Sebastian Galiani University of Maryland and Sukkoo Kim

1. Political Centralization and Urban Primacy:Evidence from National and Provincial Capitals in the Americas Sebastian Galiani University of Maryland and Sukkoo Kim Washington University in St. Louis and NBER

2. Within a relative short time, a significant literature has emerged which links institutions and economic growth • Sokoloff and Engerman (1997; 2002), Acemoglu et. al (2001), etc. • Urban literature, on the other hand, has been much slower to take on the role institutions seriously • spatial organization is usually explained solely by economic factors such as agglomeration economies and congestion costs

3. But, institutions are likely to matter for urban economics • cities are “creatures of states” meaning that higher-level of government usually has the power to determine how and whether local governments can be established, their geographic boundaries, their revenues sources, etc. • Institutions determine fiscal federalism • the patterns of federal, regional, and local government revenue shares and expenditures vary significantly between unitary and federalist governments

4. However, while there might be a strong correlation between institutions and spatial organization (urban and local development), it is not clear whether institutions cause urban development or whether urban development causes institutions to change • Similar endogeneity problem exists in the growth and development literature

5. In this paper, we use the strategy of exploiting the quasi-experimental distribution of political institutions in the Americas caused by the European colonial experience to examine the role of institutions on urban and local development • We argue that the colonial quasi-experiment contributed to an exogenous variations in the initial levels of political institutions in the Americas • While changing economic and political conditions might cause institutions to change and evolve over time, these initial institutional forces persist as they set bounds on future institutional development

6. Thesis: European colonization experience led to different types of political institutions in the Americas which affect urban and local development • In much of Latin America, political power was centralized at the level of the federal government which gave little political and fiscal authority to regional and local governments • In North America, with the creation of a federalist form of government, provincial and local governments possessed considerable fiscal and political autonomy • Yet, even between US and Canada, two different types of federalism emerged which led to important divergence in the organization of cities and local governments

7. In Latin America, many countries have unitary governments; but even in countries which adopted the US federalist model, political power is highly centralized in the federal government (Galiani and Kim (2010)) • In Canada, federalism came to favor provincial rights but not localism; provincial governments, especially over the second half of the twentieth century, centralized their control over local governments • In US, federalism generally favored state and local rights; even when the federal government became important over the twentieth century, state and local governments retained considerable autonomy

8. Predictions • Political centralization is likely to contribute to urban primacy or unbalanced distribution of city sizes • political centralization is made possible by the rise of administrative bureaucracy, usually in capital cities • see Galiani and Kim (2010) for a simple model • Because political centralization is associated with reduced local autonomy, it is likely to decrease the number, density and type of local governments • local autonomy given by home rule legislation or constitutional amendment permit local governments to create local charters • local autonomy also reduces the size of local government political jurisdictions because it generally reduces the odds of municipal consolidation through annexation

9. Colonial History and Institutional Variations in the Americas • In Spanish America, as in the Iberian Peninsula, political power was highly centralized in the King, his council and the Viceroy. Unlike in North America, no charters were granted to establish colonists’ rights of self-government; local assemblies possessed few political rights • Local conditions or factor endowments also favored political centralization • Main objective of the Spanish crown was to exploit silver mines and labor intensive crops using native labor; thus, there was little reason for the Spanish to establish institutions which gave colonists and natives the powers of local autonomy • Local governments were under the direct control of the King and his advisors

10. Colonial History and Institutional Variations in the Americas • In North America, the British settlers attempted to establish local institutions which were similar to those of their mother country • In England at the time, local governments consisted of first-tier counties and second-tier townships or manors • King and Parliament had by the late seventeenth century centralized authority over most of these local governments through the appointment of county sheriffs and justices, but their control was not systematic as local officers were chose from local rural gentry; larger cities possessed corporate charters which granted them some measure of autonomy

11. Colonial History and Institutional Variations in the Americas • In the US, the adoption of English institutions varied across the colonies, especially between the North and South (see Kim (2009) for a greater discussion) • Virginia and other southern colonies most closely adopted the English model as local officials were appointed by the governor of the colony • New England, favoring compact settlements, chose the town as the primary unit of local government; more importantly, the town officers were elected; counties were also organized for judicial purposes • Middle Colonies adopted a hybrid system which combined New England towns and southern counties, but like New England, chose local autonomy as town and county officials were elected • Over time, the Middle Colony model was adopted in other states and local autonomy was extended even in the South

12. Colonial History and Institutional Variations in the Americas • In Canada, colonial authority over local matters was vested in colonial governors and their appointed council • With the influx of \American migrants the demand for local autonomy rose and eventually local officers were elected; however, the Governor continued to exercise his authority as he appointed many public officials of consequence • In Canada, the county never developed as a true local governmental unit; rather, its local governments – rural townships, villages, towns and cities all became independent units of municipal government

13. Divergence of US and Canada • In both US and Canada, the national-provincial/state relationship is “federal”, but provincial/state-local relationship is “unitary” in the sense that local governments became “creatures” of provincial/state governments in different ways • However, the local “unitary” relationships diverged between US and Canada, largely due to historical circumstances (see Kim and Law (2010) for a more detailed discussion)

14. First, Canadian provinces possess centralizing institutional powers such as parliamentary authority largely unchecked by a written constitution and courts • Parliament can make laws regarding anything • No parliament can bind future parliaments • Courts cannot overturn a valid act of parliament • In Canada, provincial governments face relative few formal constraints – local governments are truly creatures of states • In comparison, US state legislatures representation is decentralized by nature, costs of centralized coordination is high, state constitutions places limits on state legislature control over county and other local governments, home-rule provides autonomy to cities and other local governments

15. Second, the existence of 50 small states as compared to 10 large provinces contribute to greater political competition by states to attract people and business to their localities. Gibbins (1982) • Jefferson argued for the division of the western territories into numerous states because he believed that political competition would encourage localism. Berkofer (1972)

16. While there are many channels by which institutional rules can impact cities and local governments, the most likely channel is through fiscal federalism • Thus, we present some evidence of the variations in fiscal federalism which are likely to be correlated with levels of political centralization

27. Bird and Tassonyi (2001)

28. Conclusion: Political centralization tends to concentrate revenue collect at the level of the government in which the power is centralized • In Latin America, it is federal • In Canada, it is provincial • In US, despite the growth in the federal government, states and local governments are relatively free

29. Predictions • Political centralization is likely to contribute to urban primacy or unbalanced distribution of city sizes in Latin America relative to North America and in Canadian provinces as compared to US states • Political centralization in Canadian provinces over local governments relative to those of US states will lead to smaller number, variety, density of local governments; local government jurisdictions are likely to be greater

30. Because political centralization favors capital cities, we estimate the impact of capital city status on population concentration in our previous papers • The main benefit is that the choice of most political capitals in the Americas were due to political rather than economic reasons; thus, the choice of their locations is likely to be exogenous from an economic perspective • Thus, the capital city effect is likely to capture political reasons for population growth

35. US State Capitals

47. National Capital City Effects • DC: 68% in 1900, 447% in 2000 • Ottawa: 159% in 1920; 589% in 2000 • Latin America: 523% in 1900; 677% in 1990 • Provincial/State Capital City Effects • US: 30-34% in 1900-1920, 40-49% in 1940-2000 • Canada: 48-66% in 1920-1940, 100% in 1940-2000 • Latin America: 70% in 1900, 232-353% in 1990

48. Conclusion • First, political centralization at the national or regional levels is associated with urban primacy or a skewed distribution of city sizes favoring larger cities • Second, political centralization leads to greater use of general purpose as compared to special purpose governments • Third, political centralization limits the number, density and variety of local governments • Fourth, political centralization leads to larger local governments

49. Conclusion • Because it is difficult to measure productivity of local governments and their impact on the national growth rate, it is almost impossible to determine the economic impact of institutions on local governments • However, in comparing Latin America and North America, scholars generally believe that the costs of urban primacy are likely to be significant

50. Conclusion • Between US and Canada, however, scholars differ on which system is more efficient • Benefits of Canadian type centralization are economies of scale in administration and tax collection, capture of external economies, and a more equitable distribution of in come, among others • Benefits of US type decentralization are greater competition for institutional innovation and Tiebout “voting with feet,” closer matching of local preferences with local public goods, among others