ESTIMATION OF INTERDEPENDENT BEHAVIOR OF CITY GOVERNMENT UNITS IN THE PHILIPPINES USING THE LINEAR EXPENDITURE SYSTEM RONALD D. ESTRADA MS in Econometrics

INTRODUCTION Republic Act 7160: 1991 LGU Code

1991 LGU Code Devolution of regulatory functions and licensing power Devolution of public services Broader Financial Resources Debureaucretization Entrepreneurship

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Strengths Increase in spending Better services Poverty reduction

Shortcoming s

Source: Llanto, 2009; Manasan, 2005; and ADB, 2005

Social welfare Infrastructure Public safety

There is a need to study LGUs income and expenditur e

INTRODUCTION Model for City Government Unit spending behavior Income of the city Locally-generated

Spending Behavior of Neighboring LGUs Local Characteristics Demographic Economic Political

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Source: Case et. al , 1993

CGU Spending Behavior

INTRODUCTION RATIONALE

Develop demand system of basic social services Identify subsistence level of expenditures in basic social services Investigate existence of fiscal interaction Utility of policy makers

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STUDY AREA

LUZON

VISAYAS

MINDANAO

18

STUDY AREA Legend: No. 1

National Capital Region

18

Province

No.

Province

Ilocos Norte

41 Antique

2

Ilocos Sur

42 Iloilo

3

La Union

43 Guimaras

4

Pangasinan

44 Negros Occidental

5

Apayao

45 Negros Oriental

6

Abra

46 Cebu

7

Kalinga

47 Bohol

8

MT. Province

48 Siquijor

9

Ifugao

49 Northern Samar

10

Benguet

50 Samar

11

Batanes

51 Eastern Samar

12

Cagayan

52 Biliran

13

Isabela

53 Leyte

14

Nueva Viscaya

54 Southern Leyte

15

Quirino

55 Zamboanga del Norte

16

Aurora

56 Zamboanga del Sur

17

Nueva Ecija

57 Zamboanga Sibugay

18

Tarlac

58 Camiguin

19

Zambales

59 Misamis oriental

20

Pampanga

60 Bukidnon

21

Bulacan

61 Lanao del Norte

22

Bataan

62 Misamis occidental

23

Quezon

63 Davao del Norte

24

Riza

64 Compostela Valley

25

Laguna

65 Davao Oriental

26

Cavite

66 Davao del Sur

27

Batangas

67 North Cotabato

28

Marinduque

68 Sultan Kudarat

29

Romblon

69 South Cotabato

30

Mindoro Oriental

70 Sarangani

31

Mindoro Occidental

71 Dinagat Island

32

Palawan

72 Surigao del Norte

33

Camarines Norte

73 Agusan del Norte

34

Camarines Sur

74 Agusan del Sur

35

Albay

75 Surigao del sur

36

Sorsogon

76 Lanao del Sur

37

Catanduanes

77 Maguindanao

38

Masbate

78 Basilan

39

Aklan

79 Sulu

40

Capiz

80 Tawitawi

METHODOLOGY

Linear Expenditure System Publicly provided service level

Stone-Geary Utility Function M

Max U(Qi1 ,...,Qim ) = ∑ βm ln(Qim − φm ),

Subsistence service level of service m

m =1

Local income of city i

subject to

M

Gi = ∑ pimQim m =1

i = 1,2,..., N Unit cost of social service m

Maximizing the above function subject to budget constraint yields the LES model, Subsistence expenditure on service m M

Expenditure on service m

p imQim = pim φ m + β m (Gi − ∑ pim φ m ),

i = 1,2,..., N

m =1

Fraction of discretionary income on service m

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METHODOLOGY If we replace pimQim by Eim and pimϕim by αm the LES model becomes Subsistence expenditure level on service m M

E im = α m + β m (Gi − ∑ α m ),

i = 1,2,...,

N.

m =1

Expenditure on service m

The subsistence expenditure αm is identified dependent on cost determinants which can be expressed as Jm

α m = α m0 + ∑ α mj Simj ,

Exogenous variables j which determine the cost of acquiring minimum standard of service m

j =1

Unknown coefficients to be estimated

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METHODOLOGY Similarly, discretionary spending βm is identified dependent on cost determinants on local preference written as K

βm = βm0 + ∑ βmk Zik ,

Exogenous variables which determine the share of discretionary income that is spent on service m

k =1

Unknown coefficients to be estimated

Incorporating all exogenous variables in the model, the full model involving a system of M equations can be written as Jm M ⎛ K ⎞⎤ ⎛ ⎞⎡ Ei1 = α10 + ∑α1jSi1j + ⎜ β10 + ∑ β1k Zik ⎟.⎢Gi − ∑⎜⎜ αm0 + ∑αmjSimj ⎟⎟⎥ + εi1 , j =1 m =1⎝ j =1 k =1 ⎝ ⎠ ⎢⎣ ⎠⎥⎦ J1

.

.

.

.

.

.

.

.

.

Jm M ⎛ K ⎞⎤ ⎛ ⎞⎡ EiM = αM0 + ∑αMjSiMj + ⎜ βM0 + ∑βMkZik ⎟.⎢Gi − ∑⎜⎜αm0 + ∑αmjSimj ⎟⎟⎥ + εiM , j =1 m=1⎝ j =1 k =1 ⎝ ⎠ ⎢⎣ ⎠⎥⎦ JM

16

METHODOLOGY ‰ The study will make use of mixed autoregressiveregressive model to integrate spatial effects in the system. This is done by making expenditure dependent on the expenditure of neighboring cities: Committed expenditure on other cities Jm M ⎛ K ⎞⎤ ⎛ ⎞⎡ Eim = δmWEim +αm0 + ∑αmjSimj +⎜ βm0 + ∑βmkZik ⎟.⎢Gi − ∑⎜⎜αm0 +∑αmjSimj ⎟⎟⎥ +εim, j =1 j =1 k=1 ⎝ ⎠ ⎢⎣ m=1⎝ ⎠⎥⎦ Jm

Spatial weight matrix describing the spatial arrangement of the cities in the sample Spatial autoregressive coefficient to be estimated

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RESULTS AND DISCUSSION

18

RESULTS AND DISCUSSION

18

RESULTS AND DISCUSSION

18

RESULTS AND DISCUSSION

18

RESULTS AND DISCUSSION

18

RESULTS AND DISCUSSION

18

RESULTS AND DISCUSSION

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SUMMARY, CONCLUSION, RECOMMENDATION Summary of Results Cities with higher incomes are dependent to locally-generated income Cities with lower incomes are dependent to IRA fund Expenditure share is highest in education sector while lowest in social welfare sector LES model which incorporates the influence of neighboring cities fits the data reasonably well as compared to LES model which ignores the influence of neighboring cities 6

SUMMARY, CONCLUSION, RECOMMENDATION Summary of Results Fiscal interactions among cities were found significant with education and social welfare services Subsistence expenditure level of education, health and nutrition, and social welfare services were found statistically significant at 10% alpha level Density of secondary students is a strong determinant of education subsistence expenditure

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Density of health worker is a strong determinant of health and nutrition subsistence expenditure

SUMMARY, CONCLUSION, RECOMMENDATION Summary of Results Marginal discretionary income share of local tax rev., education, health and nutrition, and social welfare were found statistically significant. Both population density and saving rate significantly predict the marginal discretionary income share of all service sectors. Local tax revenue, education, health and nutrition, and social welfare are normal goods.

6

Demands of all service sectors tend to be inelastic with respect to government income.

SUMMARY, CONCLUSION, RECOMMENDATION Areas for further Research: Parallel study with panel data in different settings, set of dependent variables and cost variables Extension of the study to test which theory applies to fiscal interaction among cities.

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estimation of interdependent behavior of city government units in the ...

Model for City Government Unit spending behavior. Source: Case et. al , ... La Union. 43 Guimaras. 4. Pangasinan. 44 Negros Occidental. 5. Apayao. 45 Negros ...

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