EFFICIENCY OF LOCAL GOVERNMENT SPENDING*

By Pedro Herrera Catalán

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The importance of local government's spending in Peru has been increasing as the execution of territorial decentralization initiatives is being continually designed to reorient public decision-making from central to sub-national levels. In this context, whether or not this municipal government spending is executed efficiently is certainly a central concern and an issue for open debate in Peru.

This study analyses the efficiency of local government spending of 1686 Peruvian municipalities through a comprehensive evaluation of municipal public activities as a process of production that transforms inputs into outputs (Bradford et al. 1969 and Fisher 1996). In doing so, we established several «best-practice» production frontiers so as to estimate the extent of municipal spending that seems to be wasted relative to that frontier.

Five methodologies for the estimation of production frontiers were used (i) three non-parametric: (i) Free Disposal Hull (FDH) and Data Envelopment Analysis (DEA-CRS and DEA-VRS) and (ii) two parametric: one deterministic and the other stochastic, which were estimated for ten categories of municipalities (four groups of provincial and six of district municipalities) defined through hierarchical clustering methods.

In the second stage efficiency analyse we use TOBIT regression models to analyse the fiscal, socioeconomics and demographic determinants of the efficiency levels. We found varying degrees of efficiency, and although it was possible to identify good practices in local government spending, the results at the national level are a matter of concern since these indicate that equivalent efficiency levels could have been obtained with 57.6% less resources.

Among the key determinants of this public spending inefficiency were the FONCOMUN and canon transfers, which were particularly important at the district municipal level. Local forms of civil participation, represented in the study by the Local Coordination Council, was a determinant factor for a more efficient provision of local services.

The results of the study support the need for making more efforts to improve efficiency of local government spending in Peru. It is noteworthy to mention that even though policy recommendations and conclusions are based on estimations for the year 2006, these are still pertinent today since a wide range of case studies in efficiency of local government spending seems to suggest that its long-term efficiency has not been improved.

* Final results of research project awarded 5th Place by CIES/CIDA/IDRC, National Research Grant Competition, Economic and Social Research Consortium, 2005, Lima, Peru.