Study shows that the government transfers more resources to aligned municipalities in local electoral years

By Henrieta Isufllari

Municipal elections would not feel complete without the continuous allegations of a governmental bias on the allocation of public resources, claiming that regions under incumbent mayors receive a larger chunk of development funds than those run by opposition members. The last municipal election was no exception; a denunciation drafted by Chile Vamos, the right wing party coalition previously known as Alianza, directly accused the Bachelet Government of unfairly allocating funds dedicated to urban development to municipalities run by the left. Although the majority of these allegations come from opposition parties, there is also the example of the Piñera Government, which was faced with accusations of favouring the competition, coming from within its own party, Renovación Nacional. 

Are the allegations of a biased allocation of public resources founded? Does the government transfer more resources to municipalities during electoral years? And if it does, are these transfers prone to favouritism? In the case of Chile, these and other relevant questions are thoroughly addressed in a recent academic paper by economists Alejandro Corvalán (UDP, MiPP), Paulo Cox (-Universidad de Talca) and political scientist Rodrigo Osorio (USACH). The paper, Indirect Political Budget Cycles: Evidence from Chilean Municipalities, provides evidence of the presence of indirect Political Budget Cycles (iPBC) in Chile, by showing that there is an increase in intergovernmental transfers during election years, and furthermore, the additional funds are mainly allocated to incumbent mayors.   

Municipal Revenues and Transfers

As professor Corvalán explains, the municipalities are financed through three sources of income, with permanent income mainly collected from property taxes, and from patent and municipal rights, among others. Part of that income goes to the Common Municipal Fund, a contributory pillar from which these resources are redistributed between municipalities according to a legally established formula. The paper focuses on a third component, which comes from transfers from the central government to the municipalities. The purpose of government transfers is to directly finance municipal programs, from improvement of infrastructure and development of particular neighbourhoods, to natural disaster relief.

“From the point of view of the government, the amount allocated to municipalities is quite small - less than 1% of the fiscal budget” explains Corvalán, “but at a local level, government transfers represent, on average, 20% of municipal revenues, and for many local governments, they may account for more than half of their fiscal budget. This imbalance implies that the government needs only marginally increase its budget allocation for municipal transfers, in order to generate a substantial effect on municipal finances.” Chilean law establishes budgetary spending in great detail, and most line items need to be approved by Congress. However, the entity in charge of the distribution of intergovernmental transfers is the Office of Regional Development, (SUBDERE), a government office under the Interior Ministry, which maintains a significant degree of autonomy over the allocation of such transfers.

Corvalán points out that it is precisely this level of discretion that is key in establishing the indirect influence of incumbent governments on the outcome of consequent elections, a cause for concern among state advisory bodies. A 2009 reports by The Public Reform Commission states that the resources received by municipalities “were typically very bureaucratic, discretionary and not always focused on the local realities”, while in 2015, the Anti-Corruption Advisory Council proposed to "…improve the regulation of (municipal) transfer mechanisms to facilitate the review and control of expenditures."

An increase in transfers in election years

To empirically demonstrate the topic, Corvalán et al. make use of the detailed and publicly available information on municipal finances reported by the government through the Municipal Information System (SINIM). Since transfers depend in part on the size of the municipality, the model calculates the per capita transfers per municipality, and then reports an annual total for each one, during 2000-2013 (in millions of 2013 real Chilean pesos). In this graph, Corvalán explains that the thinnest continuous line represents the long-term trend of the total per capita transfers, which increases systematically over the chosen period.

In the same graph, the difference between the actual transfers and the long-term trend, (the gap between the two lines), shows the annual short-term deviation. On a year-to-year comparison between actual transfers and long-term trend, the results show that for 2004, 2008, and 2012, the percentage change between the two is, on average, more than 10% compared with other years.  Given that these are also municipal election years, the difference accounts for a significant political cycle (the vertical dotted lines). Chilean municipal elections are usually held the year before national elections, and as the graph suggests, the paper’s findings show that intergovernmental transfers during national election years do not follow the same cycle.

“The observed increase in transfers has been independent of the political affiliation of each corresponding government,” says professor Corvalán, “The cycles of 2004 and 2008 were the product of the governing of the (centre-left) Concertación, and that of 2012 was caused by the Alianza.” In terms of magnitude, the additional transfers by the Lagos and Bachelet Governments increased by an average of 30 million pesos per municipality during municipal election years, while those by the Piñera Government by 60 million pesos. These figures seem small with respect to the municipal budgets, especially if we consider the significant population density of the municipalities of the capital. “However, for many of the country’s municipalities, fiscal budgets are not so high.” continues Corvalán,  “The best example of the relevance of government transfers comes from a comparison to the average cost of a mayor's campaign in Chile, which for 2008, was 10 million pesos for Alliance and Concertación candidates, and even lower for the rest of the coalitions.”

An additional relevant topic is the distribution of these additional resources. The increase in intergovernmental transfers becomes valuable only if it favours the campaign of incumbent mayors, making it instructive to compare the changes in the trend of per capita municipality transfers for both, the mayors of the Concertación during the administrations of Lagos and Bachelet and the Alianza mayors during Piñera, with mayors not aligned with the government, represented in this graph.

The dark line in the graph represents transfers to mayors aligned with the government, while the thinnest line those to non-partisan mayors. “We observe that the increase during municipal election years is systematic only for politically affiliated mayors, showing a more irregular movement for the rest,” reports Corvalán. “During the central-left governments, the increase in transfers to mayors of their own party in years of municipal elections was 18%, which increased to 24% during the consecutive government. In other words, Piñera delivered an additional 100 million to each municipality administered by the Right during the 2012 municipal elections.”

In conclusion

The research brings to light the diversion of resources from the government to incumbent municipalities during electoral years. Professor Corvalán emphasises that, although the figures are quite telling with respect to the degree of discretion that the SUBDERE has in the allocation of resources, these effects should not be exaggerated. The Chilean State has put in place important control mechanisms, of which municipal transfers are not exempt. On the one hand, they must be assigned by pre-established formulas, and on the other, these mechanisms must be endorsed by both the executive and the legislative bodies. “The fact that the government presents all municipal information in a public and transparent way,” concludes Corvalán, “provides citizens with various effective auditing mechanisms. However, the substantial levels of discretion of SUBDERE remain present, and should be a subject for review.”



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