On subnational data - pick your black box

South Africa faces significant challenges such as a low economic growth rate, high unemployment rate, high poverty rate and substantial inequality.  I often argue that these problems and their possible solutions have a spatial dimension that is neglected.  But, to support local economic development the public and private sectors require access to reliable sub-national data.  Statistics South Africa collects and disseminates socio-economic data, but information about local economies is limited to two private sector databases: Global Insight's REX and Quantec's Regional indicators.Recently, one of my Master's students set out to compare the two databases and we found some interesting differences.

The first thing to note is that in both cases the data are derived or imputed. This in itself is not a problem - it is also the case with for example the EU's NUTS-3 data - but the questions are about the amount of source data that do exist and the assumptions made to generate economic data at municipal level. It has been said that sub-national economic data in South Africa are not suitable for dynamic analysis because it is generated from aggregate GDP figures on the basis of a static algorithm. Our look at the data did not find simple disaggregation of official national or provincial total to the municipal level based on some or other fixed proportion, or fixed growth rates over time. We did find some interesting differences in, for example, population numbers.

There is hardly any way of knowing which is more correct, so for the economic data we argued as follows. If you subscribe to the idea that agglomerations of economic activity are characterised by cumulative causation and path dependency you would expect that over the short period for which there is data available, some places would grow faster and others slower than the national average but there would be persistence in relative positions and ranking. This is typically what the databases show. There is a lot more in the dissertation about the growth rates of GVA and different places' share of GVA, but the table below gives a brief summary of a test of rankings.

Each database shows internal consistency, but there are large (and significant) differences in rankings of places' share of GVA between the two databases.

Our conclusion: There is no evidence that the private sector databases are a simple breakdown of national or provincial numbers. There are no exploding standard errors. But the databases are black boxes and they differ substantively. They should not be used together. It is a question of picking your black box. 

What we need is an academic, open source dataset - a resource that can be vetted, applied and improved by all users.

Workshop: Urban governance and service delivery

I receieved a mail about this workshop and want to add the details here:

The African Centre for Cities and the United Nations University-World Institute for Development Economics Research have the pleasure of inviting you to a seminar on:

Urban Governance and Service Delivery in Africa

5 June 2012

8:30-12:30

University of Cape Town

Studio 5, Environmental and Geographical Science Building, Upper Campus

Africa is one of the fastest urbanizing regions of the world.  On the one hand, this demographic transformation offers important opportunities for growth, economic development, and innovation.  On the other hand, rapid urbanization generates high demand and formidable challenges for delivering basic services, including housing, water, sanitation, and electricity.

In preparation for the 2012 World Urban Forum VI, this seminar emphasizes the role of governance structures and institutions for addressing these opportunities and constraints, paying particular attention to the interaction between local actors and national political contexts.  The presenters will offer both an understanding of urban governance and service delivery across Africa while also elaborating on specific case studies of cities in Kenya, Senegal, South Africa, and Uganda.  Through these empirical examples, the seminar will also aim to provide practical policy recommendations for confronting the region’s rapid urbanization and highlight areas for greater 

research.

Since space is limited, you have to confirm your participation by 1 June 2012 by registering online.

The #CityTalk discussion on Twitter last night

A new tax on businesses to be paid to municipalities?

IOL today reported that the SA Local Government Association (SALGA) is backing a new tax on businesses to be paid to municipalities. Aparently, "with municipal debt nationwide totalling well over R60 billion, the National Treasury said that at least one metropolitan government had mooted the new tax" and it has also been discussed at a MinMec meeting. The article goes on to report that Mr Jan Hattingh, the Treasury’s chief director of local government and budget analysis explained that the proposal has been discussed at a Budget Forum, but there is a process to follow: Salga would have to propose the tax to the Treasury, followed by consultation with the Financial and Fiscal Commission and the Department of Co-operative Governance and Traditional Affairs.

At this point one should note that there are few details available about the above proposal. Will the tax be levied at local level? Or will SARS collect and Treasury redistribute? Before we get to the obvious objections to taxing businesses during an economic downswing and the #epicfail of  local government in South Africa, it is worth to briefly mention the theory of taxes and spending at sub-national level. What sort of tax would be sensible or fair?

According to the ability-to-pay principle, the burden of a tax should be shared according to taxpayers' ability to pay - firms with bigger payrolls or profits, pay more. This is best when typical public goods are supplied that are non-rival and non-excludable in consumption and equity is an important consideration. The alternative is the benefit principle - the tax burden is shared out among taxpayers in accordance with the benefits they receive. This is best when the tax is a user charge and the link between tax income and spending is more direct.

Proponents of fiscal decentralisation argue that provincial or local governments may be more efficient at allocating resources since they are closer to the people and better able to determine their demand for public goods and services. In an economist's perfect world, the decentralisation of spending responsibilities is also followed by revenue-raising capabilities. Since the people are closer to government they should also be able to better monitor taxes and spending and if they do not like it, vote with their feet and move somewhere else.

The implication is that the proposed tax may be neither sensible nor fair. It is not clear that the businesses will be paying a user charge for a local good or service supplied according to their preferences. If the aim is only to repay some of the debt of ill-managed municipalities, allowing them to set rates will precipitate a tax competition race to the bottom with the more solvent municipalities setting lower rates and drawing in businesses. If government wants prevent this and administer a uniform tax centrally, there is no sense in setting up another tax to do it. A simple structure is always more efficient.

My final point has already been made in the responses to this tax proposal on Twitter: Pouring more money into municipalities is not the solution to improved service delivery.

This relates to earlier work by myself and some co-authors (See Krugell, Otto & van der Merwe, 2010 in the SAJE no less) where we examined indicators of the ability of municipalities to supply services. We constructed a service delivery index and had a close look at the places that were able to improve delivery.

Our results showed that:

Different municipalities face different challenges reflecting socio-economic conditions and municipal competence. The analysis showed that urban municipalities with higher population densities and greater GDP per capita are able to provide better access to services, while improved service delivery attracts people. Improvers have, on average, fewer vacancies, more spending on goods and services in proportion to the total budget, and they relied much less on grants income relative to rates income.

Re-reading this I realise it is a long story to make a simple point - a new tax on business at municipal level is a bad idea.