Corruption, Not Services, Are Reduced by Cutting Spending
A well-designed cut in public spending can have the positive effect of reducing the corruption of politicians, without compromising the level of citizens' welfare. This is the result of a recently published working paper by Gianmarco Daniele (Bocconi) and Tommaso Giommoni (ETH Zurich), that analyzed the case of the Italian Domestic Stability Pact.
In 2013 the Stability Pact, which limits local public spending, was extended to municipalities with less than 5,000 inhabitants. The authors then measured the changes that occurred in municipalities just below the threshold, comparing them with the changes that occurred in very similar municipalities (those just above the threshold), to be certain that the changes observed depended solely on the introduction of the Stability Pact.
The new policy, the authors conclude, led to an average decrease in corruption by 11%, measured by the number of recorded charges, without any significant change in local welfare. Local welfare was measured by local income and by a set of 11 indicators of municipal public services, which range from the number and percentage of children admitted to a nursery school, to the extension of the road network and public lighting, up to the number of houses covered by public waste collection. In municipalities where the effects of the Stability Pact were more stringent, corruption decreased by up to 30%.
The effect was strongest in municipalities where the mayor could run for re-election, in pre-election years, and for mayors with higher education.
"In our opinion, the two conditions that contributed to the effectiveness of the Domestic Stability Pact," says Gianmarco Daniele, "were the existence of sanctions, so much so that 99% of the municipalities respected the limitations, and the strong accountability of local politicians to the electorate in such small towns."
Data show that, faced with a decrease in available money, administrators chose to maximize the chances of re-election by keeping the level of services constant and reducing what we might call their rent. In theory, the opposite case would also be possible: if administrators were certain of re-election because of patronage mechanisms or because of a never-swinging ideological vote, they could in fact opt for maintaining their rent and reducing services.
The effect described does not, however, apply to municipalities in the six regions (Apulia, Basilicata, Calabria, Campania, Sardinia and Sicily), whose GDP is less than 75% of the European average and which, for this reason, receive significant European funds under the Territorial Cooperation programs. These funds are not affected by the Stability Pact and, in the municipalities of these regions, amount to 57% of the total funding for public investment, making the cut on the rest of the spending capacity definitely marginal.
The result is of absolute importance for those dealing with austerity policies or corruptive phenomena, both as scholars and as policy-makers. The paper has, thus, already been presented twice to different branches of the European Commission, first to the DG ECFIN, the Directorate-General for Economic and Financial Affairs that designed the Stability Pact, and then to the Joint Research Centre in Ispra.
Gianmarco Daniele, Tommaso Giommoni, Corruption Under Austerity, BAFFI CAREFIN Centre Research Paper No. 2020-131. Available at SSRN, DOI: 10.2139/ssrn.3531683.