikolov. - Maribor : Institute for Local Self-Government and Public Procurement, 2013. - (Lex localis) (Book series Intergovernmental fiscal relations) ISBN 978-961-6842-16-7 269100288 Price: 59.60 EUR COST EFFICIENCY OF MUNICIPALITIES IN SERVICE DELIVERY: DOES ETHNIC FRAGMENTATION MATTER? Marjan Nikolov Cost Efficiency of Municipalities in Service Delivery: Does Ethnic Fragmentation Matter? 1 MARJAN NIKOLOV ABSTRACT Driven by the Ohrid Framework Agreement (OFA), decentralisation in Macedonia is a policy choice for spurring national cohesion rather than an economic instrument for the more efficient delivery of services. The OFA resulted in a new Macedonian Constitution with policies related to the decentralisation process and equitable representation of communities. This book aims first to estimate the spending efficiency of Macedonian municipalities in service delivery from their own resources and, second, to ascertain the determinants of that efficiency. The ethnic fragmentation of municipalities is taken into account as a possible determinant of efficiency, which represents a novelty in such types of studies. We employ the DEA-VRS, Kernel and SFA estimation techniques to control for the robustness of our estimates. Our findings show that on average Macedonian municipalities exhibit low efficiency in service delivery, although there are significant variations among municipalities. The ethnic fragmentation of municipalities together with the population density, own tax revenues and political affiliation of the mayor with the leading political coalition at the state level explain differences in their efficiencies. More fragmented municipalities tend to be less efficient when providing services to citizens. KEYWORDS: • fiscal decentralisation • cost efficiency • service delivery • ethnic fragmentation • non-parametric efficiency analysis • parametric efficiency analysis CORRESPONDENCE ADDRESS: Marjan Nikolov, Ph. D., Docent at Insternational Slav University Sveti Nikole, Centre for Economic Analyses, Bul. Jane Sandanski, 10/2-11, 1000 Skopje, Republic of Macedonia, email: [email protected]. DOI 10.4335/978.961.6842.16.7(2013) ISBN 978-961-6842-16-7 © 2013 Institute for Local Self-Government and Public Procurement Maribor Available online at http://www.lex-localis.com. Marjan Nikolov, Ph. D. Author Biography Marjan Nikolov graduates Mechanical engineering from the University of Ct Cyril and Methodius in Skopje in 1996 and started to teach at secondary technical school in Skopje. He started to attend the MBA program at the Faculty of economics from the University of Ct Cyril and Methodius in Skopje in 1998 and soon he won the EFTA scholarship for MSc studies at the Faculty of economics in Reykjavik. In 1999 he started to work at the Economic institute in Iceland on productivity and efficiency research. In 2000 in Reykjavik he took his M.Sc. in International economics and finance from the University of Iceland and soon was engaged from the IMF office in Macedonia to assist the resident expert on the VAT system implementation in Macedonia. Marjan was part of many donors’ projects in Macedonia that involved public finance management and decentralization issues as well as business support. Marjan took his PhD on a fiscal decentralization topic about municipal economic efficiency measurement from the Faculty of Economics at the University of Ljubljana in 2013. He initiated and established the first economic think tank in Macedonia in 2003 the Center for Economic Analyses-CEA. He is docent at the International Slav University in Sveti Nikole-Macedonia. Foreword Modern societies, being extremely more mobile than traditional societies, are becoming increasingly diversified in terms of culture, ethnicity, regional and other social and perosnal characteristics. Individuals are called not only to adapt themselves to this changing context, but they and thei societies will have also to face the challenge of transforming what is still felt by many as a liability into an asset of personal and societal growth and sophistication. there is a large and growing literature by economists on the impact of ethnic fragmentation on the economic and political performance of the societal concrned by this phenomenom. there is also an increasing consensus in this literature on the fact political institutions play a crucial role in this respect. When political institutions are properly shaped, societes turn competition between ethnic groups into a positive sum game from negative one. the case of Maurice in the Indian Ocean area provides one of the best examples, where huge ethnic fragmentation has been turned into an engine of rapid and harmonious growth for the all nation. bosnia and Herzegovina show not the opposite, but surely an example where existing political and constitutional arrangements have the effect of paralyzing, rather than promoting, healthy competition among the ethnic components of the society. The volume by Marjan Nikolov represents a very important contribution to the debate on this issue. Marjan Nikolov is one most qualified observers of the politics of ethnic fragmentation at the local level in Macedonia, having extensively worked on intergovernmental relations and decentralization in this country. The volume analyzes, with an appropriate and sophisticated methodology, the impact of ethnic fragmentation on the efficiency of local expenditure in Macedonia. The main result is that (unfortunately) this impact is not positive, showing that political institutions are not properly shaped to produce healthy competition between ethnic groups, or more hopefully, that they are still too recent to have been able to fully display their expected potential. There are many explanations for this. Some refer, as Marjan Nikolov points out, to the peculiar structure of decentralized government in Macedonia, such as lack of tax autonomy and excessive central control. Another and possibly crucial explanation refers to the working of the political and electoral system of Macedonia, where, among other, the two main ethnic components have to be jointly represented at the central government level. In fact, Marjan Nikolov’ s volume shows that when the mayor of a city has the same party affiliation of the party coalition forming the national government - meaning also that the mayor may be indifferently either Macedonian or Albanian - efficiency is higher. However, higher efficiency does not derive necessarily from better effort, but more likely from the patronage system prevailing in Macedonian politics, where action by mayors of the opposition will be hindered and action by friendly mayors will be favoured beyond merits. The volume is of interest for a very broad public extending over disciplinary and national boundaries presenting a careful and well structured introduction to the recent evolution the Macedonian polity and economy and its interactions with the actions of the international community. The interest of the various topics and the high quality of the book make it very recommendable to read. Prof. Giorgio Brosio, Ph.D. University of Torino Cost Efficiency of Municipalities in Service Delivery: Does Ethnic Fragmentation Matter? M. Nikolov Contents Introduction.............................................................................................. 1 Macedonia and the Transition ................................................................ 5 1 Macedonia in Yugoslavia .......................................................................... 5 2 Monetary independence, transition, restructuring and macroeconomic performance ..................................................................... 7 3 Structural changes in the Macedonian economy: The legacy of the transition ............................................................................................ 11 4 The Ohrid Framework Agreement and the new Macedonian constitution of 2001 ................................................................................. 12 4.1 History of the Macedonian and Albanian relationship............................. 12 4.2 The OFA and the constitution after the OFA ........................................... 16 5 Socio-economic differences in Macedonia at the regional level .............. 19 Theoretical Consideration of Decentralisation .................................... 29 1 Decentralisation theory ............................................................................ 29 2 Public service delivery in an ethnically diverse local government .......... 34 3 Economic efficiency and the fiscal
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