This blog is part of the “Latin American Perspectives in Regional Studies” series and was published in both Spanish and English.
The subject of fiscal, political and administrative decentralisation remains a part of the discussion about the regional economy since it is hoped distinct decentralisation processes will contribute to a less unequal distribution of economic activity and, furthermore, that local and regional governments can manage their long-term development. At the same time, decentralised public resource management decreases bureaucracy in the use of public resources, which may result in more efficient spending. Thus, in the medium and long term, decentralisation may serve as an instrument to boost economic growth in local and regional economies, which would reduce economic gaps. However this effect may be affected by some drawbacks such as inefficient spending or lack of technical preparation from subnational governments.
Illustration 1, Source: Own elaboration with EOG images
Measuring these effects and making international comparisons is not easy. Firstly, because countries have very different government structures due to the size of countries, the level of autonomy and, lastly, because there are no directly comparable measurements of added value or gross production at the municipal and/or regional level.
Our project proposes to research countries in Latin America. Initially Mexico, Brazil, Colombia and Chile are included, but new countries will subsequently be incorporated into the estimates, whose aim is to determine to what extent decentralisation in Latin American countries has contributed to a less unequal geographical distribution of economic activity. Through econometric techniques the relationship between decentralisation of spending and the regional convergence of the economic activity indicator by country was estimated.
As an economic activity indicator the emitted light captured by NASA satellites was used. In our initial estimates, the results show the existence of regional convergence in the countries mentioned. However, the variables used as indicators of decentralisation do not show a significant relationship to the economic activity growth rate, leaving a question mark about the benefits of decentralisation and spending in these countries for the study period.
Better compatibility between countries
The methodology of emitted light captured by satellites has been widely explored as an alternative for measuring economic activity, especially for underdeveloped countries, for various reasons. Firstly, because administrative records at municipal or regional levels do not exist or are not compatible with the national accounts system and are less inclusive, due to a lack of mechanisms that allow better control during the observation of production at the municipal level. Secondly, given that in underdeveloped countries the informal sector of the economy is more abundant than in advanced economies, a large part of the activity may not be observable when production and/or added value statistics are used.
And lastly, given the differences in the estimation methodology between countries and the differentials in exchange rates and inflation, a cross-sectional and longitudinal comparison becomes challenging. Thus, by using emitted light at the municipal level as a proxy variable of economic activity the aim is to provide an indicator that allows greater compatibility between countries.
However, it must be acknowledged that the indicator also has disadvantages. Firstly, light estimates need to be recalibrated given that satellites move, and information is not directly comparable between satellites and projects developed by research groups. Another limitation is the study period, since the last Earth Observation Group project presents comparable data only for 2012-2020.
Likewise, it should be taken into account that there is a great difference in the added value generated by various localised economic activities, for example, a residential building and a building that houses a group of financial institutions may emit a similar light intensity, but the size of the production related to them will be different. As such it is also important to consider the economic structure within the measurements. And lastly, given that measurements may show variations not related to economic activity, but rather to other physical, climatic and technological factors, benchmark indicators that validate the use of these data are employed.
It is important to make progress in these types of projects based on different GDP estimation methodologies, since they shed light on the subject of economic growth and lay the groundwork for research related both to decentralisation and to the use of alternative tools for studying local, municipal and regional economies.
Cristina Isabel Ibarra Armenta, Full-time teacher and researcher, Faculty of Economic and Social Sciences, Autonomous University of Sinaloa.
José Guadalupe Ibarra Armenta, Full-time teacher and researcher, Faculty of Physics and Mathematics, Autonomous University of Sinaloa
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