Cost Efficiency of Municipalities in Service Delivery: Does Ethnic Fragmentation Matter?

Front matter

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Cost Efficiency of Municipalities in Service Delivery: Does Ethnic Fragmentation Matter?

Marjan Nikolov

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

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Fragmentation Matter? LO CALIS M. Nikolov Contents Pntrødüttón. iiir ee heise nen eG ales 1 2 Monetary independence, transition, restructuring and 3 Structural changes in the Macedonian economy: The legacy of thetransitloN seeen aeee aE EEE EE E RES 11 4 The Ohrid Framework Agreement and the new Macedonian constitution OF 2001 .-siecsis casaceis cacessceossvengsoscesocs cosandtecteosceenseasegscsssscessetvons 12 4.2 The OFA and the constitution after the OFA oo... eee cee eeseeneeneee 16 1 Review of empirical studies on the efficiency of local BOVEMMMEMS essas En E iE E NE R a A a a e aE 57 1.2 Determinants of efficiency... eee ee ceeeesecesecssecneeceeeeeeeeeeeeeeeeeeeeeeerens 66 1.3 Review of studies of municipal efficiency by authors «0.0... ee 71 21 -DEA frontiers oe cenieni ani e E ender Seti EE EE 81 2.2 The Kernel nonparametric method 0.0.0.0... eee eee cseeereeeeeeeeeeeeeeeeeeeens 85 23 SHA Womens: eenean eA E R E RE 87 3 The modèl yess osecesceibeedss cescshe E E AE E A E AEE 88 4 DAL eles hes sei A E E E a a E E T S 93 4,3 Political Variables s.2..:.ccic0.cssccieosvecseiscieeece estes nen sun iaaeteenetees 98 4.4 Other explanatory variables 0.0.00... eee cee cseeeeeeeeeeeeeeeeeeeeeeseenseesseenaeenaes 99

5.1 DEA-VRS estimation results 00... ee eceeceescesecesecesecaecsaecneesneeees 100 5.2 Kernel estimation results 0.0.0... eee eee eeeeeeeeeceeeeeseceeceseeseceaecsaesseeeneeees 105 5.3: -SFA estimation results isisisi e bscee rererere i rE eisso 109 5.4 Comparing the DEA-VRS efficiency scores with the SFA efficiency SCOrES. isre erore e a ienes Ee esiri E i se ERES 115 6 Measuring the outcome as perceived by the citizens — subjective MEÄSÚTES Eo aE EREE E E E E e E E A 116 Conclusión oer Aci o E E E EE E EAEE 123 References *.9. 38 series teasers nu E E E EE EE EIRE 141 Apéndices: is earn o anea ae pete E E en aia eee 153 Tables Table 1. Main indicators of Yugoslavia and its republics... eee 6 Table 3. Labour market statistics by regions in Macedonia for ZOOS E E fede seteas RE E EEE TEE 22 Table 4. Natural population growth in Macedonian regions for the period 2006-2009. sesressesne savere oe k atar ea EEE enee sa ii 23 Table 5. Received remittances in the last six months of 2008 by TESIONS in Macedonia, sissien aarin era n i esa 24 Table 6. Mean and median equivalent household income by ethnic Table 7. Equivalised disposable income and expenditure by quintiles and by rural and urban settlements in 2008... 26 Table 8. Equivalised disposable income by quintiles and by ethnic groups in 200E ieper seeiis Enar res Eses enoras REER CESES 26 Table 10. Descriptive statistics of GDP at PPP and unemployment Table 11. Descriptive statistics of population per km area and per km of asphalt-equivalent across local governments in Macedonia: si. cit a aii eis Bid hielo ial R 46 Table 12. Ethnic structure of the Macedonian population in 1961— 2O02 Ei aa ass sees ae hs eae earl ates Seb ete ed ee ae as as 46 Table 13. Total budget of Macedonian municipalities in 2010 by Table 14. Macedonian municipal revenues by source of financing in 2010 GM Euros) san a eere ia aani pescce eek in ea 49

Table 15. Earmarked and block transfers from the central government to local governments for the transferred

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Figures

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Contents iii

Central and local government revenues as shares in GDP

IN, Macedonian oaser eaea aE EE sss ET EEE E ER ede 53 Share of expenditure in GDP by levels of government:

Review of empirical studies estimating the efficiency of municipalities and input and output variables used in the

Determinants of the efficiency of municipalities analysed Information on the methodology, variables and their sources used in our estimations oo... ee ee eee eee cseeteeeceeeeeeeeeeeeeees 90 DEA inputs and outputs with proxies for inputs and outputs and descriptive statistics 0... lee eeeeeeeeeeseceeesaeenaes 93 Explanations of the dummy political variables used in the SPA Gstimation ssi s eyed e r are a ESE in cee tates 98 Summary statistics for the DEA-VRS efficiency scores by Summary statistics for explanatory variables: ETF, per The hypothesised and estimated results from the Kernel second-stage estimation 0.0... eee eeeeeeeecesecesecssecssecseesseeeseeees 107 Results of the SFA estimation... eee ceeereeeeeeeeeeeeeerens 111 Comparison of DEA-VRS efficiency scores and SFA Correlation coefficient between the ETF and statements

GDP in Macedonia in 1990 prices for the period 1990—

Real GDP growth rates in Macedonia for the period 1990-2009: (10%) neen nne e EEEE EEEE hia SEE 9 EBRD transitional scores in selected countries for the penod 1989-2008 vrss pes peene eero oer Eeer Eese 10 Unemployment rates in Macedonia for the period 1996— ZOOS EE atira AE E E EE EEEE 11 GDP per capita in PPP across regions in Macedonia; Macedónia= LOO misstean oey eee desane Esne SEI AEren oa suses E guvaetees 23 Household sources of income by regions in Macedonia in PANU E E EEE RTE PONCE EEE 25 S80/S20 income quintile share ratios in EU countries and in Macedonia in 2008 -ssiri pesipesi pesega sS 27 Illustration of DEA dynamics 200.0... cece cece eeceeeeeseeeseeeseenaeenaes 82 iv | Contents

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Appendix A.

Appendix B.

Appendix C.

Appendix D.

Kernel estimation of the explanatory variables on the

DEA-VRS efficiency SCOPES oo... ee eee esse esse cscs eneeeseeeeeeeeeeeeees Kernel estimation of the explanatory variables on the

DEA-VRS efficiency scores without outliers oe

Chronology of Macedonian and Albanian relations during T990= 200) ects spk tS eect cesta noise aa Rae ee The Macedonian constitutions — a comparison between 1997 and 2001.2. s. eshte heh ety nia ee acti The two-phased approach to fiscal decentralisation in Macedonia n ae eee taae oree a a ERE cassia EEEE STER

Appendix E. The determinants of municipal general efficiency «00...

Appendix F.

All statements (significant and insignificant correlation

Cost Efficiency of Municipalities in Service Delivery: Does Ethnic ji ~À = Fragmentation Matter? LO CALIS M. Nikolov