Measuring Municipal Spending Efficiency: Evidence from Macedonia's Decentralization Reforms

Abstract

Debates have been ongoing for decades about the efficiency of municipal services in centralized or decentralized systems. the fundamental argument for decentralization is that it shifts decisionmaking authority to local governments which are closer to citizens’ needs and preferences and thus are better to know what is wanted. This study contributes to the growing literature on measuring local government efficiency by using data from 79 Macedonian municipalities from 2008 to 2015 and assessing whether decentralization results in greater efficiency. the results indicate that more decentralized municipalities are, on average, more efficient than less decentralized ones. There was, however, a significant disparity in performance throughout the decentralization period, with small municipalities often under-performing relative to larger ones. These results indicate that decentralization has limited effects on the efficiency of municipal spending, and does not reduce disparities across municipalities. the evidence suggests that many of the inequalities could be alleviated by implementing equalization programs as a substantial part of a regional development strategy.