FPM Constitutional Transfers: what are the incentives for corruption?

Responsible researcher: Pedro Jorge Holanda Alves

Article title: THE POLITICAL RESOURCE COURSE

Article authors: Fernanda Brollo; Tommaso Nannicini; Roberto Perotti; Guido Tabellini;

Location of intervention: Brazil

Sample size: 1202 municipalities

Sector : Economic Policy and Governance

Variable of main interest : Corruption

Evaluation method: Experimental Evaluation (RCT)

The Policy Problem

Imagine a situation where a country discovers a new source of wealth or more funds are transferred from a general government to a local region. These resources would generate unexpected growth in government revenues, but would they be beneficial to society? According to the theory of the curse of natural resources, this answer would be no, since due to this paradox, countries with an abundance of natural wealth tend to have lower economic growth due to the inability to manage these results and market mechanisms, which appreciate the exchange rate. real.

According to a wide literature, one of the reasons for economic backwardness is the poor functioning of government institutions. This malfunction is directed at aspects related to corruption, which are defined in the literature as a complementarity effect: greater unexpected revenues induce greater corruption and attract lower quality individuals into politics.

What Brollo et al. (2013) analyze how an unexpected harvest of government revenues in Brazil affects politicians' decisions to become corrupt or not. In light of these (theoretical) results, the authors used a scenario close to ideal to evaluate the empirical implications in Brazilian municipalities. To do this, they used the Municipal Participation Fund (FPM), Brazil's main constitutional transfer fund, as a way to find the real causes of how additional revenues affect the quality of politicians. But how would this be possible?

The Implementation and Evaluation Context

With the determination of the Brazilian Federal Constitution of 1988, it is possible to use municipalities close to the FPM as an evaluation experiment to discover the effects of an increase in government revenue on corruption policies and the quality of politicians. In the case of municipalities, the main instrument for transferring funds is the FPM (represents on average 40% of municipal revenue and 75% of all federal transfers).

Information on revenues coming from the FPM was taken by the authors from the National Treasury Secretariat (STN) and the IBGE population estimate for two periods of full mayoral management (2001–2004 and 2005–2008). As the scope of the experiment, the authors defined their sample as consisting of all municipalities close to the first 7 ranges, represented in table 1. The justification is that the larger the population size of the municipality, the smaller the change in behavior of individuals close to the range.

Table 1 - FPM coefficients

As the objective is to evaluate how these municipalities behave regarding corruption, the authors used data on corruption, taken from the General Inspectorate of the Union (CGU) from the Brazilian anti-corruption program. The program was launched in 2003 and consists of randomly selecting municipalities through a lottery to be audited. The database represented around 1,202 observations, with 802 municipalities audited between 2001 and 2004 and 400 municipalities between 2005 and 2008. Other electoral information was collected from the Supreme Electoral Court.

Policy/Program Details

Under the Brazilian anti-corruption program, auditors gather information about the inspected municipalities and, a few months after the audit, disseminate the reports to all levels of government, making them available on the website of the Comptroller General of the Union (CGU). With information from 2001 to the present, the report contains a detailed list of all irregularities found by auditors, such as fraud, non-competitive bidding, excessive billing, embezzlement of funds, etc.

Thus, through the report, it is possible to detect the types of irregularities that the local public government (municipal public administration) is taking, becoming a valuable basis for evaluating corruption. To define the variables to be studied, the authors state that corruption can be defined as broad and narrow. Broad corruption includes irregularities that could also be interpreted as mismanagement, while narrow corruption is serious irregularities that are more likely to be visible to voters.

Assessment Method

From table 1 it is possible to observe that these bands are discrete by a population interval, so that it is possible to observe that transfers to the municipalities must change discontinuously between the intervals of the population bands. In other words, due to the constitutional establishment, municipalities close to the FPM range receive divergent amounts of funds in different proportions that their population differences represent simply by being on different sides of the range.

Let's use a case as an example: municipalities with 10,150 inhabitants and 10,200 are very similar in terms of population and therefore should not have different tax collection levels. However, due to the ranges, municipalities below 10,189 receive less than those above. Thus, it is possible to see that municipalities close to the FPM bands have discontinuity in revenue, which can be attributed to this effect as an unexpected increase in revenue. This effect can serve as a channel as a possible effect for other mechanisms, which is what is to be discussed here.

The data was divided into two samples of municipalities: a small sample and a large sample, and the sample was restricted to municipalities with less than 50,940 inhabitants due to limitations in the local governments audited. fuzzy regression discontinuous design . This method attributes to the treatment the dependence on a variable that is continuous, but for external reasons, generates discontinuous results. For this exercise, this variable would be the population, which is continuous throughout the municipalities, but due to the constitution it generates discontinuity for those municipalities close to the bands.

fuzzy discontinuous regression method is implemented because there are cases of incorrect assignment around the population cutoff points. In other words, not every municipality close to the range has significant growth in its revenues from the FPM. Therefore, the fuzzy RDD works only with municipalities that had discontinuity in the bands, making their data represent only individuals who had this behavior. The authors' objective is to discover how these municipalities qualified in the corruption results obtained from the audit data.

Main Results

The results show that a 10% increase in federal transfers increases the incidence of a broad measure of corruption by 6 percentage points and the incidence of a more restrictive measure by 16 percentage points. At the same time, a 10% increase in transfers worsens the quality of political candidates challenging candidates running for re-election, decreasing the fraction of opponents with at least a university degree by 7 percentage points. As a result, candidates who receive larger transfers increase their probability of re-election by 6 percentage points.

Overall, empirical evidence showed that a large amount of transfers increases the check for corruption and reduces the average educational level of mayoral candidates. The empirical findings found by the authors point to the existence of what we call the “political resource curse”, that is, a negative impact of unexpected resources on political corruption and political selection. The abuses detected by the audits suggest that Brazilian municipalities are a fragile institutional environment, where problems of political agency are widespread.  

Public Policy Lessons

It may be that an inheritance of resources does not have the same deleterious effects in other contexts, such as societies with a long tradition of good governance and abundant social capital. However, additional resources are often allocated precisely to regions or countries with weak institutions. Therefore, it is necessary that these transfer policies are taken with care, because, even if they have the objective of reducing regional inequalities or generating beneficial incentives for the local population, these results, as found by Brollo et al. (2013), may generate opposite results.

References:

BROLLO, Fernanda et al. The political resource curse. American Economic Review , vol. 103, no. 5, p. 1759-96, 2013.