THE POLITICAL ECONOMY OF PUBLIC SPENDING ON PUBLICLY-PROVIDED GOODS IN DEVELOPING COUNTRIES

Abstract

It is common for many governments to provide services, such as education or healthcare, to the public even though many of these services have privately available counterparts. Although the literature on public economics has studied various determinants of policy choice, it typically takes granted the existence of institutions which are often very weak in less-developed countries. More importantly, many developing countries experience widespread corruption in the public sector, which undermines the functioning of governments. In this dissertation we have developed a probabilistic voting model using political pressure approach to characterize the policy choice in a local government. Politicians seek to maximize their chances of reelection by maximizing the social welfare. They are also influenced by special interest groups seeking public funds for their own benefit. In this model leakage of public funds undermines the quality of public services. In response, the wealthy switch to private alternatives. Their exit leaves the poor as the only constituents who have a stake in local governance but with little influence over politicians. As the civic control over local governments weakens, corruption in public offices becomes even more pervasive. Such a cycle is less likely to be observed in developed countries, where Tiebout's "voting-by-feet" functions relatively well (thereby keeping redistributive politics in check) and local politicians are more sensitive to the electorate. Our model shows that establishing institutions (such as local taxation or voucher programs) that spread the costs and benefits of governance across the whole society is crucial for the success of local governments. Empirical results from the Philippines showed that local financing, coupled with political participation of citizens, may increase the allocation of resources on publicly provided services, that corruption in local governments is less problematic in communities that rely on local taxation, that households are more likely to participate in political processes if local government spending is financed mainly through local taxes, and finally, that demand of the wealthy for publicly provided services is among the primary forces that facilitate better governance and better public services.