Governments around the world could improve their financial resilience

14 Nov 17

International local governments cope with economic shock in different ways, explains Ileana Steccolini, but to improve financial resilience they must learn lessons from one another. 

Recent crises and shocks have attracted increasing attention to government responses.

In a recent book (Governmental Financial Resilience. International Perspectives on How Local Governments face Austerity, edited by Steccolini, Jones and Saliterer), we looked at the experiences of 45 local governments across 11 countries worldwide to better understand how local governments are deploying and developing their capacities to face austerity and financial shocks.

The analyses show that while such events impacted most of the countries considered, the effects on local governments were not uniform, with some being affected immediately and/or more substantially than others.

Moreover, it highlights that local governments’ responses to austerity and crises are not only explained by country contexts, national policies and economic, socio-demographic and institutional features.

Rather, five main patterns of local government financial resilience appear to emerge across countries and cases and appear to be the result of the intertwining of environmental conditions and organisational vulnerabilities and coping and anticipatory capacities (see figure below). 

The first pattern, pro-active adaptation, refers to those local governments which are able to look at shocks as opportunities for improvement, and thus appear proactive in responding to them, for example by adapting or transforming to reduce expenditure, reconfiguring service delivery and finding alternative sources of income.

In short, these local governments appear to be able to internally develop, over time, self-regulating capacities that allow them to more successfully forecast and react to shocks, employing a full range of anticipatory as well as coping capacities.

Reactions are, thus, based on existing competences and resources as well as exploring new alternatives (e.g., innovation, networking).

These local governments believe in their ability to manage not only their internal capacities, but to also to use and shape the external environment to generate opportunities for income creation, demand management, and service delivery.

Local government belonging to the second pattern, constrained adaptation, appear to be unable to control their own destiny.

They are constantly and proactively adapting, but are constrained by external forces, usually exerted by upper levels of government.

Even though they do not perceive their environment as being as controllable as their self-regulating peers, they see shocks as opportunities and have in place, or are able to develop, a range of capacities that allow them to continually change and adapt.

Local governments in the third pattern, reactive adaptation, have learned to deal with austerity largely by adapting to changed circumstances in their environment.

The nature of adaptation here appears to be diverse and could extend to both anticipatory and coping capacities, with a consequential impact on respective vulnerabilities.

Local governments in this group are characterised by both an acceptance of the need to adapt to changing circumstances as well as the implementation of actions to do so.

Local governments across this pattern entered the crisis period with varying levels of vulnerability and anticipatory capacity.

Rather than having a strong set of anticipatory capacities from the start, the impact of the crisis took some in this group by surprise and as such they did not, at least initially, fully comprehend the extent of their vulnerability.

Within the powerlessness group, the financial crisis would seemingly exceed the threshold of local governments’ existing capacities, leading to a perception of powerlessness and forcing them into a fatalist mode, i.e. a day-by-day management of emergencies, leaving them highly reliant on buffering capacities, externally driven and constrained by external pressures.

Although the anticipatory capacity may be expected to increase over time, such cases respond with rather passive behavior, and an orientation towards buffering capacities may prevail.

Such local governments may be less willing to take ownership of necessary changes, deflecting issues back onto national governments and postponing solutions.

The lack of both anticipatory and coping capacities could lead to such local governments having a poor understanding of their vulnerabilities, leaving them highly vulnerable at the beginning of the crisis and remaining vulnerable at the end.

In the contentedness group, conversely, we find local governments that were relatively wealthy and therefore not particularly vulnerable at the onset of the crisis.

Such local governments may be expected to have weak anticipatory capacities as their relative wealth has meant they have never had to face a significant financial crisis before, being either immune to shocks, or being able to absorb them comfortably should they occur.

Furthermore, their favorable environmental conditions may have encouraged them to downplay emerging and increasing vulnerabilities and to not invest in building anticipatory and coping capacities as their still wealthy conditions and context offset extant anticipatory and coping weaknesses.

In short, they would appear to behave like contented organisations, which, resting on their laurels, had not anticipated the crisis, hoping to weather the storm relying on their buffering capacities.

In the long term, however, this may translate into increased vulnerability and the need to take stronger actions in developing anticipatory coping capacities.

As such, the analysis shows that there may be different ways of being financially resilient, resulting from different combinations of anticipatory, buffering, adapting and transforming capacities, perceived sources and levels of vulnerability, and the external environment.

The type of path of progress or regression in internal capacities in the face of crises will also depend on how people see and interpret the crises, existing conditions, and the future possibilities of actions.

Crises cannot only be seen as triggers for change, but also as mirrors, which prompt organisations to reveal their capacities and attitudes.

Along these lines, the stories told in the book tell us that local governments continuously struggle to find an equilibrium between financial and non-financial goals, pressures from the external environment and organisational resources, capacities and responses.

Thus, financial resilience is not an alien concept to local government.

Rather it is a way of being and behaving that needs to be better understood, explored and highlighted, so as to share possible lessons to learn for the future, or for other local governments that are struggling against similar challenges.

  • Ileana Steccolini

    Professor of accounting & finance at Newcastle University and CIPFA government faculty board member

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