New public management

Public choice theory (Niskanen, 1994), which in turn informed market-based philosophy in the public service of New Public Management (NPM) movement in the late 1980s (Hood, 1991), substantially set the policy agenda from the mid-1980s to the mid-1990s. This saw government failure very much in terms of agency driven by self-regarding, marginal utility maximising behaviour of individuals within the institutions that distorted policy goals and implementation. As well, the state was seen to lack the capacity to deal with contemporary issues. This disillusionment in the state has manifested as a roll-back of the state to allow a far greater market role in determining the allocation and employment of resources and to institute control mechanisms on individuals within the bureaucracy. The roll-back of the borders of the state (Helm, 1988), saw a reduction in state involvement in the market, but it has also resulted in new institutions of profit driven state and local government owned trading enterprises.

While a wide range of reform measures were enacted under the NPM umbrella, Kjaer (2004) notes there is no agreement as to the exact composition. Rather, they include a range of mechanisms for dispersing national government both horizontally and vertically, through:

 Transfer of private sector management principles to the public sector rather than policy;

 Privatisation: transferral of public sector enterprises to private ownership, contracting out, and contestability in public service provision;

 Agentification: establishment of semi-autonomous agencies responsible for operational management, so that there is distance from the central department to give freedom to manage;

 Competition: introduction of quasi-markets into the public sector (e.g. school vouchers);

 Devolution4_{: relocating functions to lower levels of government so that decisions}

can be taken that are more responsive to local community needs, together with development of new reporting, monitoring, and accountability mechanisms; and

 Citizens‘ empowerment: accountability of public officials to their clients and users (Kjaer, 2004; Boston, 1991: 9).

Although associated as being part of the NPM stable, the inclusion of devolution and citizens‘ empowerment can be debated (Kjaer, 2004:206). For example, Turner and Hulme (1997: 232) note that New Zealand's reforms, which have been among the most comprehensive NPM reforms, have been characterized as having 'a preference for retaining key governmental powers and responsibilities at the central government level with only limited devolution to sub-national government.‘ Rhodes (1997) notes that British prime- minister Margaret Thatcher‘s reforms reasserted central authority, resulting in simultaneous centralisation and devolution resulting in ‗more control over less‘.

On the other hand, decentralisation had been considered a core part of progressive 1980s management practice: It was championed by management gurus Peters and Waterman (1982:15) who found top-performing (large) American firms getting close to their customers, and that decentralised, loose-tight structures – that ‗pushed autonomy down to the shop floor … and are centralists around the few core values they hold dear.‘ Decentralisation was described as part of a ‗new wave‘ in which ‗new political parties, new philosophies, and new management techniques sprung up and explicitly attacked the centralist premises of the previous ruling paradigm‘ (Toffler, 1981: 268). As Cummings (1995: 110) identifies, this tradition holds that a balance between centralisation and decentralisation exists for each organisation.

Peters and Waterman (1982), writing about the private sector, and Osborne and Gaebler (1992), examining the public sector, promote a bottom-up, loose-tight configuration. Most decentralised functions are services, implementing policy. Policy, establishing the rules of the game, is reserved to higher levels of government. Osborne and Gaebler, while championing decentralisation note that the federal system would still have responsibility for providing funds and setting an overall policy framework, even if it is not delivering services, including:

 policy areas that transcend capacities of state and local government, e.g. international trade, macroeconomic policy, and much environmental and regulatory policy;

 antipoverty policy, which requires investment in regions with the least resources;

 social insurance programs - if equal benefits are wanted across the country, cannot expect rich and poor states to shoulder the same burden; and

 investments that they are so costly they require sizable tax increases that might discourage business from locating or stating in a city or state (Osborne & Gaebler, 1992: 276-279).

In short, steering, but not rowing, should remain centralised.

A substantial political economy of local government exists informed largely by public choice theory (e.g. Helm and Smith, 1987; Dollery and Wallis, 2001). This literature focuses on municipal local government and service delivery functions. Its application is less applicable to regional level government policy institutions, except where they provides services, but even then the friction of distance at the regional scale appears to reduce its relevance. Much of the theory for determining the physical size of jurisdictions draws on fiscal federalism in the public finance literature (Dollery and Wallis, 2001). Underlying this is the ‗correspondence‘ principle, where public goods and services are provided over a geographic range that matches the positive and negative externalities they generate. This achieves symmetry between decisions relating to expenditures and revenues. This theory is largely built on Tiebout‘s hypothesis (Tiebout, 1956). This hypothesis assumes first that different municipalities offer different mixes of services at a variety of prices, and second that people have different preference sets for services and their quality and ability to pay, individuals will choose to locate, or move until they find a municipality that maximises their personal utility. Where a municipality does not provide such utility, its citizens will ‗exit‘, or ‗vote with their‘ feet, relocating in another that does, forcing underperforming municipalities to improve their performance to attract and retain citizens to fund them. Tiebout‘s ‗exit‘ strategy relies heavily on a high level of fragmentation of local government so that citizens have an effective choice of local government by locality. This may be applicable to countries such as the United States of America and Australia where municipalities are often very small. However, it is less relevant where larger councils predominate, as in New Zealand or the United Kingdom, and even less so at the regional level where relocation requires substantial spatial relocation with attendant social and economic disruption to individuals. In any case, Tiebout‘s theorem is hypothetical; transactional costs of relocation are for most people going to exceed any benefits achieved by relocation, except in very mobile societies where frequent house sale and purchase is the norm.

Public choice theorists, drawing on Tiebout and others, accordingly favour jurisdictional fragmentation, including metropolitan areas, so that inhabitants of individual jurisdictions share homogenous preferences, avoiding externalities (Frug, 2003). On the other hand there also exists a strong theoretical and pragmatic economic argument for amalgamating municipalities to create economies of scale. In small councils economies of scale can undoubtedly be gained in some areas, allowing greater efficiency and unit outputs and increased productivity through greater use of underutilised assets.

This is underlined by the simultaneous demand for making local government units both larger and smaller. For example, amalgamation to improve performance is proposed in

Australia, not only for shires most of which have less than 5,000 people, but also within the Sydney conurbation (Dollery and Johnson, 2005). Similarly, there is pressure in Canada for further amalgamation, especially among large metropolitan cities, such as Toronto (Bish, 2001). Simultaneously, pressure is mounting to break up large cities such as San Francisco, and some smaller sub-districts want to secede for the same reason (Bish, 2001). This apparent paradox can be explained by local government services having different optimal sizes, which in turn may not match communities of interests. A mismatch results in both inefficiencies and ineffectiveness.

With the possible exception of special purpose authorities, there is accordingly no functionally optimal size for local governments that maximises efficiencies of all services. For example, the optimal service district for fire services is unlikely to coincide or even resemble garbage collection, public parks or sewage treatment services. Also, coordination and control of activities can become more difficult in larger organisations, reducing efficiency. Economies of scale typically apply where capital is dominant, for example infrastructure, but are less evident in labour intensive activities. Accordingly, scale efficiencies for one activity may also produce diseconomies for another.

Public choice theory suggests decentralised government may be better informed about needs of individuals or communities, and reflect preferences of individuals (Helm and Smith, 1987). However, it also recognises there may also be benefits from centralised administrative economies of scale and need for central or national solutions to address market failure. Rather, Helm and Smith suggest the balance will shift with different policy areas, so that there is no a priori right answer to the proper degree of decentralisation, independent of the characteristics of the goods and services provided.