10 reasons to *give localism a chance*

Localism means that public services are more likely to reflect the needs and preferences of communities as local citizens have the opportunity to directly set priorities and the nature of local services.  They also have a greater ability to hold their local decision-makers to account.

To learn more read below.

Governments exist to provide for the common good and ensure communities receive the public services they require to provide for their social and economic well-being.  Given that these are goods and services generally not suited to provision through markets an important policy question is how do we ensure that communities receive the public goods and services they need? That is, does the supply of public services equal the demand and in a way that is allocatively efficient?

Localism improves the ability of governments to achieve allocative efficiency in two ways; first, through the manner in which local government boundaries, responsibilities and resourcing are determined and second, through the ability of citizens to exercise voice and exit.

Determining governmental roles

A critical principle used when determining the roles, responsibilities and boundaries of local governments is the decentralisation theorem.  The purpose of the decentralisation theorem is to achieve allocative efficiency by ensuring governing institutions address the practicalities of accessing local services in a way that is responsive to local preferences.

Since individuals differ in their preferences for levels of public good provision, the capacity of decentralised government to diversify public outputs in accordance with local preferences will improve resource allocation (Browne and Jackson 1986 p. 217). 

The decentralisation theorem recommends that each public service should be provided by the jurisdiction which has control over the smallest geographic area that can internalize the benefits and the costs of the provision of that public service, with the result being efficient in an allocative sense because:

• local governments understand the concerns of local residents;
• local decision making is responsive to the people for whom the services are intended, encouraging fiscal responsibility and efficiency, especially if financing of services is also decentralised;
• unnecessary layers of jurisdiction are eliminated;
• inter-jurisdictional competition and innovation is enhanced (Shah 2005 p. 6).

A critical issue, however, is the nature of the public service itself.  If the scale of the benefits arising from a public service is larger than the legal jurisdiction of the government responsible for its provision then allocative efficiency will not be achieved.  In short local governments should “be created such that preferences vary little within localities but vary strongly between them” (Bailey 1999 p. 21).

Strengthening Voice and Exit

In the case of those goods and services provided by the private sector consumers are able to “shop around” until they get the good or service that best meets their preferences.  Should a consumer be unhappy with the level of service provided by a store or by the range of goods on offer they can “exit” and shop elsewhere, or give “voice” to their feelings by contacting the store owner.  Voice and exist are essentially signals to which markets respond accordingly and allocative efficiency is effectively achieved (see Albert Hirschman, Exit, Voice and Loyalty 1970). 

In the case of public goods “exit” is difficult to achieve because governments are monopolies (unless citizens choose to migrate), except for those services provided by local governments.  Local provision allows people to shift between jurisdictions until they find one that provides the range of services they desire (Oates 199).

Multiple units of local government allow for people to exit (shift) if they disagree with the performance or the range and quality of local services delivered by their council, in a similar manner to the way in which consumers change supermarkets. Even if exit is not practically viable the threat of exit, which American economist James Buchanan describes as virtual exit, may be sufficient. In addition citizens are able to exercise voice much more effectively at the local level, given the proximity of decision makers, than they can at the national level.

In addition economists generally regard autonomous systems that raise the majority of their own income as preferable, primarily for two reasons:

• It is more efficient for services that have a limited range of benefits to be funded by the group of people who receive those benefits. This is because of improvements to allocational efficiency, as there is a direct link between those who pay and those who receive the service.
• It improves accountability, because it is clear where the responsibility for allocating resources lies. In systems where funding is provided.

On this basis decentralised sub-national government is preferred in situations where collective preferences align as closely as possible to jurisdiction boundaries.  Where this is achieved spill-overs, that is, where the benefits of services “spill over” to neighbouring authorities that are not contributing to the cost of providing the services, and free riding, should be diminished and allocational efficiency improved. 

Conclusion

Allocative efficiency is concerned with the degree to which the goods and services that are provided by governments actually meet the needs of the individuals and communities for which they are intended.  The more complex and diverse societies become the more difficult it is for a single decision-maker, such as central government, to ensure people receive the public goods and services consistent with their needs and preferences – a localist approach is needed.

References

Browne, C and Jackson, P, Public Sector Economics, Oxford 1986

Buchanan, J. (1995/96) Federalism and Individual Sovereignty, Cato Journal, Vol. 15, Nos. 2-3, pp. 259 – 268.

Hirschman A, Exit, Voice and Loyalty, Harvard University Press, Massachusetts.

Oates, W. (1999) An Essay on Fiscal Federalism, Journal of Economic Literature, Vol. 37, Issue 3, pp. 1120-1149

Shah, A (2005) Fiscal Decentralisation and Fiscal Performance, accessed from https://openknowledge.worldbank.org/bitstream/handle/10986/8582/wps3786.pdf?sequence=1&isAllowed=y

Communities are not the same.  As we become more diverse “one size fits all” policies become less and less workable.  Localising more public decision-making so that communities can shape public services to reflect local values, consistent with our belief in tolerance and a “fair deal”, benefits all of us and drives inclusiveness.

To learn more read below.

Amongst the arguments given for centralising power is the social value that results from New Zealanders being able to access services of equal quality and quantity.  Yet while this may be true of many services, such as justice, social welfare benefits and democratic rights, it is less applicable for those services where preference may vary according to ethnicity, that is, where values and preferences are heterogeneous.  New Zealand’s increasing diversity (see figure 1) means many public services may have to be configured and delivered in different ways; ways that provide for a larger role for local authorities.

Figure 1: The changing face of New Zealand

Source: Statistic NZ

Diversity is not increasing at the same rate in all communities, resulting in a situation where the populations served by local authorities will vary significantly.

Standardised “one size fits all” policies and programmes are no longer an appropriate response to these differentiated communities society, nor the growing desire of many Iwi and Hapu for greater self-management. Commenting on these changes Francis Fukuyama notes that centralised hierarchies are poorly placed to deal with the over-whelming local nature of the information needs of our increasingly complex and diverse communities (1999). He further notes that public policy often fails to adequately understand and respond to diversity and pluralism and argues that legislators are far too ready to reach for and impose universal solutions to what are in fact local matters – solutions that are ultimately pluralism-eroding. 

Democratically debating and resolving public issues locally reduces the need to find universal answers that fit all communities across the country, thus making consensus easier to achieve. Solutions that are more tailor-made to specific local circumstances make them more effective. Localism increases the chances that governmental decisions will reflect the beliefs and values of voters.

Addressing the needs and priorities of communities with diverse preferences, whether based on values, culture or ethnicity, calls for governance arrangements that are able to provide differentiated policy responses, particularly on a geographic or regional basis.  Giving communities a greater say about the manner of their development provides citizens with the authority, as well as the incentive, to adopt policies and programmes to change their circumstances. 

Localism is also an important mechanism for addressing ethnic and cultural tensions, such as those resulting from, and causing, the growth of populist parties and nationalist movements in multiple countries.  An example of a country that manages significant ethnic and cultural diversity without experiencing the ethnic strife found in many, is Switzerland.  Switzerland’s 26 cantons, which contain different languages, ethnicities and religions, co-exist within the Swiss federation largely because of the high level of autonomy that each canton possesses and the role each plays in collective decisions (Lars-Erik Cederman, Swiss Federal Institute, quoted in Mackenzie 2014).

Immigration, which in New Zealand is the responsibility of central government, is a function that could benefit by giving local government a more formal role.  It is in the interest of both central and local government to ensure new citizens are settled in areas where employment and housing is available and infrastructure, amenities and services have the capacity to cater for further demand.  They are also best placed to develop programmes to make cities more welcoming to migrants and promote integration.

As diversity increases, within and between communities, the limitation of nationally designed policies becomes more pressing.  To successfully govern a nation composed of increasingly diverse communities, political power and resources must be localised, providing a mechanism for local policies to reflect the needs, interests and preferences unique to each local area.

References

Fukuyama, F. (1999) The Great Disruption: Human Nature and the Reconstitution of Social Order, Profile Books, London.

Michael D. Hais, Doug Ross, and Morley Winograd, (2018) Go Local: Communities as Laboratories, for Rescuing American Democracy in, LOCALISM IN AMERICA: Why We Should Tackle Our Big Challenges at the Local Level.

MacKenzie D (2014), Imagine there’s no countries, New Scientist, September 2014.

Extreme concentration of power and authority is a risk to all societies. Localism is one way of ensuring that power and authority is spread around communities rather than concentrated in one place.  Empowering communities provides a check and balance on central government as it gives citizens a level of autonomy and self-governance on local matters.  The result is a stronger democracy all around.

To learn more read below.

Some of the earliest thinking about sub-national government and its constitutional significance can be found in the Federalist Papers, where key figures like Madison and Jefferson debated at length about the best form of government to govern the recently independent 13 states. The Federalists, concerned at the risk of concentrated power, believed that if democracy was to survive power would need to be dispersed. As a result the United States came to embody a division of powers within its written constitution, including a spatial division of powers between the federal government and states.

The federalists who designed the constitution were strongly influenced by Montesquieu, who played a significant role in the development of democracy as we understand it today.  Montesquieu saw local government as providing a check on the power of the sovereign and took the view local governments should be granted general powers while national governments should be constrained to those decisions which can only be undertaken nationally (see Norton 1994).

While the division of powers is frequently defined in a country’s written constitution, it is in those without constitutional documents that provide for local government, or without constitutional documents altogether, that the status of local government is even more important. GW Jones, a British political philosopher, described this function in the following terms:

In a country without a written constitution local government takes on an added significance, since it is the only legitimate check on the power of central government. In a unitary state … local government has to be a substitute for constraints on arbitrary power that are provided elsewhere by the checks and balances of federalism and a written constitution.

Local governments provide a constitutional check on the role and power of the executive in two ways.

• First, they reflect a disaggregation of authority by the fact that councils are able to make decisions on a range of local matters through the exercise of their own discretion. Even though legislation can be amended and local powers removed it still allows for a range of political matters to be resolved outside the immediate responsibility of national governments.
• Second, by providing opportunities for citizens to make a range of decisions about matters of local significance, without the approval of the centre, local government provides an important opportunity for the expression of diverse policy preferences. Such preferences may vary from the preferences of the central government and as such provides a constructive way in which dissent can be expressed.

Arguably, recent changes to local government’s powers may have strengthened this role.  While local government in New Zealand can be abolished by a simple majority vote in parliament the passage of the LGA 2002 and the introduction of general empowers was seen by the Rt. Hon Sir Geoffrey Palmer as ‘implying a degree of power-sharing or at least governance sharing (devolution not just delegation), (and) has constitutional implications in a country hitherto unitary in its governance’ (Palmer, 2000, p.4). 

Localism strengthens local government’s constitutional role by strengthening the capacity for and opportunities of citizens to exercise a level of self-government.  In effect power is shared and local citizens have greater opportunities to undertake develop policies and programmes in response to local matters that central government may have given little regard.  This function was well expressed by Prof John Roberts, formerly professor of public administration at Victoria University, when he stated:

The growing power of government as evidenced by its increasing intervention in the economic and social affairs of the people constitutes another reason for the existence of an efficient system of local government; an effective local government structure is an important counterweight to the growth of central government power.

Local government provides the democratic machinery for the expression of local opinion on all matters of public policy (Roberts, 1968).

References

Florida, R (2018) United Cities of America in Localism in America, America Enterprise Institute

Norton, A., (1994) International Handbook on Local and Regional Government – A Comparative Analysis of Advanced Democracies, Edward Elgar, England.

Palmer, G (2000) The legal history and framework of the constitution, paper delivered to the Building the Constitution conference, Wellington.

Roberts, J. & Sidebotham, R. (1968) Local Government in the Wellington Region: The challenge of chaos, Victoria University, Wellington.

A problem with the centralised government is that public services are often provided by departments working in isolation of each other, resulting in duplication and overlaps “on the ground” - this is known as the problem of “public service silos”. Localism takes a “place based” approach to service provision that brings service providers together around a common vision and problem definition.

To learn more read below.

One of the challenges that governments at the national level face when delivering or commissioning services is how to avoid “silos” and ensure that services at the local level are joined-up or integrated.  The silo problem arises when departments work in isolation. Working in isolation can result in the duplication of services, gaps in service coverage and ambiguous accountability. This issue is particularly prevalent in the New Zealand public sector model, and was highlighted in two reports on the performance of the New Zealand state sector nearly two decades ago  (SSC 2001 and 2002). Both reports identified the lack of co-ordination and alignment between departments and public agencies as specific problems:

a number of stakeholders and commentators … emphasised the need for clarity on directions and expectations, particularly in relation to issues or intentions impacting across sectors or the whole of government. Weaknesses include … the fragmentation of the sector which makes it difficult to actively pursue cross cutting objectives (The Review of the Centre, SSC 2001, p. 14).

The problem of silos is felt most intensely at the local level where service delivery can be fragmented with multiple agencies working with the same whanau and in the same communities.  Not only does this undermine the effectiveness of the specific interventions it is also a poor use of public resources.  While Government departments attempt to address this by more collaborative forms of contracting, such as selecting lead agencies to negotiate contracts on behalf of multiple departments (for example Whanau Ora) the real challenge is to take a “place-based” approach, something that is difficult to do from a central perspective. 

Local governments, if given the mandate, authority and resources, are well placed to join-up public services within localities since that they are the only organisation with a mandate to express the collective views and interests of local citizens and make trade-offs based on those views and interests.  As Katz and Novak point out “cities that are characterised by multi-disciplinary and multi-sectoral networks, rather than by the narrow, specialised silos of federal or state bureaucracies, can think outside the box” (Katz and Novak 2017).  An example of a New Zealand city working on a multi-sectoral strategy is the integrated planning approach being taken by Whangerei District Council towards the development of its central city.

Mario Pezzini (2001), writing about the challenges of developing successful regional and territorial policy notes that traditional (top down) policy-making methods are failing, because:

• They assume a level of knowledge and understanding of local issues that is not always present;
• that policy-makers often decide issues in isolation, and
• that central government officials tend to take a hierarchical communication and rigid command approach to implementing decisions.

Instead a new policy approach is needed, one that brings together all relevant actors to share the knowledge that they have.  In Pezzini’s view this must be a place-based approach that builds on and strengthens horizontal relationships.  In order to address the complex issues facing today’s communities we need to find more effective forms of horizontal integration or co-governance, such as, for example, “community planning”.

Community planning is a participatory process designed to collect and analyse information about the priorities of people who live in an area. The plan is put together by local people themselves, assisted by an independent facilitator and supported by the local council in partnership with public agencies active in the area. Community plans can be used to set departmental spending priorities, confident that these plans reflect local people’s wishes (see https://www.carnegieuktrust.org.uk/). 

For community planning work however public agencies need to “buy-in” to local priorities.  The issue is highlighted by two local initiatives:

The Hokonui Huanui project, supported by Gore District Council, is designed to provide a platform to address the challenges faced by children and young people in that district by:

• Improving the wellbeing and safety of children and young people.
• Improving engagement in education by children and young people.
• Facilitating cross-sector support for family/whanau.
• Having a fully engaged community with a strong and shared sense of belonging

The Hokonui Huanui project is based on a structure and framework that is designed to integrate and maximise opportunities for children and young people; bring stakeholders and key partners to together to agree a shared vision and prioritise, develop and deliver actions to meet the needs of the district’s young people.  It’s objective of ensuring local young people have the skills to take up local jobs has recently been supported by the Provincial Growth Fund. 

Demarcation zones are regional areas (rather than cities) that are demarcated as places in which to undertake public policy experiments by adopting a new governance or decision-making system.  Such approaches are typically considered in response to areas experiencing multi-generational social problems that central government decisions makers have either overlooked or lack the policy tools to resolve.

A proposal to establish three demarcation zones in 2017 was developed by the McGuinness Institute in partnership with the mayors of Gisborne District, Far North District and Rotorua Lakes District, in response to the long term consequences of entrenched poverty affecting those areas.  The mayors approached the government of the day seeking the chance to replace old rules that were no longer working with a new approach fit for their specific communities.  The proposal was put forward to the government for consideration prior to the 2017 election.

Put simply, dealing with today’s wicked issues will require more inter-governmental collaboration than we have seen in the past and for this to be effective local government needs the powers and resources to be a more credible partner.  Localism is essential to ensure local leaders have the resources and the powers to facilitate local networks of organisations and agencies and promote the alignment of policies and programmes with the needs, priorities and preferences of communities.

References

Katz, B and Novak, J (2017) The New Localism: how cities can thrive in the age of populism, Brookings, Washington.

Pezzini, M (2001) Main trends and policy challenges in OECD regions: metropolitan regions in a global context, OECD.

Richardson and Durose (2013), Who is accountable for localism? Findings from theory and practice, Arts and Humanities Research Council,

State Services Commission The Review of the Centre and its follow-up report, The Review of the Centre One Year On (SSC 2001 and 2002).

Resilience can be strengthened by taking a localist approach because risks are shared across multiple communities rather than being concentrated in one.  By encouraging community self-reliance, spreading risk and reducing the impact of policy and operational failure New Zealand as a whole can better withstand challenges and shocks.

To learn more read below.

Resilience, in an ecological context, involves diversity. The same is true when it comes to governing societies.  Reminding us of the old maxim of “not having all your eggs in the same basket”, resilient networks or systems are characterised by the ability to keep operating even when part of the system suffers catastrophic failure.  Sharing decision-making across a range of governing bodies reduces the impact of policy failure by any single institution and increases the opportunity for innovation and policy learning.  Consequently small self-contained systems are likely to withstand shocks than large networked ones.

Where highly centralised systems can run the risk of ‘diseconomies of scale, community-based governance draws on expertise which is often highly localised, involving a plurality of organisations and builds resilience.  Size can increase exposure to internal and external risks, such as when an event that damages part of a large networked infrastructure system affects all connected households. In contrast the impact on smaller self-contained infrastructure models is likely to be less catastrophic.  The risks of centralised models has also been highlighted in other contexts as well, with an article in the New Scientist highlighting risks to sectors as diverse as food production;

There is a growing feeling among economists, political scientists and even national governments that the nation state is not necessarily the best scale on which to run our affairs. We must manage vital matters like food supply and climate on a global scale … At a smaller scale, city and regional administrations serve people better than national governments (MacKenzie, 2014 p. 31.)

A critical feature of policy making in localities is their multi-disciplinary and inter-sectoral nature. This creates more “buy-in” by firms, organisations and citizens and contributes to the ongoing sustainability of policies and programmes – which are more likely to be non-partisan. 

In their recent publication “New Localism” Bruce Katz and Jeremy Novak argue that “unlike national institutions, corporate or political urban stakeholders are fundamentally grounded and patient investors, committed to long term value appreciation and broad prosperity rather than a quick buck or political win” (p.37) – a phenomenon they explain as due to the unifying impact of “place” on decision-making.

Resilience in the face of changing climate

Governments throughout the world are investigating strategies designed to reduce their carbon footprints and become carbon neutral over time – strategies that are intimately local.  Carbon neutrality encourages small scale sustainable initiatives such as investment in micro energy grids, use of digital technology to reduce a city’s energy footprint and local leadership for campaigns to change household consumption of energy.

Rather than a top-down process becoming carbon neutral must be driven at a community level with support, resourcing and facilitation from higher order governments. However, as long as councils lack the power and ability to fund and finance initiatives our performance will be sub-optimal.

Strengthening citizens and community capacity

Ultimately resilience will depend upon the capacity of citizens and community organisations to manage for themselves in times of crisis.  This requires governing models that enable citizens to develop the skills and capability of self-government.  The issue was addressed by recent work undertaken by the Rockefeller Foundation and the 100 resilient cities’ network which found:

Through city case studies, public administration literature identifies a series of conditions under which urban resilience would likely improve: decentralization and local autonomy, accountability and transparency, responsiveness and flexibility, participation and inclusion, and experience and support (Urban Institute 2018 p.76).

Transferring power to localities and strengthening their decision-making powers enables citizens to participate more in the way their towns, cities and neighbourhoods are governed.  This is associated with a willingness to be involved in formal and informal community activities.  The European Union has surveyed such participation in its member states and, when set beside to their relative levels of fiscal decentralisation, a strong relationship is found, see figure 2.

Figure 2: Fiscal decentralisation and participation

Source: UCLG/OECD and EU (2015)

Formal participation represents participation organised groups and networks, such as service clubs or political parties.  It represents the vibrancy of civil society and the graph highlights the inter-relationship between a strong civil society and empowered local government.  A strong civil society is a critical element in assisting communities to survive significant shocks, as was found in the immediate aftermath of the Christchurch Earthquakes (see http://www.hrc.govt.nz/news-and-media/media/virtuous-circle-helps-christchurch-communities-recover-earthquakes).  In addition a correlation was also found between fiscal decentralisation and participation in informal, as well as formal, networks.

References

Katz, B & Novak, J (2016) The New Localism, how cities can thrive in the age of populism, Brookings.

MacKenzie D (2014), Imagine there’s no countries, New Scientist, September 2014,

Urban Institute (2018) Institutionalizing Urban Resilience: A Midterm Monitoring and Evaluation Report of 100 Resilient Cities accessed from https://assets.rockefellerfoundation.org/app/uploads/20181205162438/Institutionalizing-Urban-Resilience-A-Midterm-Monitoring-and-Evaluation-Report-of-100-Resilient-Cities.pdf

Localism not only enables communities to experiment with new ways of doing things, it also encourages innovation as our towns and cities compete with each other, in constructive ways, to offer a better quality of life and attract investment.  Also, policies and programmes can be trialled at the local level as the impact of failure is significantly less than introducing them for the first time at the national level.

To learn more read below.

Towards the end of the 20^th Century economies began to transition from a focus on the mass production of goods, often described as Fordist because of the assembly line analogy, to the production of specialised products, or a Post-Fordist mode.  The transformation had and has significant political implications, signalling a change in the importance and role of the state, which owed its existence to the provision of large scale goods, such as national infrastructure and defence. 

Success in the Post-Fordist world involves speed, responsiveness and flexible forms of production, all of which benefit from smaller governments, especially cities.  Centralised bureaucracies are simply not well placed to exploit the opportunities found in this environment – a localist approach is needed.  Recognising the new economy the federal Government in Australia has recently launched its Smart City Plan designed to support cities which wish to become more entrepreneurial:

City Deals’ will position our urban centres, whatever their size, to realise their full potential. They will do this through coordinated governance, strategic planning, investment and reform. By taking advantage of the unprecedented pace of technological progress, governments and the community can make cities more prosperous and sustainable.

Real time data and smart technology will lead to better utilisation of infrastructure, clean energy and energy efficiency, improvements in services and better benchmarking of cities performance (Australian Government).

As towns and cities address local issues and problems they have the opportunity to experiment and “try things out” and earn from the experience of each in a way that central governments cannot – processes that encourage innovation and build a capacity for dealing with the unexpected.  In this sense sub-national government can be considered a type of laboratory, something that has been recognised as a strength of the federal structure in the United States.

Louis Brandeis, the former U.S. Supreme Court Justice, described how a "state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country”.  Reinforcing this view a recent edition of the Economist featured a short article on how countries handled the integration of migrants, comparing labour force integration in Denmark, Germany, the Netherlands, Norway and Sweden.  It found that Germany was a clear leader with 70% of refugees in employment after 15 years. 

One of the reasons found for Germany’s success was the fact that it had given municipalities the discretion to adapt their refugee integration policies to local conditions, unlike other countries (April 21 2018. p.51). As Bruce Katz and Jeremy Novak argue, “problem solving close to the ground rather than policy making from a remote national or state capital has the tangible benefits of customisation.  A local solution can be more efficient as it more aligned with the distinctive needs and circumstances of a place.  In addition spending decisions made locally, or made on the basis of locally agreed strategies and plans, will be much smarter.  The UK’s IPPR report entitled “The Relational State” notes that

[…] local, flexible decision-making will be more capable of adapting to particular circumstances, avoiding waste and driving innovation, whilst opening up the space to make logical spending switches, such as towards low-cost preventative measures in healthcare, in preference to expensive remedial action.[i]

Local governments in New Zealand also have a long history of innovation including the well-known role that Invercargill City Council played in the introduction of the “no fees” policy for the city’s local polytechnic, which was a key to turning around that city’s declining economy.  More recently Christchurch City Council has taken a leading role in situating that city as a site of new technology. 

Yet the capacity of councils to innovate is seriously constrained by the manner in which they are funded and by their limited task profile.  Dependence on a single form of taxation, property tax, discourages investment as there is not financial from those investments, as recent problems with the provision of visitor infrastructure for New Zealand’s growing tourism sector illustrates.  In addition, council’s’ narrow task profile means that most services, from care of the elderly to education and health, are determined by officials that do not live in the communities served by those services which diminishes the incentive to innovate as well as making innovation more difficult.

It is important that governments resist the temptation to scale-up successful community innovations. It is common for governments to simultaneously accept the adage that “one size does not fit all” while at the same time seeking to “roll out” successful initiatives. If localism enables local innovation to flourish then diversity of provision is also important - it shouldn’t be assumed that an innovation in one context will necessarily be able to be replicated elsewhere.

References

DPMC, Australian Government, (2017) Smart Cities Plan, accessed frohttps://infrastructure.gov.au/cities/smart-cities/plan/index.aspx

Katz, B and Novak, J (2017) The New Localism: How cities can thrive in the age of populism, Brookings Institute Press, Washington.

[i] Institute for Public Policy Research. “The Relational State: How recognising the importance of human relationships could revolutionize the role of the state” 2012.

Shifting more decision-making to communities and their councils provides more reasons for people to stand for local office and vote.  Having more ability to influence whether or not and how a community grows and develops will increase interest in local government and attract people with more knowledge and experience to stand for and work in councils.

To learn more read below.

Empowering local governments and communities will have a transformative effect on the performance of local authorities and re-boost interest in local democracy due to two factors:

• In the first instance there will be greater interest in elected member performance as a result of councils having access to other forms of funding (buoyant taxes) that ensure communities, rather than central government, benefits from successful council programmes and investments.
• In the second instance because transferring responsibilities to local government increases salience or importance. Greater salience is associated with more turnout and increasing citizen interest due to greater relevance. 

Incentivising local politicians

The way in which local government raises revenue (its only form of taxation is property tax) can disincentivise councillors from making decisions that promote economic growth, such as encouraging population growth or building visitor facilities. This occurs because councils are required to meet the cost of such decisions and receive none of the financial benefits – many of which go to central government in the form of additional GST or income tax. 

Under the existing distribution of taxes investments local economic growth increases both consumption and income taxes but has a neutral impact on property taxes.  In other words councils receive no direct return from investing in activities that grow local economies – something that is likely to not only affect the decision-making priorities of councillor but also citizens. 

Under a localist policy framework councils would receive a share of either GST or income tax (or some other form of buoyant tax) which would provide additional incentives to invest in those activities/infrastructures, that have positive economic impacts.

Increasing interest in local government and local democracy

The experience of democracy is acquired through practice at not just the national level but also, and more directly, at the local and regional levels and research tells us that in countries where people have a greater say about the policies and programmes that affect their lives the more likely they are to vote.  The reason is to do with the salience of a local government system.

Salience refers to the degree to which a council is relevant to the communities it represents.  Only when local authorities are responsible for services that people recognise and value will they invest in the time and effort required to make an informed vote. Because New Zealand is a highly centralised country councils have a low level of salience compared to countries with a broader range of responsibilities and the discretion to decide how those services are delivered.  Figure 3 shows a positive correlation between fiscal decentralisation (salience) and voter turnout in local government elections.[1]

Figure 3: Relationship between decentralisation and voter turnout (LG)

Source OECD and UCLG

Because of its proximity to communities, local government is often promoted for the opportunities it provides for direct political participation by citizens. In New Zealand this is acknowledged in the purpose of local government when it uses the phrase to “democratic decision-making by and for communities” (S.10 LGA 2002). While the use of “for” reinforces the representative and governance role of elected members (representative democracy) the addition of “by” is meant to signify the importance of providing mechanisms for citizens to directly take part in decision-making processes themselves (participatory democracy).

Behind much of the rhetoric about the importance of political participation lies a belief that participation promotes the ideal of citizenship, that is, the formation of citizens who are capable of self-government and committed to democratic.  This is described by Michael Sandel  as “the formative aspect of republican politics requires public spaces that gather citizens together, enable them to interpret their condition, and cultivate solidarity and civic engagement” (Sandel 1996 p.349). He argues that contemporary issues make the politics of neighbourhoods more important as they constitute sites of civic activity and political power that can equip citizens for self-rule. 

..if democracy is to do with self-government, the control of one’s own life and environment, then the most important area of control is the most immediate environment, the locality in which one lives. Home and neighbourhood should take precedence over the wider and more remote units of region, state or nation” (Mulgan quoted by LGNZ 2013).

The 2017 report on the State of Democracy suggests the world is going through a “democracy recession” - a recession that has been present in western democracies for more than two decades (Economist 2017).  One feature of this recession has been declining voter turnout in some countries. In New Zealand, for example, voter turnout in central and local government elections has declined throughout this period, with a decline in local government turnout of nearly 18 percent and central government turnout of nearly ten percent (although both appear to have at least steadied).  More recently a number of countries have experienced a rise in populist parties that have strong authoritarian sympathies and autocratic leaders. 

There is also a growing gap between reasonably high levels of public support for the concept of democracy across the globe and the widespread disappointment for the way the concept functions (Pew Research Centre 2017).

The cause of this apparent disenchantment is generally explained as a growing feeling of disempowerment experienced by significant numbers of citizens, particularly those living in regions experiencing economic decline.  Surveys indicate that the sense of being excluded from decision-making and political influence is widespread.  The solution, as recommended by the recent Commission on Strengthening Local Democracy in Scotland is to provide citizens with meaningful opportunities to design and shape policies in their own communities.  Giving a nod to localism the Commission argued for:

A radical transfer of power is essential to communities is essential if we are to rebuild confidence in Scotland’s democracy and improve outcomes across the country (The Scotland Commission on Strengthening Local Democracy).

Participation also has indirect value as a result of its contribution to social capital. Social capital is a way of describing the stock of informal norms and values in communities, particularly reciprocity and connectivity, and their role in creating the conditions for cooperation and social cohesion. The results are not only stronger networks and ties of mutual recognition but increased levels of community trust (Putnam 1995).  A society with high levels of trust should be able to spend less on compliance, such as the cost of a judiciary, courts, police and the legal profession. Consequently societies with high level of social capital provide a cheaper environment in which to do business. 

Frances Fukuyama argues that variations in what he calls the “level of spontaneous sociability” are related to historical patterns of political centralization and that devolution and decentralisation were associated with greater levels of social capital and trust in government.  Localism is positively correlated with trust in government, see figure 4.

Figure 4: Localism and trust in government

Source UCLG OECD

The notion of a more politically active civil society as distinct from the more passive participation of broad based membership associations has implications for the way governments work and structure themselves. Novak (1996) argues that the historic assumption that the underlying problems of communities could be solved at the locality level diminished as the 20^th Century progressed and public affairs were gradually removed from the reach of the average citizen to become matters for policy elites operating at the highest levels of government. He argues that at-large city wide systems of representation “handed governance to corporate and professional elites (who) possess a scientific and rational view of governance (ibid p. 16).

Addressing these issues requires a policy to re-empower localities and regions so that citizens are able to have a meaningful impact on the policies and decisions that affect their lives.

References

Economist (2017 State of Democracy accessed from https://www.economist.com/graphic-detail/2017/01/25/declining-trust-in-government-is-denting-democracy

LGNZ (2013) Submission to the Constitution Conversation accessed from http://www.lgnz.co.nz/assets/Submissions/Submission-to-the-Constitutional-Conversation.pdf

Novak, M. (1996) To Empower People: From State to Civil Society, 20th Century Edition, AEI Press, Washington DC.

Pew Research Centre (2017) accessed form http://www.pewresearch.org/fact-tank/2017/10/30/global-views-political-systems/

Putnam, R. (1995) Bowling Alone, Journal of Democracy, Vol. 6, No. 1, pp. 65-78.

Sandel, M. (1996) Democracy’s Discontent: America in Search of a Public Philosophy, Belknap Press, Harvard University, Cambridge, MA.

[1] To ensure a like for like result federations and new democracies (former East European countries) are not included.

Shifting decision-making to communities is essential in order to reverse our growing regional inequality as it gives councils and local leaders the tools and incentives to invest in regional economic development.  Countries that are decentralised tend to be wealthier and have less regional disparity.

To learn more read below.

In early 2012, facing a recession and rising unemployment, David Cameron, the then UK Prime Minister, asked Lord Heseltine, a former Conservative Cabinet Minister, to review his Government’s economic development strategy and give the Government his bold ideas on how to bring government and industry together. Heseltine reported to the Government in October 2013 and his report had one over-arching message, that increasing centralism is bad for business.

His prescription for the UK economy included a more explicit role for local authorities and he explicitly expressed concern at the dominance of Whitehall and the relegation of local government to the role of a service provider, which had reduced the involvement of local business people and deprived cities and towns from the benefits of their innovation and energy. In his view the loss of local economic leadership was exacerbated by:

• the general failure of governments to be informed about the different circumstances of communities when making decisions; and
• the tendency of governments to operate in a siloed manner which inhibits their ability to take a holistic approach and deal with the total range of issues affecting an area.

Heseltine argued that since barriers to growth are multi-faceted the traditional ‘one size fits all’ approach of the state is seldom appropriate for all places.  In his view local leaders are best placed to understand not only the opportunities to growth in their own communities but also the obstacles.

How does localism increase economic growth?

One of the values of decentralisation is the incentives on local governments created by the proximity to decision-makers, local accountability and better information, to tailor services so that they better meet the needs and preferences of users and consumers, especially in comparison to the incentives that higher level governments have.  Based on their examination of cities in the United Kingdom (a country nearly as centralised as New Zealand) they found that centralisation was hindering the delivery of local services that support economic growth.  They concluded that:

the incentives and rewards for supporting growth need to be rebalanced with more of the benefits of growth passed on to local areas where the costs of investment are borne and where reinvesting the proceeds of growth is likely to generate cumulative benefits to the economy” (Centre of Cities blog January 17 2014).

In addition to the constraints on councils they also found that central government budget and service silos hindered the design and delivery of efficient and joined up services.  As a result cities found it difficult to meet place specific demands such as matching skill training with the needs of the local jobs market. 

Their recommendations highlighted the need for central government offer powers and structures that empower local authorities and their partners in cities to work across silos, coordinate strategic investments and recoup the costs of investment in the local economy or society.

Comparative data reinforces the conclusions that both Heseltine and the Centre for Cities’ arrived at with centralised countries having lower GDP per capita than decentralised countries, see figure 5.

Figure 5: Relationship between fiscal decentralisation and GDP

Source UCLG/OECD

Figure 5 shows a strong relationship between a country’s GDP per capita and its level of fiscal decentralisation, in short the more decentralised a country is the higher its per capita GDP. 

Impact on growth

Recent research also suggests a positive correlation between decentralisation and gross domestic product (GDP) per capita growth (Blochliger 2013).

Local government systems which have high levels of tax and revenue assignment and tax autonomy, appear to have a stronger impact on economic activity with a 10% increase in the level of decentralisation being associated with a 3% higher GDP per capita on average (ibid).

This is most pronounced in situations where strongly centralised countries are decentralising. The effect is less pronounced in those countries which are already partly decentralised indicating that the relationship between growth and decentralisation is not hump shaped, i.e. there is not an optimal degree of decentralisation (ibid p.4). 

Blochliger (2013) notes that the economic effects of decentralisation are similar to the effects of a reduction in the tax burden: a reduction in tax of 1% has a similar effect on GDP as an increase of 1% in the decentralisation ratio.

It is no surprise that the strongly decentralised countries, such as Iceland, Sweden and Switzerland are more prosperous and more equal.  In each country communities, through their local governments and civic organisations, have the authority and the incentive to drive change.  Incentivising councils to make local investments by, for example, assigning them some form of buoyant tax (income or transaction) can address the problem of inequality, especially where inequality has a spatial or regional dimension.

Decentralisation is also associated with less regional inequality

Centralised states, such as New Zealand and the United Kingdom, tend to have higher levels of inequality than decentralised states.  For example, the GDP per capita of the three poorest regions in New Zealand averages $41,000 in contrast to the average GDP per capita of the three most prosperous regions of $67,500.  The difference is significant and, combined with the fact that the poorest regions also have the lowest rates of educational achievement, the highest rates of young people not in employment, education or training, and have the highest rates of Maori unemployment, represents a serious failure of our centralised decision-making model. 

Where power and authority are centralised regions and communities lack the ability themselves to significantly change their own circumstances and are at risk of being left behind and creating a geography of social and economic disadvantage. Centralised decision-makers lack the same incentives to respond and address local issues when compared to their local counterparts.  

A recent international example where local action has led to economic growth, despite failure at the national level, is the city of Cluj in Romania.  Cluj is one of only two cities in Romania not suffering from declining population - a situation the city attributes to the adoption of a municipal strategy that gave priority to universities over factories. Today the city is home to 1,350 IT companies and “an estimated 20,000 developers, up from 12,000 in 2014” (Economist December 22, 2018).

As noted above poverty in New Zealand poverty has a notable spatial dimension with some communities and regions falling behind.  These regions and sub-regions have lost investment, lost jobs and have poorer educational opportunities for their children.  The social and economic divide between these communities and the rest of New Zealand appears directly related to our centralised governance model and the failure of decision-makers in the centre to share power.  Figure 6 shows a small correlation between centralisation and inequality which, arguably, reflects the increased risk of spatial inequality in centralised states.

Figure 6: Localism and inequality

Sources OECD UCLG

To address New Zealand’s regional inequality we need to give communities the necessary decision-making authority and access to funding that will both incentivize and enable them to adopt policies and programmes, and make the appropriate investments to address the constraints holding back their social and economic development.

References

Blochliger (2013) Decentralisation and Economic Growth - Part 1: How Fiscal Federalism Affects Long-Term Development, OECD Working Papers on Fiscal Federalism, No. 14, OECD Publishing, Paris. http://dx.doi.org/10.1787/5k4559gx1q8r-en

Centre for Cities blog (2017) accessed from https://www.centreforcities.org/blog/

Heseltine, M (2013) No Stone Unturned: in pursuit of growth, accessed from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/34648/12-1213-no-stone-unturned-in-pursuit-of-growth.pdf

Katz, B and Novak, J (2017) The New Localism: How cities can thrive in the age of populism, Brookings Institute Press, Washington.

Cities are the driving force of the modern economy. They attract investment and drive innovation but cities can only grow and develop if they have the necessary power and decision-making authority.  New Zealand compete with cities in other countries for investment but lack the level of autonomy that their competing cities possesses. Localism means strengthening the ability of urban residents to govern their own city.

To learn more read below.

To succeed in the 21st Century economy our cities need to be productive and accessible, but they also need to be liveable with a clear focus on serving their citizens. Great cities attract, retain and develop increasingly mobile talent and organisations, encouraging them to innovate, create jobs and support growth. (Australian Government 2016)

Over recent decades, as globalisation has increased, cities have come to be recognised as engines of national economic growth and the global economy.  Authors, such as Richard Florida and others, argue that it is now city regions rather than national states that are the relevant boundaries and jurisdictions for competing in a world economy.  Such thinking underpinned the consolidation of Auckland in 2010 with the Government committed to establishing New Zealand’s fist “International city”. 

As cities grow they are able to achieve the benefits of agglomeration and scale with their economic output being larger than their share of population. A McKinsey study of 600 cities found that while they contained 22 per cent of the world’s population they produced 52 per cent of the world’s output.  For example Toronto, with 7 per cent of Canada’s population, produces approximately 11 per cent of that country’s national output (Forum of Federations 2011).  The value of cities is expected rise further are a result of growth in the digital economy. 

Bruce Katz and Jeremy Novak in their recent book, “The New Localism”, argue that “vanguard cities and metropolitan regions are inventing new models of growth, governance and finance” which involves leveraging their distinctive sectors to commercialise research, seed and grow business and create new jobs; catalysing growth through new forms of governance based on collaboration rather than coercion and developing new tools to fund investments in innovation, infrastructure and “inclusivity initiatives”.

However, if cities are to achieve their potential as engines of growth and innovation laboratories they must be empowered to make decisions about their own development. Political decentralisation and devolution is essential to provide the flexibility to enable cities to quickly adjust to changing conditions given the pace of technological and social change.  In addition local officials and businesses are better placed to identify potential opportunities for investment than their national counterparts and are also more able to determine whether services and infrastructure are adequate.

This is not the case for New Zealand’s cities which have limited powers when compared to many of the cities they compete with.  These limitations include:

• New Zealand’s cities limited range of funding and financing tools which constrains investment in growth and restricts development of key infrastructure;
• The need to get central government agreement before investment in critical transport infrastructure can be undertaken, as highlighted with the central rail link in Auckland;
• Important areas of social policy which impact on a city’s ability to respond to investment and economic opportunities currently sit with central government officials.. Two areas in particular, education and housing both of which would normally sit with a municipality, are vital to provide a skilled workforce able to participate in the new economy. 

Localism provides the recipe for making our large cities competitive in the global environment in which they exist.  It is unreasonable to expect legislators and policy makers based in central government to either fully understand or be prepared by themselves to make the decisions that are necessary for cities like Auckland to thrive and prosper.

References

DPMC, Australian Government, (2017) Smart Cities Plan, accessed frohttps://infrastructure.gov.au/cities/smart-cities/plan/index.aspx

Forum of Federations (2011) The Governance of Metropolitan Regions – European and Global experiences, accessed from https://espas.secure.europarl.europa.eu/orbis/document/governance-metropolitan-regions-european-and-global-experiences

Katz, B and Novak, J (2017) The New Localism: How cities can thrive in the age of populism, Brookings Institute Press, Washington.

Localism involves shifting a range of decisions from central government to communities.  Because communities understand their own circumstances better than officials in central government they will ensure that public services address their specific issues and needs, therefore reducing over and under provision. 

To learn more read below.

Transferring public decision-making and the associated accountability for making those public decisions is one way of managing the cost of government.  The reasons for this claim are set out below, they involve:

• The cost of information asymmetry
• The value of local discretion
• The agent principal problem

Responding to signals

As discussed in the section on allocative efficiency, decentralisation helps to address the risk of under or over provision of local public services, thus resulting in more efficient use of public resources.  The ability of citizens to Exit or use Voice to express their preferences is one of the mechanisms by which efficiency is promoted.  The ability to use exit is not even.  The Wellington urban area, for example, is composed of four cities.  Each city provides a different mix of services and, for those services that they provide in common, levels of service may vary, consequently citizens are able to choose to live in the city that best meets their preferences, without having to change their employment or perhaps the school that their children attend.  The same option is not available to citizens living in Auckland, although “virtual exit” may have a similar effect.

Another value of co-existing local authorities allows for knowledge of different approaches to “spill over” potentially driving calls for change.

Voice can also lead to efficiencies.  Voice involves an individual or collective appeal to political representatives to change or protect a policy or programme. The mechanisms through which voice is expressed include voting, petitions, submissions, and direct representation to elected representatives. Local government, with its proximity to service users, is more favourable to the success of voice strategies than higher level governments. Voice has advantages over exit as the conditions for making exit a realistic choice are almost impossible in practice

The economic value of adapting to local circumstances

Local, bottom-up solutions end up costing less.  As Oliver Hartwich notes in #Localism, when a central government standardises a process, they need to know that the standardised process is being followed to ensure that each of the components of that process work properly.  Standardisation, by definition, removes the ability to vary or differentiate what a government can offer with the result that costs actually increase.  In addition, where workers in government organisations are able to exercise a level of autonomy over their processes they tend to be more satisfied in their profession and more productive.

Reinforcing the idea that local government costs less in the long term are the relative tax rates of centralised New Zealand and decentralised Switzerland.  According to OECD data, the tax-to-GDP ratio in terms of percentage of nominal GDP for New Zealand is 32.1, and for Switzerland it is 27.6 (Federal Finance Administration). Thus, the Swiss actually pay less tax compared to us here in New Zealand. The decisions to centralise services in New Zealand were done largely to save money, and whilst this may be true in the short term, the effect is the opposite in the long term because you lose flexibility and efficiency, and decisions are made further away from the people.

Managing local agents

Local government is often also better placed to manage the provision of public services than central government.  One of the challenges that governments face when providing services is ensuring that policies and programmes are delivered in a manner consistent with what decision-makers intend, in other words avoiding the risk that those charged with implementation may put their own goals and objectives ahead of the goals and objectives of government, otherwise known as “agency capture”. 

Dieter Hall and Stephen Smith (1987), writing on the economics of local government argue that one way of ensuring public programmes meet their intended objectives is to transfer them to local government.  Rather than decentralised bureaucracies and national decision-makers they argue that local voters are best placed to evaluate performance, especially in relation to the less tangible aspects of service quality. 

Information asymmetry

One of the challenges that central government face when determining what services should be provided to whom and at what level is “information asymmetry”. Put simply the distance between individual citizens and their communities and governments at the national level is such that acquiring necessary information to design and develop effective programmes is costly. 

An important advantage of local government is that of its proximity to citizens.  Because of that proximity and their greater levels of political representation local governments tend to have more knowledge about the needs and preferences of their citizens.  It is important to note that this advantage can be lost if councils themselves fail to openly engage with communities or adopt policies that provide for active participation.

Economies of scope

A common argument for functions being transferred to central government is that they benefit by economies of scale, that is, the larger the unit of production the lower the product price.  However, when activities are transferred away from councils the benefits of any economies of scale may be smaller than the loss of economies of scope.  Because councils are multi-functional they also achieve “economies of scope”, especially economies of scope which are external to specific services.

Economies of scope occur where specialist skills can be shared across a range of services thus ensuring that overheads are used efficiently and that scarce and expensive skills are fully occupied. A typical example would be a small council which can share the expertise of its engineering department across multiple services, such as water services, roading and civic amenities - where potentially, on their own, specific services would be too small to justify the cost of a fully qualified engineering team.

References

Buchanan, J (2002) Federalism and Individual Sovereignty, accessed in 2003 from www.cato.org/pubs/journal/cj15n2-3-8.html

Federal Finance Administration (Switzerland), Switzerland's tax-to-GDP ratio and tax ratio compared internationally,https://www.efv.admin.ch/dam/efv/en/dokumente/finanzstatistik/kennzahlen/Faktenblatt%20Fiskalquote.pdf.download.pdf/Fiskalquote_factsheet_e.pdf

FCM(1999)  Local Government Participatory Practice Manual

Hartwich, O (2019) #Localism, New Zealand Initiative, Wellington

Helm, D and Smith, S, (1987) The Assessment: Decentralisation and the Economic of Local Government, Oxford Review of Economic Policy, Vol. 3, No. 2.