Middle East Centralization, and Decentralization North Africa and Confl ict in the Middle East Working Paper and North Africa Series No. 51 October 2008 by The World Bank Mehmet Serkan Tosun Produced by the Serdar Yilmaz Offi ce of the Chief Economist Summaries in Arabic and French Middle East and North Africa Working Paper Series No. 51 Centralization, Decentralization and Conflict in the Middle East and North Africa By Mehmet Serkan Tosun∗ University of Nevada, Reno and Serdar Yilmaz• World Bank October 2008 Discussion papers are not formal publications of the World Bank. They represent preliminary and often unpolished results of country analysis and research. Circulation is intended to encourage discussion and comments; citation and the use of the paper should take account of its provisional character. The findings and conclusions of the paper are entirely those of the authors and should not be attributed to the World Bank, its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The authors thank Lyn Squire, Blanca Moreno-Dodson Jennifer Keller and Robert Beschel for helpful comments and suggestions, Dilek Uz and Omid Harraf for excellent research assistance. The findings, interpretations, and conclusions are entirely those of authors, and do not represent the views of the World Bank, its executive directors, or the countries they represent. Corresponding author: Serdar Yilmaz. * Department of Economics, College of Business Administration, University of Nevada-Reno, Reno, Mail Stop 0030. Nevada 89557; [email protected]; phone: +1-775-7846678. • Social Development Department, World Bank, 1818 H Street, NW, Washington D.C. 20433; [email protected]; phone: +1-202-473-9350. TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS.........................................................................................I ABSTRACT..............................................................................................................................II 1. INTRODUCTION..........................................................................................................1 2. CENTRALIZATION IN THE MENA COUNTRIES: A HISTORICAL PERSPECTIVE ........2 Ottoman Taxation System..........................................................................................2 3. COMPARISON OF INTERGOVERNMENTAL STRUCTURE IN SELECTED MENA COUNTRIES ................................................................................................................6 Deconcentration and Decentralization in MENA......................................................6 Expenditure Assignment............................................................................................7 Revenue Assignment .................................................................................................9 Intergovernmental Transfer Characteristics...............................................................9 Discussion..................................................................................................................10 4. DETERMINANTS OF CENTRALIZATION AND DECENTRALIZATION...........................11 Measurement Issues and Review of the Literature....................................................11 Empirical Analysis.....................................................................................................13 Empirical Results.......................................................................................................16 5. INTERGOVERNMENTAL REFORM OPTIONS AND CONCLUSIONS ..............................19 REFERENCES..........................................................................................................................23 APPENDICES Appendix A: Government Structure in Egypt....................................................................34 Appendix B: Government Structure in Iran.......................................................................36 Appendix C: Government Structure in Tunisia .................................................................39 Appendix D: Government Structure in West Bank/Gaza ..................................................40 Appendix E: Government Structure in Yemen..................................................................42 TABLES Table 1. Share of Local Government in GDP and in Total Government Expenditures ..................................................................................................26 Table 2. Deconcentration and Decentralization Systems in MENA Countries ...........27 Table 3. Expenditure Assignment in MENA Countries ..............................................28 Table 4. Expenditure Assignment Scores ....................................................................29 Table 5. Revenue Assignment in MENA Countries....................................................30 Table 6. Transfer Characteristics and Allocation Rules in MENA Countries.............30 Table 7. Summary Statistics for the Regression Analysis on the Determinants of Centralization in MENA Countries ...............................................................31 Table 8. Determinants of Central Government Expenditure in MENA Countries......32 Table 9. Determinants of Decentralization in MENA Countries.................................33 APPENDIX FIGURE Figure A1. Egyptian Local Government System .............................................................35 APPENDIX TABLES Table B1. The System of Subnational Administration in Iran .......................................37 Table D1. Categorization of Local Government Units in West Bank & Gaza...............41 ABBREVIATIONS AND ACRONYMS DPI Database of Political Institutions EPCs Elected People's Council GCC Gulf Cooperation Council GDP Gross Domestic Product GFS Government Finance Statistics ICRG International Country Risk Guide LLA Law on Local Authorities MENA Middle East and North Africa Region MoH Ministry of Health MoI Ministry of Interior MoLA Ministry of Local Administration MoLD Ministry of Local Development MoLG Ministry of Local Government MPO Management and Planning Organization WBG West Bank and Gaza i ABSTRACT In this paper, we examine broadly the intergovernmental structure in the Middle East and North Africa (MENA) region, which has one of the most centralized government structures in the world. We are addressing the reasons behind this centralized structure by looking first at the history behind the tax systems of the region. For this, we review the Ottoman taxation system that has been predominantly influential as a model and discuss its impact on current government structure. Next, we discuss the current intergovernmental structure by examining the type and degree of decentralization in five countries representative of the region: Egypt, Iran, West Bank/Gaza, Tunisia and Yemen. We then conduct a cross-country regression analysis using panel data for a broader set of MENA countries to understand the factors behind heavy centralization in the region. Our findings show that external conflicts constitute a major roadblock to decentralization in the region. JEL classification: H77, H87, N45, O53 Key words: Fiscal decentralization, intergovernmental relations, Middle East and North Africa ii Centralisation, Décentralisation et Conflit au Moyen-Orient et en Afrique du Nord Avant-propos Ce document examine, sous un angle général, la structure intergouvernementale de la région du Moyen-Orient et de l’Afrique du Nord (MENA), l’une des structures publiques parmi les plus centralisées au monde. Nous abordons les raisons sous-jacentes à cette structure centralisée en se penchant tout d’abord sur l’historique des systèmes fiscaux de la région. Pour ce faire nous examinons le système fiscal ottoman qui a été un modèle d’une influence prédominante et nous discutons son impact sur la structure gouvernementale actuelle. Ensuite, nous discutons de la structure intergouvernementale actuelle en examinant le type et le degré de décentralisation dans cinq pays représentatifs de la région : l’Egypte, l’Iran, la Cisjordanie/Gaza, la Tunisie et le Yémen. Nous réalisons ensuite une analyse de régression transfrontalière en se servant de données de panel pour un plus grand nombre de pays de la région MENA afin d’appréhender les facteurs qui expliquent la forte centralisation dans la région. Nos conclusions montrent que les conflits extérieurs constituent un obstacle majeur à la décentralisation. iii ﺍﻟﻤﺭﻜﺯﻴﺔ ﻭﺍﻟﻼﻤﺭﻜﺯﻴﺔ ﻭﺍﻟﺼﺭﺍﻉ ﻓﻲ ﺍﻟﺸﺭﻕ ﺍﻷﻭﺴﻁ ﻭﺸﻤﺎل ﺃﻓﺭﻴﻘﻴﺎ ﺍﻟﺨﻼﺼﺔ ﻨﺘﻨﺎﻭل ﻓﻲ ﻫﺫﻩ ﺍﻟﻭﺭﻗﺔ ﺒﺎﻟﺒﺤﺙ ﻫﻴﻜل ﺍﻟﺘﻨﻅﻴﻡ ﺍﻟﺤﻜﻭﻤﻲ ﻓﻲ ﻤﻨﻁﻘﺔ ﺍﻟﺸﺭﻕ ﺍﻷﻭﺴﻁ ﻭﺸﻤﺎل ﺃﻓﺭﻴﻘﻴﺎ ﺍﻟﺘﻲ ﺘﺘﺴﻡ ﺒﻬﻴﺎﻜل ﺤﻜﻭﻤﻴﺔ ﻫﻲ ﻤﻥ ﺃﻜﺜﺭ ﺍﻟﻬﻴﺎﻜل ﻤ ﺭ ﻜ ﺯ ﻴ ﺔﹰ ﻓﻲ ﺍﻟﻌﺎﻟﻡ. ﻭﻨﺴﺘﻜﺸﻑ ﺍﻷﺴﺒﺎﺏ ﺍﻟﺘﻲ ﺘﻘﻑ ﻭﺭﺍﺀ ﻫﺫﺍ ﺍﻟﻬﻴﻜل ﺍﻟﺸﺩﻴﺩ ﺍﻟﻤﺭﻜﺯﻴﺔ ﺒﺎﻟﻨﻅﺭ ﺃﻭﻻ ﻓﻲ ﺘﺎﺭﻴﺦ ﺍﻟﻨﻅﻡ ﺍﻟﻀﺭﻴﺒﻴﺔ ﻓﻲ ﺍﻟﻤﻨﻁﻘﺔ. ﻭﻟﻬﺫﺍ ﺍﻟﻐﺭﺽ، ﻨﻘﻭﻡ ﺒﺎﺴﺘﻌﺭﺍﺽ ﺍﻟﻨﻅﺎﻡ ﺍﻟﻀﺭﻴﺒﻲ ﻓﻲ ﺍﻟﻌﻬﺩ ﺍﻟﻌﺜﻤﺎﻨﻲ ﻭﺍﻟﺫﻱ ﻜﺎﻥ ﻤﻬﻴﻤﻨﺎ ﻜﻨﻤﻭﺫﺝ ﻭﺒﺤﺙ ﺁﺜﺎﺭﻩ ﻋﻠﻰ ﺍﻟﻬﻴﻜل ﺍﻟﺤﻜﻭﻤﻲ ﺍﻟﺤﺎﻟﻲ. ﺜ ﻡّ ﻨﺘﻨﺎﻭل ﺒﺎﻟﻤﻨﺎﻗﺸﺔ ﺍﻟﻬﻴﻜل ﺍﻟﺤﺎﻟﻲ ﻟﻠﻬﻴﺌﺎﺕ ﺍﻟﺤﻜﻭﻤﻴﺔ ﻋﻥ ﻁﺭﻴﻕ ﺩﺭﺍﺴﺔ ﻨﻭﻉ ﺍﻟﻼﻤﺭﻜﺯﻴﺔ ﻭﻤﺩﺍﻫﺎ ﻓﻲ ﺨﻤﺴﺔ ﺒﻠﺩﺍﻥ ﺘﺸﻜل ﺘﻤﺜﻴﻼ ﻟﻠﻤﻨﻁﻘﺔ، ﻭﻫﻲ ﻤﺼﺭ ﻭﺇﻴﺭﺍﻥ ﻭﺍﻟﻀﻔﺔ ﺍﻟﻐﺭﺒﻴﺔ ﻭﻗﻁﺎﻉ ﻏﺯﺓ ﻭﺘﻭﻨﺱ ﻭﺍﻟﻴﻤﻥ. ﻭﻨﺠﺭﻱ ﺒﻌﺩ ﺫﻟﻙ ﺘﺤﻠﻴﻼ ﺍﻨﺤﺩﺍﺭﻴﺎ ﻓﻴﻤﺎ ﺒﻴﻥ ﺍﻟﺒﻠﺩﺍﻥ ﺒﺎﺴﺘﺨﺩﺍﻡ ﺒﻴﺎﻨﺎﺕ ﻤﺘﺴﻠﺴﻠﺔ ﺯﻤﻨﻴﺎ ﻟﻤﺠﻤﻭﻋﺔ ﺃﻭﺴﻊ ﻤﻥ ﺒﻠﺩﺍﻥ ﺍﻟﻤﻨﻁﻘﺔ ﻟﻔﻬﻡ ﺍﻟﻌﻭﺍﻤل ﺍﻟﻤﺅﺜﺭﺓ ﻓﻲ ﻫﺫﻩ ﺍﻟﻤﺭﻜﺯﻴﺔ ﺍﻟﺸﺩﻴﺩﺓ ﻓﻲ ﺍﻟﺸﺭﻕ ﺍﻷﻭﺴﻁ ﻭﺸﻤﺎل ﺃﻓﺭﻴﻘﻴﺎ. ﻭﻴﻅﻬﺭ ﻤﺎ ﺘﻭﺼﻠﻨﺎ ﺇﻟﻴﻪ ﻤﻥ ﻨﺘﺎﺌﺞ ﺃﻥ ﺍﻟﺼﺭﺍﻋﺎﺕ ﺍﻟﺨﺎﺭﺠﻴﺔ ﺘﺸﻜل ﻋﻘﺒﺔ ﺭﺌﻴﺴﻴﺔ ﺃﻤﺎﻡ ﺘﻁﺒﻴﻕ ﺍﻟﻼﻤﺭﻜﺯﻴﺔ ﻓﻲ ﺍﻟﻤﻨﻁﻘﺔ. iv 1. INTRODUCTION There have been significant decentralization efforts in developing countries in recent decades. These efforts led to an extensive literature on the causes and consequences of both centralization