Participatory budgeting and government efficiency: evidence from municipal governments in South Korea

Abstract

The current study evaluates the role of a democratic institution—participatory budgeting—in improving government efficiency. Participatory institutions aim to enhance governance, information sharing, and the responsiveness of political agents to citizens, leading to fiscal accountability and efficiency. Drawing from a database of 221 municipal governments in South Korea around a mandatory participatory budgeting adoption period, we find that participatory budgeting adoptions are followed by improvement in multiple dimensions of government efficiency. In particular, municipal governments experience statistically significant improvements in their fiscal sustainability and administrative efficiency. In additional analysis, we find that the efficiency improvements are more pronounced in the presence of strong mayoral leadership. Overall findings suggest that participatory budgeting programs contribute to fiscal health and administrative efficiency, above and beyond their role in securing fiscal democracy.

Points for practitioners

The current study suggests that participatory budget systems not only contribute to quality in democracy (as prior studies have found), but also improve fiscal efficiency and accountability by serving as a bottom-up governance mechanism. We document that introductions of participatory budgeting programs are followed by statistically significant improvements in fiscal sustainability and administrative efficiency. The results also indicate that the efficiency-improvement effect differs across municipalities, depending on their political environments. Overall, this study provides a strong argument for the participatory budgeting system by empirically supporting its efficiency-improvement effect.

Keywords

democratic institutions,government efficiency,participatory budgeting,local governance

Introduction

In recent decades, innovations in local governance have emphasized the role of grassroots democracy in fiscal decision-making. Participatory budgeting (PB) is a democratic institution in which citizens have a direct say in the distribution of public resources (Cabannes, 2004). PB programs address “two distinct but interconnected needs” by improving government performance and enhancing the quality of democracy (Wampler, 2007). By promoting institutional rules that encourage transparency and constrain lax management, civic engagement in the fiscal process helps improve administrative performance (Baiocchi and Ganuza, 2014; Wampler, 2007).

Prior studies have focused on the role of PB systems in promoting fiscal democracy (De Renzio and Wehner, 2017). For example, one established area of empirical research links PB systems’ fiscal openness to better resource allocation and poverty improvement (Boulding and Wampler, 2010; Goldfrank and Schneider, 2006; Gonçalves, 2014; Touchton and Wampler, 2014). Less attention has been paid to the efficiency-improving effect of fiscal openness. As bottom-up accountability mechanisms, PB programs provide local citizens with better access to financial information and with continuous opportunities to strengthen community-based monitoring and social coalitions (Gonçalves, 2014). Hence, PB programs are expected to contribute to government efficiency. To this point, however, we have scant empirical evidence on the efficiency-improvement effect of PB.

The current study aims to fill this void by examining whether the introduction of PB programs leads to improvements in government efficiency. South Korea provides ample data related to our research question since all municipalities were required to adopt PB programs starting in 2011. Using the 221 municipal governments in Korea during 2010–2014 (N = 1063), we find evidence that supports an efficiency-improvement effect of PB. After PB adoption, municipal governments experience statistically significant improvements in various indicators of fiscal sustainability and administrative efficiency, including reliance on external grants, balance of revenues and spending, labor costs, benefits and perks, and non-program expenses. These findings are robust to controlling for municipal fixed effects and year fixed effects.

We argue that there are three channels through which PB programs contribute to efficiency. First, PB programs increase fiscal transparency by facilitating information sharing between citizens and budget authorities (Gonçalves, 2014; Wampler, 2007). Transparent budget information prevents politicians from pursuing opportunistic goals and makes them work more efficiently (Benito and Bastida, 2009; Carlitz, 2013; Cucciniello and Nasi, 2014). Second, PB programs enhance bottom-up monitoring of municipal governments by citizens. In effect, the programs serve as “citizenship schools” that empower and educate individuals in citizenship and financial literacy (Sintomer et al., 2012; Wampler, 2007). Informed, educated citizens are better positioned to understand and audit municipal administrations (Krishnan, 2003), leading to better government performance (Björkman and Svensson, 2009). Finally, PB programs provide a public forum where citizens bond socially and create political consensus (Wampler and Hartz-Karp, 2012). Politically active electorates and their coalitions pose credible threats to elected governments (Díaz-Cayeros et al., 2014; Michels, 2011) and provide stronger incentives for incumbents to be responsive and accountable (Besley and Burgess, 2002).

In additional analysis, we further find that the efficiency-improvement effect of PB is less pronounced when the legislative branch is stronger than the executive branch or when incumbent mayors face stronger political competition. These findings suggest that a supportive political environment¹—a strong mayor’s office in particular—should maximize the positive outcomes of PB by encouraging the efficient implementation and operation of the PB program (Bland, 2011; Choi, 2010; Wampler, 2007; Yang and Callahan, 2007).

Our study contributes to the studies on the consequences of PB programs. Prior studies in this area have concentrated on PB’s impact on resource allocation and fiscal democracy (De Renzio and Wehner, 2017). We extend the literature by empirically documenting an important but underexplored outcome: improvement in government efficiency. Our study provides strong support for the idea that PB, as part of administrative reform, can improve not only fiscal democracy, but also administrative performance.

Our study also provides a potential explanation for the mixed evidence in prior studies about PB outcomes (Brun-Martos and Lapsley, 2017; Goldfrank and Schneider, 2006; Kim, 2017). Although several studies discuss the importance of political factors such as executive–legislative relations (Bland, 2011; Wampler, 2007) for the success of PB institutions, empirical evidence based on large-scale archival data has so far been limited. Our findings, which are based on large-scale archival data, suggest that the net benefits of PB programs may hinge on the political environment for each municipality, such as its executive–legislative dynamics.

Finally, our study adds to studies on the relation between political factors and fiscal outcomes. Government structure and the separation of power, among other political factors, shape the fiscal performance of government bodies (Grilli et al., 1991). Our findings imply that strong checks and balances between the executive and legislative branches may impede institutional changes that would contribute to administrative performance, and thus have an adverse impact on fiscal outcomes.

Institutional background

Participatory budgeting in South Korea

In South Korea, PB was introduced as part of a campaign of democratic reform and decentralization (Nah, 2005; Sintomer et al., 2012). PB programs were first introduced in 2003 to Buk District in the city of Gwang-ju. This was followed by a nationwide campaign that emphasized civic engagement in policy decisions (Sintomer et al., 2012). In 2011, an amendment to the Local Finance Act mandated the adoption of PB programs by every local government (see Figure 1, available at: https://journals.sagepub.com/home/ras).

Key principles and designs of South Korean PB programs were borrowed from Porto Alegre in Brazil and then locally adjusted, giving birth to a “reduced version” of the Porto Alegre model (Sintomer et al., 2012). While the Korean PB programs vary across municipalities, they have a number of common features. As in the Porto Alegre model on separate budgets for investment and public service, Korean PB programs establish separate “citizen-proposed budgets” that come out of the mayor’s discretionary funds (Gonçalves, 2014; Yoon and Lim, 2016). Key participants are “citizen councilors,” who often collaborate with “neighborhood assemblies” and “coordinators.”

The representatives are elected at neighborhood meetings. A participatory council consisting of neighborhood representatives and mayor-recommended experts assumes responsibility for discussing, evaluating, and prioritizing the citizens’ proposals. Government officials also attend these meetings to share information about annual budget policy and local projects that require investments. The participatory council meetings are the core of the PB process, and some municipalities also designate subcommittees to lead forums on specific themes (e.g., welfare, safety, public transportation, etc.). Residents eventually vote for their preferred PB projects, and the mayor submits a finalized proposal to the legislature. The mayoral office and the coordinators work to facilitate participatory budgeting (Yoon and Lim, 2016), and the monitoring committee monitors project implementation.

A special feature of Korean PB is its emphasis on education programs, such as the “citizens’ budget school” and “budget policy seminar.” These programs provide opportunities for citizens and participatory councilors to develop a better understanding of budgeting and accounting, and are among the most important contributions of South Korean PB to PB elsewhere (Sintomer et al., 2012). Appendix A (available at: https://journals.sagepub.com/home/ras) summarizes Korean PB and compares it with Brazilian PB (Panel A). Panel B exhibits the variations in the substructures of Korean PB programs, while Panel C shows the annual cycle of Korean PB programs.

Local finance of municipal governments in South Korea

Fiscal sustainability and efficient administration are the primary challenges faced by municipal governments. Financial health of municipal governments depends on sustainable revenue sources and an efficient costs structure (Chapman, 2008; Hauner and Kyobe, 2010). Revenues of municipal governments in South Korea rely heavily on subsidies and grants from central government. In our sample, 72% of total revenues are grants from central government, while the remaining 28% are self-generated revenues (21% of local taxes and 7% of other self-revenues).² Expenditures of municipal governments are classified into spending on service-providing (program) activities and spending on administrative and financing activities (Krishnan et al., 2006). Among our sample municipalities, 78% of total budgets go to program activities and 22% to non-program activities. Non-program expenses cover administrative and financing costs, such as labor expenses, non-labor expenses, current transfer payments, capital expenditures, and so on. Labor expenses include salaries for government officials and outsourced workers. Non-labor expenses cover various expenses, such as discretionary expenses and benefits for workers.

Literature review and hypotheses development

PB programs address “two distinct but interconnected needs”: improving the efficiency of government and enhancing the quality of democracy (Wampler, 2007). PB helps improve government efficiency through institutional mechanisms that curb opportunism by government officials, while creating opportunities for residents to voice their concerns on public policy. However, empirical studies of PB have primarily focused on its social welfare aspects, such as poverty improvement and resource reallocations, while remaining relatively silent on its effects on government efficiency (Boulding and Wampler, 2010; Goldfrank and Schneider, 2006; Gonçalves, 2014; Touchton and Wampler, 2014). Our study fills this void by documenting empirical evidence of efficiency improvements after PB programs are implemented in South Korean municipalities.

Three facets of PB programs are likely to contribute to government efficiency. First, PB programs enhance fiscal transparency by providing channels through which citizens can better understand budgetary decisions (Gonçalves, 2014). PB programs provide formal channels through which citizens can request and obtain the information they need to assess and propose the citizens’ budgets (Wampler, 2007). They also generate face-to-face interactions with government officials. This leads to “practical” transparency—a step beyond “formal” transparency—in which the citizens encourage officials to disclose needs-based, targeted information (Cucciniello and Nasi, 2014).³ A survey study of the Korean city of Uijeongbu shows that both government managers and citizen councilors experienced improvement in fiscal transparency and information disclosure after PB adoption (Jang and Yeom, 2014). Another survey reveals that experience in proposing the citizens’ budget increases the general understanding of municipal finance (Ahn and Choi, 2009).⁴ The other survey report documents that citizen councilors perceive that overall budget transparency has improved after four years of PB implementation (Seoul Metropolitan Government, 2016).⁵ Transparent budget information, in turn, prevents politicians from pursuing opportunistic goals and forces them to work more efficiently (Benito and Bastida, 2009). This is because more complete information prevents voters from electing incompetent officials and helps citizens better target punishment via electoral mechanisms (Carlitz, 2013; Lindstedt and Naurin, 2010).⁶

Second, PB programs strengthen bottom-up monitoring of government by citizens. Community-based monitoring can be more targeted and effective than external auditing, leading to better public service performance (Björkman and Svensson, 2009). Further, PB programs empower citizens to exercise their rights and duties (Wampler, 2007), and educate citizens in financial literacy (Sintomer et al., 2012). A majority of Korean municipalities operate “citizens’ budget schools,” which significantly improve citizens’ ability to understand fiscal processes (Seo, 2017). Educated, well-informed citizens are better positioned to understand budgeting and make their own determinations on fiscal policy, which strengthens the monitoring by citizens (Kim and Lee, 2009; Krishnan, 2003).⁷ In addition, civic engagement increases public attention to budgetary processes, which, in turn, forces governments to more carefully attend to financial health and fiscal accountability (Strömberg, 2004).

Third, PB programs create a public venue where citizens and civic groups network and build a consensus. Citizens usually participate in PB programs as members of civic groups such as nongovernmental organizations (NGOs), civil society organizations (CSOs), and local parties (Choi, 2014; Wampler and Hartz-Karp, 2012). Participation in such groups builds solidarity among participants and facilitates collective action. Local civic groups in Korea have committed to monitoring local administration and budgeting processes (Seo, 2011; Song, 2016).⁸ The presence of politically active, socially bonded citizens provides stronger incentives for governments to respond to voters’ needs (Besley and Burgess, 2002) and poses a credible political threat to an incumbent government (Díaz-Cayeros et al., 2014; Michels, 2011). Hence, active political engagement and collective actions pressure the government to enhance its administrative efficiency.

To summarize, PB programs are expected to contribute to government efficiency by: (1) increasing budgetary transparency (especially “useful” transparency); (2) strengthening bottom-up monitoring by citizens; and (3) making the risk of social sanctions credible. Consistent with our argument, a survey-based study in Korea suggests that citizen councilors perceive PB programs as an opportunity to constrain budgetary waste (Kim and Lee, 2009). Importantly, these proposed channels can generate efficiency-improvement effects even if citizens do not completely control entire budgets. PB enhances fiscal transparency in general, which, in turn, reduces the adverse selection of inefficient management. PB programs also provide a venue for bottom-up monitoring and collective actions, which deters the moral hazard in overall management. We maintain that PB creates favorable conditions for administrative transparency and accountability, which, in turn, forces governments to work more efficiently:

H1: The introduction of PB programs is positively associated with government efficiency (“efficiency-improvement effect”).

Methods

Sample selection and data sources

Municipal governments in South Korea are a powerful setting in which to test our research questions. The amendment of the Local Finance Act in 2011 mandated that all municipalities establish PB-related ordinances. The resulting activity by the municipalities generated large-scale archival data (1063 observations in our final sample). Mandatory adoption also mitigates the endogeneity concerns that would arise with voluntary adoption. We further strengthen the credibility of our inferences by employing fixed-effects regressions that control for municipality-specific characteristics (Wooldridge, 2010).

We start with 226 municipalities. Municipalities are the smallest politico-administrative divisions in South Korea but they all have authority to form and approve their own budgets.⁹ Since we examine the treatment effect of PB adoption on spending behaviors in local governments, we restrict our sample period to around 2011 (i.e., 2010–2014) and avoid making it unnecessarily long.¹⁰ From the initial sample, we exclude observations that lack data on voting outcomes¹¹ or the financial data needed for control variables. This leads to a final sample of 1063 government-year observations from 221 municipal governments.

We obtained the local governments’ financial data, including budgets and financial statements, from the Local Finance Integrated Open System website. We gathered information about the PB adoption by hand collecting the initial enactment date of the local ordinance related to the PB system from the website of the National Law System. To calculate our measures of political environments, we also hand collected the results of local elections and the party affiliations of incumbent mayors and local councilors from the website of the National Election Commission. We obtained socioeconomic information, including municipal populations, municipal ageing populations, and regional gross domestic product (GDP), from the National Statistics Office website.

Model specification and variable measurement

To test H1, we regress Equation (1) with 1063 government-year observations during 2010–2014. To mitigate concerns that unobservable characteristics of each municipal government drive our results, we employ the fixed-effects regressions method (Wooldridge, 2010):

\begin{array}{l} Government Efficiency_{i, t} = ß_{0} + ß_{1} P B_Adop t_{i, t} + ß_{2} Total_{Expenditure}_{i, t} \\ + ß_{3} DEB T i, t - 1 + ß_{4} SEL F i, t - 1 + ß_{5} GRD P_{i, t} + ß_{6} PO P i, t - 1 \\ + ß_{7} OL D i, t - 1 + ß_{8} G_PART Y_{i, t} + ß_{9} C_PART Y_{i, t} + Municipal Fixed Effects \\ + Year Fixed Effects + ε_{i, t} \end{array}

(1)

Measurement of government efficiency

Sustainable fiscal policy should balance surpluses and deficits, so that services will not be compromised for future generations (Chapman, 2008). Efficient governments should thus minimize their spending while continuing to deliver a certain baseline level of public services (Hauner and Kyobe, 2010). Hence, the dependent variable—Government Efficiency—is one of the following measures of fiscal sustainability and administrative efficiency: External_Reliance, Current_Ratio, Labor_Expenses, Benefits_and_Perks, and Non-program_Expenses.

Fiscal sustainability

To retain their self-autonomy and promote a sustainable cost structure, municipal governments try to reduce their reliance on external grants and maximize self-generated revenues (e.g., local taxes). A low external reliance reflects the municipal government’s long-term viability to serve future generations with their own revenues (“External_Reliance”). External_Reliance is defined as “1 – self-generated revenues/total revenues,” where self-generated revenues are the sum of local taxes and non-tax revenues. Current account ratio—the balance between ongoing expenses and ongoing revenues—is another important indicator of sustainable cost structures and, in turn, of the sustainability of a municipality’s local finance over time (“Current_Ratio”). Current_Ratio equals current expenses over current revenues.

Administrative efficiency

Labor expenses for government officials account for a large share of total expenditures (15% in our final sample). Labor costs are “sticky,” meaning they almost never decrease after going up (Anderson et al., 2003).¹² If the level of public service remains constant, labor costs indicate how efficiently the municipal government utilizes its human resources (“Labor_Expenses”) (Yoon and Seo, 2017).¹³ Labor_Expenses is defined as the natural logarithm of labor expenses paid to government officials in the municipality.

Despite accounting for a relatively small proportion of total budgets (0.31% in our final sample), executive benefits and perks are an important proxy for agency problems in both the private and public sectors (Jensen and Meckling, 1976; Niskanen, 1971). Executive benefits and perks are discretionary expenses for employees, including gifts, social and club activities, and entertainment expenses. Anecdotal evidence reveals that mayors often use these discretionary budgets for self-serving purposes (Cho et al., 2018),¹⁴ and that they subsequently draw public criticism for it (“Benefits_and_Perks”). Benefits_and_Perks is defined as the proportion of discretionary administrative expenses spent by government officials and local legislators among total expenditures.¹⁵

Contributors to municipal finance (e.g., taxpayers) want a dollar’s worth of service for every dollar they pay in taxes. In other words, they expect their municipal governments to produce a public service that is in proportion to the sum they contribute (Weisbrod and Dominguez, 1986). Service-to-administrative-spending ratio—that is, spending on service-providing activities relative to spending on administrative and financing activities—captures how much of taxpayers’ money goes to actual service outputs (Krishnan et al., 2006). In our sample, 78% (22%) of total budgets go to program activities (non-program activities). We define Non-program_Expenses as “1 – program expenses/total expenses.”

Measurement of PB adoption

We operationalize the effect of PB programs with the adoption indicator of PB programs (PB_Adopt). Using hand-collected data on the enactment dates of the local ordinances establishing PB, we code the budgets in a certain year as being approved under the PB system if the municipality enacted its PB ordinance before October of the previous year. We use October of the previous year as the criterion since the final budget proposals for the next year should be submitted to the legislature around October. Since our efficiency measures (External_Reliance, Current_Ratio, Labor_Expenses, Benefits_and_Perks, and Non-program Expenses) decrease with greater efficiency, we expect that coefficients on PB_Adopt are significantly negative, consistent with H1 (ß₁ < 0).

Control variables

We include the natural logarithm of total budgeted expenditures (Total_Expenditure) in the regressions to control for potential changes in total budget size after PB adoption (Lee and Kim, 2011). Prior studies suggest that socioeconomic and political factors influence fiscal spending (Roubini and Sachs, 1989; Vatter and Rüefli, 2003). Hence, we control for the ratio of total debt to total budget in the prior year (DEBT), the proportion of the ageing population among the total population in the prior year (OLD), the natural logarithm of the total population in the municipality in the prior year (POP), and the proportion of the self-reliance of budgets in the prior year (SELF). We also control for the natural logarithm of regional GDP per capita at the metropolitan level (GRDP), an indicator of the mayor being from the national ruling party (G_PARTY), and an indicator of the mayor being from the Conservatism Party (C_PARTY).

Table 1 presents the descriptive statistics of the variables. Among total municipal observations, about 27% (73%) belong to the pre-adoption (post-adoption) period.

Table 1.

Summary statistics.

Variable	N	Mean	Min.	P25	Median	P75	Max.	STD
PB_Adopt_i,t	1063	0.7272	0.0000	0.0000	1.0000	1.0000	1.0000	0.4456
External_Reliance_i,t	1063	0.7138	0.3854	0.5617	0.7309	0.8800	0.9420	0.1695
Current_Ratio_i,t	1063	0.7445	0.4878	0.5873	0.6736	0.8537	1.4408	0.2141
Labor_Expenses_i,t	1063	24.6526	23.9833	24.3228	24.5709	24.9810	25.6027	0.4010
Benefits_and_Perks_i,t	1063	0.0031	0.0011	0.0022	0.0027	0.0035	0.0078	0.0013
Non-program_Expense_i,t	1063	0.2211	0.1514	0.1851	0.2066	0.2442	0.3691	0.0510
Political_Competition_i,t	1063	1.7160	0.5769	1.2768	1.6953	2.0130	4.2623	0.6033
High_Legislative_Power_i,t	1063	0.3368	0.0000	0.0000	0.0000	1.0000	1.0000	0.4728
Total_Expenditure_i,t	1063	26.7857	25.3753	26.4727	26.7009	27.0478	28.6604	0.5268
DEBT_i,t−1	1063	0.0565	0.0000	0.0051	0.0400	0.0892	0.2391	0.0584
SELF_i,t−1	1063	0.2848	0.0983	0.1735	0.2418	0.3768	0.6740	0.1415
GRDP_i,t	1063	24.0377	23.4678	23.8370	24.0544	24.2182	24.5826	0.2516
POP_i,t−1	1063	11.8331	10.1586	10.9515	11.8556	12.7234	13.4376	0.9842
OLD_i,t−1	1063	0.1619	0.0615	0.0991	0.1373	0.2243	0.3152	0.0746
G_PARTY_i,t	1063	0.2888	0.0000	0.0000	0.0000	1.0000	1.0000	0.4534
C_PARTY_i,t	1063	0.4610	0.0000	0.0000	0.0000	1.0000	1.0000	0.4987

Empirical results

Table 2 reports the estimation results of Equation (1) using the five efficiency measures as dependent variables. Throughout Columns (1)–(4), we observe that the coefficients on PB_Adopt are significantly negative. These findings indicate that after PB programs are introduced, municipal governments reduce their reliance on external grants and subsidies (External_Reliance, ß₁ = –0.0101, p < 0.05), improve their current account ratio (Current_Ratio, ß₁ = –0.0213, p < 0.01), reduce labor expenses for government officials (Labor_Expense, ß₁ = –0.0049, p < 0.01), and cut spending on benefits and perks for government officials and local legislators (Benefits_and_Perks, ß₁ = –0.0001, p < 0.01).¹⁶ It suggests that the implementation of PB programs is followed by the significant improvement of fiscal sustainability and administrative efficiency, lending a support for H1.

Table 2.

Estimation results of fixed-effects regressions—PB adoption and government efficiency.

			(1)	(2)	(3)	(4)	(5)
			Dependent variables
Variables	Coef.	Pred.	External _Reliance_i,t	Current _Ratio_i,t	Labor _Expenses_i,t	Benefits_and _Perks_i,t	Non-program_Expenses_i,t

PB_Adopt_i,t	ß₁	–	–0.0101**(–1.741)	–0.0213***(–2.247)	–0.0049***(–2.325)	–0.0001***(–2.412)	0.0003 (0.149)
Total_Expenditure_i,t	ß₂	–/?	–0.0236(–0.961)	–0.0143(–0.332)	0.0147(1.595)	–0.0011***(–7.155)	–0.0609***(–4.786)
DEBT_i,t−1	ß₃	–	–0.4922***	–0.3865***	–0.1135***	–0.0022***	0.1168**
			(–6.605)	(–2.624)	(–2.991)	(–4.564)	(2.398)
SELF_i,t−1	ß₄	+	–0.0827	–0.0148	0.1492***	0.0018***	0.0252
			(–1.170)	(–0.126)	(5.610)	(4.377)	(0.926)
GRDP_i,t	ß₅	+	0.1737***	–0.1797	0.0839***	0.0012***	0.0013
			(2.677)	(–1.634)	(2.909)	(3.232)	(0.049)
POP_i,t-1	ß₆	?	–0.0728	0.0412	0.1927***	–0.0008	0.0773*
			(–0.999)	(0.271)	(4.135)	(–1.406)	(1.804)
OLD_i,t-1	ß₇	?	–1.2107**	–2.6776**	–1.0321***	–0.0042	0.2016
			(–1.986)	(–2.219)	(–3.429)	(–0.938)	(0.642)
G_PARTY_i,t	ß₈	+/?	–0.0158***	–0.0287**	–0.0001	0.0001**	–0.0003
			(–2.870)	(–2.331)	(–0.030)	(2.461)	(–0.118)
C_PARTY_i,t	ß₉	–/?	0.0048	0.0387***	–0.0010	–0.0000	0.0027
			(0.759)	(2.658)	(–0.352)	(–0.393)	(0.932)
Constant			–1.5694	5.2169*	20.3855***	0.0133	0.8339
			(–0.883)	(1.709)	(22.396)	(1.203)	(1.028)
Municipal fixed effects and year fixed effects			Yes	Yes	Yes	Yes	Yes

Observations			1063	1063	1063	1063	1063
Adjusted R-squared			0.916	0.854	0.998	0.956	0.875

Notes: Robust t-statistics are in parentheses. *, **, and *** correspond to 10%, 5%, and 1% significance levels, respectively (one-tailed test if a signed prediction is provided, and two-tailed otherwise). f-tests for no fixed effects are rejected in all columns.

In terms of economic significance, the introduction of PB programs is associated with a 1% decrease in reliance on external grants, a 2% decrease in the current ratio (i.e., current expenses over current revenues), a 0.5% decrease in labor expenses, and a 0.01% decrease in spending on benefits and perks.¹⁷ These results are robust to controlling for municipality-specific fixed effects and year fixed effects. Although we do not find that PB_Adopt has a significant effect on Non-program_Expenses, our findings in Table 2, as a whole, support our prediction that PB programs contribute to government efficiency. The empirical results suggest that civic engagement in the fiscal process helps improve administrative performance by promoting institutional rules that encourage transparency and constrain lax management (Baiocchi and Ganuza, 2014; Wampler, 2007). We provide an important implication that PB programs can advance government performance while enhancing fiscal democracy through the enhancement of transparency, community-based monitoring, and collective actions.

Additional analysis

The efficiency-improvement effects may be moderated by a supportive political environment. Since the mayor’s office must be willing to prepare technical plans and contracts, and to integrate administrative agencies in support of PB-related tasks (Wampler, 2007), PB outcomes may vary across different regional contexts (Uddin et al., 2019) depending on mayoral leadership and a supportive political environment (Bland, 2011; Wampler, 2007). For instance, if the mayor’s leadership is not strong enough to protect citizens’ voices from legislative resistance, then the efficiency-improvement effects of PB programs will be undermined. In Table 3, we find results that are partially consistent with this notion. In Columns (1), (4), and (5), the coefficients on the interaction term PB_Adopt × High_Legislative_Power are significantly positive.¹⁸ These findings indicate that the efficiency-improvement effects of PB programs on External_Reliance, Benefits_and_Perks, and Non-program_Expenses diminish when local legislatures have stronger power.

Table 3.

Estimation results of fixed-effects regressions—Moderating effect of executive–legislative conflicts and electoral competition.

	(1)	(2)	(3)	(4)	(5)
	Dependent variables
Variables	External _Reliance_i,t	Current _Ratio_i,t	Labor _Expenses_i,t	Benefits_and _Perks_i,t	Non-program _Expenses_i,t
PB_Adopt_i,t	–0.0202**	–0.0421***	–0.0066**	–0.0001***	–0.0050*
	(–2.210)	(–3.024)	(–2.163)	(–2.791)	(–1.781)
PB_Adopt_i,t × High_Political_Competition_i,t	0.0044	0.0423***	0.0012	–0.0000	0.0059*
	(0.456)	(2.982)	(0.384)	(–0.182)	(1.753)
PB_Adopt_i,t × High_Legislative_Power_i,t	0.0201**	0.0046	0.0029	0.0001**	0.0062*
	(2.243)	(0.296)	(0.916)	(2.468)	(1.928)
High_Political_Competition_i,t	–0.0078	–0.0541***	–0.0011	0.0001	0.0018
	(–0.888)	(–3.328)	(–0.353)	(1.098)	(0.461)
High_Legislative_Power_i,t	–0.0101	0.0163	–0.0004	–0.0001**	0.0026
	(–1.113)	(0.911)	(–0.096)	(–2.352)	(0.704)
Total_Expenditure_i,t	–0.0219	–0.0225	0.0150	–0.0011***	–0.0590***
	(–0.879)	(–0.526)	(1.627)	(–6.906)	(–4.655)
DEBT_i,t−1	–0.4895***	–0.3562**	–0.1125***	–0.0022***	0.1187**
	(–6.466)	(–2.414)	(–2.947)	(–4.622)	(2.448)
SELF_i,t−1	–0.0816	0.0037	0.1495***	0.0018***	0.0238
	(–1.157)	(0.033)	(5.588)	(4.256)	(0.881)
GRDP_i,t	0.1793***	–0.2074*	0.0845***	0.0014***	0.0038
	(2.779)	(–1.938)	(2.913)	(3.541)	(0.146)
POP_i,t-1	–0.0699	0.0854	0.1943***	–0.0010*	0.0805*
	(–0.939)	(0.559)	(4.140)	(–1.674)	(1.912)
OLD_i,t-1	–1.1600*	–2.4307**	–1.0195***	–0.0048	0.2219
	(–1.898)	(–2.049)	(–3.383)	(–1.081)	(0.714)
G_PARTY_i,t	–0.0153***	–0.0165	0.0004	0.0001	0.0013
	(–2.658)	(–1.267)	(0.143)	(1.402)	(0.441)
C_PARTY_i,t	0.0059	0.0233	–0.0008	0.0000	0.0052*
	(0.876)	(1.495)	(–0.268)	(0.627)	(1.829)
Constant	–1.7874	5.5091*	20.3414***	0.0118	0.6791
	(–1.003)	(1.827)	(22.156)	(1.064)	(0.852)
Municipal fixed effects and year fixed	Yes	Yes	Yes	Yes	Yes
Observations	1063	1063	1063	1063	1063
Adjusted R-squared	0.917	0.857	0.998	0.957	0.878

Political competition, on the one hand, may give mayors stronger incentives to commit to civic engagement as the fear of being replaced in the next election increases policy responsiveness in incumbent governments (Downs, 1957). However, our results instead support the notion that mayors are less able to push for PB programs under stronger pressure from competing parties. The coefficients on the interaction term PB_Adopt × High_Political_Competition are significantly positive in Columns (2) and (5), while being insignificant in other columns.¹⁹ Overall, the results in Table 3 suggest that the efficiency-improvement effect of PB programs is more pronounced with stronger mayoral leadership.

Conclusion

PB is a democratic institution that aims to involve the ultimate beneficiaries of public services—the citizens—in fiscal decision-making. This bottom-up governance mechanism is expected to increase the transparency and accountability of political agents in local governments (Wampler, 2007). While previous empirical studies have focused on PB’s social welfare effects—notably, on wealth redistribution and fiscal democracy (Boulding and Wampler, 2010; Díaz-Cayeros et al., 2014; Gonçalves, 2014; Touchton and Wampler, 2014)—our study extends the literature by documenting efficiency-improvement effects of PB programs. In particular, we find that the introduction of PB programs to Korean municipal governments is associated with statistically significant improvements in fiscal sustainability and administrative efficiency.

The article has important policy implications. Institutional reforms designed to expand civic engagement can have benefits that extend beyond their intended effect. By increasing fiscal transparency, empowering citizens as watchdogs, and generating political threats to elected officials, PB can contribute to government efficiency. Our findings strongly support the notion that PB programs can advance democracy while promoting government efficiency. We further find that the programs’ positive outcomes differ depending on political environments, which could explain why prior studies document differential degrees of PB outcomes (Brun-Martos and Lapsley, 2017; Goldfrank and Schneider, 2006; Kim, 2017).

Supplemental Material

sj-pdf-1-ras-10.1177_0020852321991208 - Supplemental material for Participatory budgeting and government efficiency: evidence from municipal governments in South Korea

Supplemental material, sj-pdf-1-ras-10.1177_0020852321991208 for Participatory budgeting and government efficiency: evidence from municipal governments in South Korea by Sun-Moon Jung in International Review of Administrative Sciences

Footnotes

Acknowledgements

I am especially grateful to Jae Yong Shin and Jae-Young Kim for their helpful suggestions. I also thank anonymous reviewers for their constructive comments.

Data availability

The data that support the findings of this study are openly available.

Declaration of conflicting interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Sun-Moon Jung

Notes

Sun-Moon Jung is a PhD candidate in accounting at Seoul National University’s College of Business Administration, Republic of Korea. Her research interests include budgeting, performance evaluation, and incentive contracts in public and private sectors.

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