The case for localism in one chart
Simon Parker, Director, NLGN, 1 May, 2014

We have lots of studies which show the potential benefits of localism, but not many that can prove it really does makes a difference. A centralised state by definition does not produce lots of examples we can draw on for evidence. To try and remedy this, I started looking at international indices of good governance to see if I could draw a link between national policy performance and devolution. The good news is that such a link does seem to exist.

I took the Bertelsmann Sustainable Government Indicators 2011, which I think is the best cross-national comparison of developed countries. The indicators include a status index which combines quantitative data and qualitative expert judgements to assess a country’s overall performance. It does this by capturing the quality of a nation’s democracy (eg how effective are the rule of law and the electoral process?) and by judging policy effectiveness in 15 areas grouped under the themes of economy, resources, social affairs and security.

With a little help from Penny Osborne’s team of analysts at Northamptonshire County Council, I explored whether there was any relationship between these indicators and the extent to which states devolve power and responsibility below the national level (as measured by the OECD’s Government at a Glance). I could do this for the 30 countries covered by both datasets.

So here’s the chart – this correlates the sub-national share of taxation (ie how much of national income is raised by state and local government) – with Bertelsmann’s policy effectiveness scores. It shows that those countries with greater fiscal devolution also tend to have higher policy performance. For the statisticians among you, this gives us a statistically significant (p = 0.014) moderate correlation (multiple R = 0.44, R square = 0.2).

Chart

Of course, a chart like this raises as many questions as it answers.

It might be that fiscal decentralisation plays a role in driving better policy performance, but it could also be the other way round. Successful societies might find it easier to devolve. For example, it could be argued that the last thing a country like Greece needs is greater devolution of revenue raising powers, whereas highly successful societies such as those in Scandinavia have stronger democratic and legal institutions which obviate the need for central oversight of local actors.

Even if fiscal devolution does lead to better outcomes, we need to understand the mechanisms that make this work. Economics suggests that it may be to do with the fact that locally accountable bodies are more likely to keep taxation low and to allocate spending to the most cost-effective social interventions, rather than spending to a centrally-set template that may not optimal for a particular area.

We’ll be exploring the data more over the coming months.