THE EFFECT OF SOCIAL OBSERVATORIES MONITORING ON BRAZILIAN MUNICIPAL EXPENDITURES

Efeito do monitoramento dos observatórios sociais nos gastos municipais brasileiros

El efecto del monitoreo de los observatorios sociales en los gastos municipales brasileños

ABSTRACT

This study investigates the impact of social observatories’ monitoring on municipal public spending in Brazil. Ceteris paribus, such oversight is expected to enhance the detection of administrative inefficiencies and corruption, leading to a reduction in municipal spending. However, theoretical frameworks suggest scenarios that might negate these effects. Internationally, there is no consensus on the effectiveness of social control over public expenditure, and in Brazil, research in this area is still in its early stages. Employing agency theory and a difference-in-differences approach, we test two hypotheses: (i) the presence of social observatories significantly lowers municipal per capita spending; (ii) the impact of social observatories is more substantial in smaller municipalities with populations under 50,000. Findings validate the effectiveness of observatories across Brazil, particularly in smaller municipalities. In a country largely composed of small municipalities, often affected by corruption and administrative inefficiencies, observatory oversight enhances public spending efficiency and municipal fiscal health.

Keywords:
corrupção; ineficiências administrativas; observatórios sociais; saúde fiscal municipal; gastos públicos

RESUMO

Esta pesquisa avalia o impacto da supervisão dos observatórios sociais nos gastos da Administração Pública municipal no Brasil. Ceteris paribus, o monitoramento deve elevar a detecção de ineficiências administrativas e corrupção, reduzindo os gastos municipais. Contudo, a teoria prevê circunstâncias que podem anular esses efeitos. A literatura internacional carece de consenso sobre a eficácia do controle social dos gastos públicos e, no Brasil, os estudos são incipientes. Com base na teoria da agência e no método de diferença em diferenças, testamos duas hipóteses: (i) observatórios sociais reduzem significativamente os gastos per capita municipais; (ii) o efeito é mais acentuado em municípios pequenos, abaixo de 50 mil habitantes. Os resultados confirmam a efetividade dos observatórios no Brasil, especialmente em municípios de pequeno porte. Em um país constituído majoritariamente por pequenos municípios, frequentemente assolados pela corrupção e ineficiências administrativas, o monitoramento dos observatórios parece melhorar a eficiência dos gastos públicos e a condição fiscal municipal.

Palavras-chave:
corruption; administrative inefficiencies; social observatories; municipal fiscal health; municipal spending

RESUMEN

Esta investigación evalúa el impacto de la supervisión de los observatorios sociales en los gastos de la Administración Pública municipal en Brasil. Ceteris paribus, se espera que el monitoreo aumente la detección de ineficiencias administrativas y corrupción, reduciendo los gastos municipales. Sin embargo, la teoría sugiere circunstancias que podrían anular estos efectos. La literatura internacional carece de consenso sobre la eficacia del control social en los gastos públicos y, en Brasil, los estudios en esta área aún están en una etapa temprana. Basándonos en la teoría de la agencia y en el método de diferencia en diferencias, probamos dos hipótesis: (i) los observatorios sociales reducen significativamente los gastos per cápita municipales; (ii) el efecto es más pronunciado en municipios pequeños, con menos de 50 000 habitantes. Los resultados confirman la efectividad de los observatorios en todo Brasil, particularmente en los municipios pequeños. En un país mayoritariamente compuesto por municipios pequeños, a menudo afectados por la corrupción y las ineficiencias administrativas, la supervisión de los observatorios parece mejorar tanto la eficiencia de los gastos públicos como la salud fiscal municipal.

Palabras Clave:
corrupción; ineficiencias administrativas; observatorios sociales; salud fiscal municipal; gastos municipales

INTRODUCTION

Corruption, the “misuse of public office for personal gain,” is a global problem, particularly affecting poor and developing countries (Becker et al., 2009). At the subnational level, corruption in Brazil’s 5,570 municipalities is of particular concern. In the 1990s, Brazil underwent significant fiscal decentralization, transferring activities, resources, and responsibilities to municipalities. The aim was to improve public service efficiency and enhance control over spending (Rodden, 2003). As a result, municipal governments became responsible for key social programs such as health, education, and local infrastructure (Campos et al., 2018). Given the constitutional limitations on municipal revenue generation, sharing mechanisms were established, enabling the Federal Government to transfer part of its tax collection to municipalities (Durães & Ribeiro, 2018). However, this transfer of responsibilities also introduced challenges. Municipal governments, with their informational advantages about local needs, can create agency problems and moral hazards, where local officials (the agents) may act opportunistically, diverting funds for personal or political gain (Rodden, 2003).

On average, Brazilian Local Governments receive USD 30 billion annually from Federal Government transfers (Tesouro Nacional, 2022). Despite constitutional earmarks for some budgetary items, mayors and local legislators enjoy broad discretion in spending these resources, opening gaps for corruption. Ferraz and Finan (2011) estimate that corruption within municipal governments results in an annual depletion of approximately USD 550 million from federally allocated funds.

Beyond corruption, municipal public management faces a second challenge: administrative inefficiencies, often linked to the low qualification of local public employees and exacerbated by patterns of negligence and indolence in daily operations. This human capital shortage is particularly evident in small and medium-sized municipalities, which account for over 80% of the country (Klering et al., 2012). Severe budget constraints, driven by limited tax revenues, broad constitutional responsibilities, and strict fiscal regulations governing transferred funds, make it difficult for municipalities to offer competitive salaries. This undermines their ability to attract and retain qualified professionals and perpetuates a cycle of inefficient behavior, including indolence and negligence, further hampering productivity (Rauch & Evans, 2000). Additionally, insufficient investment in employee training exacerbates these inefficiencies, while clientelism and nepotism weaken meritocracy, favoring less qualified individuals (Olavarría-Gambi & Dockendorff, 2016).

Both administrative inefficiencies and corruption increase public administration costs. The former wastes resources through irrational consumption of public funds, while the latter imposes overpricing on contracted goods, grants undue benefits in exchange for bribes, and diverts resources, necessitating contract amendments to complete projects. In both cases, the burden falls on taxpayers, who do not receive the expected quality or access to public services (Ferraz & Finan, 2011).

A major corruption scandal in Maringá, Paraná, in the early 2000s led to increased public demand for greater accoun0ility among officials (Hising, 2017). In response, social control mechanisms were introduced, allowing civil society to monitor public activities and ensure the proper implementation of public programs, policies, and budgets (Siraque, 2009). Within this context, the non-profit organization “Observatório Social de Maringá” was founded in 2006, aiming to mobilize citizens to oversee public spending (Schommer & Moraes, 2010). The success of this initiative inspired the creation of similar “social observatories” in other cities in southern Brazil, leading to the formation of a national organization, “Observatório Social do Brasil” (OSB). Since 2008, OSB has provided guidance and oversight to a network that now includes 136 units across 17 states (Ribas & Enara, 2018). Additionally, our research identified 27 independent observatories operating throughout Brazil.

Although qualitative approaches have been used to analyze social control, there is still limited econometric research on the causal effect of social observatories’ oversight on municipal spending in Brazil. Our investigation identified Seixas and Banhos (2021) as the sole study of this nature published thus far. In their work, the authors examine the impact of observatories within the OSB network on various expenditure categories in municipalities in Paraná. They aim to provide evidence that the monitoring efforts of these observatories lead to reductions in municipal public spending, primarily by enhancing bidding processes and overall government efficiency, as well as curbing corruption. The study presents evidence of social observatories’ effectiveness; however, its limited scope, focusing solely on Paraná municipalities, restricts the external validity of the findings to other states and regions. Furthermore, while overlooking the role of independent observatories and failing to account for municipality size, the study’s exclusive analysis of the OSB network narrows its results.

Therefore, there are gaps in knowledge regarding: i) the effectiveness of social control by observatories in municipalities across Brazil and ii) the influence of municipality size on their effectiveness. This article builds on Seixas and Banhos (2021) by examining the effects of social control on municipal expenditures across different states where observatories are present. The study encompasses both units within the OSB network and independent observatories.

The primary objective of this study is to test the hypothesis that, within the Brazilian context, social observatory monitoring of local public administration is effective in reducing municipal spending. This effectiveness is achieved by reducing administrative inefficiencies and mitigating local corruption. While Caldas et al. (2016) provide evidence that corruption inflates municipal public spending, inefficiencies such as poor management and resource waste — in daily operations and procurement — also contribute to increased costs (Musgrave & Musgrave, 1989). By addressing these two issues, social observatories are expected to help improve government efficiency and reduce municipal expenditures.

Additionally, we investigated a second hypothesis related to a specific dilemma faced by Brazilian municipalities with fewer than 50,000 inhabitants. On the one hand, the ineffectiveness of state control mechanisms, particularly fragile in small municipalities, suggests that increased oversight, such as that conducted by social observatories, can significantly reduce municipal spending. On the other hand, the proximity between citizens, officials, and local elites increases the risk of co-optation, compromising their effectiveness. This issue is crucial in Brazil, where approximately 90% of municipalities have populations below 50,000 (Klering et al., 2012), as it indicates whether social observatories are suited to combating both corruption and inefficiencies, particularly given the country’s unique characteristics and needs. Therefore, we tested the hypothesis that social observatories are especially effective in smaller municipalities, analyzing the extent to which the benefits outweigh the drawbacks.

The article is structured as follows: Section two offers an overview of the theoretical framework and the institutional context under study. Section three details the survey data and defines the dependent variables. In section four, we introduce the empirical methodology. Section five tests the hypotheses and discusses the findings. Finally, section six provides concluding remarks and insights.

THEORETICAL FRAMEWORK AND THE BRAZILIAN CONTEXT

Agency theory serves as a conceptual framework for understanding the challenges that arise when tasks are delegated from a Principal (in our case, the federal executive) to an Agent (such as municipal governments) (Eisenhardt, 1989). This theory assumes that actors are rational and opportunistic, driven by utility maximization. It suggests that despite the formal authority of the Principal, the Agent may have informational advantages, allowing them to shirk responsibilities, extract unwarranted benefits, or engage in inefficient practices (Waterman & Meier, 1998). Consequently, agency theory proposes that the Principal establish regulatory mechanisms to mitigate information asymmetry and limit the Agent’s autonomy. These mechanisms aim to increase the likelihood of detecting and penalizing opportunistic behavior, reducing both the potential gains from engaging in corruption and the likelihood of inefficiency caused by negligent and/or indolent behavior patterns among public servants (Eisenhardt, 1989; Leruth & Paul, 2006).

Building on the works of Becker and Stigler (1974) and Olken and Pande (2012), we present a simplified model (Equation 1) in which the rational public agent faces a decision between acting honestly or engaging in opportunistic behaviors such as corruption, negligence, or indolence. This decision is influenced by several factors, including the probability and severity of punishment, the agent’s moral framework, and the cultural context. The model assumes that the bureaucrat receives a salary (w) from the government and, if dismissed, would transition to a private-sector salary (v). If the agent engages in corrupt or inefficient practices, there is a probability (p) of dismissal, resulting in a lower private-sector salary. However, if their misconduct goes undetected, they retain their government salary (w), potentially augmented by illicit gains (b), while incurring a cost (d) for compromising moral values or failing to perform their duties effectively. Thus, in equilibrium, the agent will choose to act dishonestly or inefficiently only if the expected costs (i.e., the wage loss w - v multiplied by the probability p of being caught) are lower than the expected benefits (i.e., the bribe or gains from shirking, minus the cost of moral compromise or inefficiency penalties, multiplied by the probability of avoiding detection).

(1) $\left(w-v\right)p<\left(1-p\right)\left(b-d\right)$

The model aids the understanding of the array of factors that contribute to reducing corruption and inefficiency due to negligence or indolence. Ceteris paribus, the government can deter these behaviors by increasing bureaucrats salaries (w), thereby raising the opportunity cost of dismissal. Additionally, stricter penalties, such as hefty fines or imprisonment, can reduce the utility and income (v) the agent would gain in the market if dismissed from the public sector. Educational campaigns and efforts to foster an anti-corruption and anti-inefficiency culture can also play a critical role by instilling honesty and accountability as fundamental values, thereby increasing the moral cost (d) associated with engaging in dishonest or inefficient behavior. The model predicts that implementing more effective controls over public sector activities increases the likelihood (p) of detecting and punishing misconduct. This shifts the balance outlined in Equation 1, making corruption, negligence, and indolence less attractive to agents.

Due to the inverse correlation between controls and opportunistic behaviors, the Brazilian federal constitution of 1988 established a public expenditure control system for the Federal, State, and Municipal levels, categorized into “internal control” and “external control” (Nóbrega, 2011). Internal control refers to the policies and procedures implemented by an entity to ensure the proper execution of its own matters, preventing misuse, deviations, and wastage (Ejoh & Ejom, 2014). The Comptroller General of the Union (CGU), an entity affiliated with the Presidency of the Republic, oversees internal control within the federal executive bodies, federal public programs, and the resources and management transferred from the Union to municipalities (Oliveira and Mendes, 2014). As dictated by Federal Law 13.341/16, the CGU is responsible for assessing the legality and evaluating the effectiveness and efficiency of budgetary and asset management in the bodies and entities of the Public Administration. Despite being a cornerstone of the Brazilian public expenditure control system, internal control suffers from notable shortcomings. Given the vast expanse of Brazil, it becomes impracticable for the Comptroller General of the Union to cater to all demands. Consequently, the CGU resorts to a randomized lottery procedure to select representative samples of municipalities from each region of Brazil for auditing purposes (Campos et al., 2018).

At the state and municipal levels, internal controls within the local executive are equally concerning. As highlighted by Nóbrega (2011), in numerous states, internal control, which should be an integral part of the government’s core functions, often manifests as a mere agency linked to the Secretary of Finance without an independent staff. Similarly, in municipalities, particularly in smaller and economically disadvantaged ones, the subpar quality of the bureaucracy and susceptibility to the influence of local elites present significant barriers to establishing effective controls. As Nóbrega (2011) states, “In small municipalities, control does not appear to be a value, and the mayor demonstrates little to no interest in its implementation” (p. 61).

External control encompasses the legislative branch’s authority to oversee the executive branch’s expenditure. Upholding the system of checks and balances essential to democracy, Article 49 of the 1988 Brazilian Federal Constitution confers upon the national congress the power to “inspect and control, directly, or through any of its Houses, the acts of the Executive Branch.” This responsibility, entrusted to the legislators, is commonly executed not by senators, deputies, and councilors but by the Federal and State audit courts acting on their behalf. At the municipal level, the TCEs (State Audit Courts) scrutinize expenditures financed by local tax resources and state transfers, while the TCU (Federal Audit Court) monitors municipal spending of Federal funds allocated by the Union to administer federal social programs at the local level.

However, regarding the TCEs, compelling evidence suggests that these institutions have not fulfilled their role comprehensively and transparently. An independent evaluation conducted by the “Fundação Getúlio Vargas – RJ” university in collaboration with the Brazilian Ministry of Justice revealed that the TCEs fail to meet the minimum standards set forth by the Access to Information Law (LAI), both in terms of active disclosure and responsiveness to information requests (Oliveira & Rodrigues, 2017). Furthermore, the appointment of ministers and counselors within both the TCU and the TCEs is often influenced by political considerations from the legislative and executive branches rather than a meticulous assessment of professional competence and academic merit (France, 2019).The pervasive practice of unethical patronage, as highlighted by Sakai and Paiva (2016), has resulted in the politicization of the audit courts, with approximately 80 percent of ministers having previously held elected or high-ranking positions in public administration, over 20 percent being defendants or having faced convictions, and more than 30 percent having familial ties to politicians (a clear manifestation of nepotism). The lack of transparency and politicization significantly impede the ability of the Audit Courts to effectively carry out their inspection duties (Nóbrega, 2011).

In this particular context, the social control of public spending can serve as a means to alleviate the chronic corruption and inefficiency prevailing within the Brazilian public sector. In situations where internal and external controls face limitations in their inspection capacity due to resource constraints, legal jurisdiction boundaries of the CGU, or inefficiencies within the audit courts, civil society emerges as a valuable resource to enhance the “accountability” of public administration. In a vast country like Brazil, with 26 states, a Federal District, and over 5,500 municipalities, civil society groups can play a crucial role in ensuring the proper implementation of local public policies and initiatives by actively monitoring subnational governments and exposing their shortcomings (Rich, 2013).

While social control holds the potential to combat local corruption and enhance public management efficiency and accountability, it should not be viewed as a panacea for all challenges. Research conducted by Olken (2007) in the Indonesian context revealed the limited effectiveness of social control, indicating that increased citizen monitoring did not lead to a significant reduction in public spending. This was primarily attributed to the co-optation of responsible citizens by local elites. In a case study on the Social Observatory of Itajaí (SP), Schommer and Moraes (2010) highlighted that despite the institution’s claim of technical analyses, the selection and disclosure of information for transparency purposes were subject to power dynamics, determining what, when, how, and by whom information was shared, and for whose benefit. While the social control of public spending may serve as a means to mitigate chronic corruption and public sector inefficiencies in Brazil, it is important to recognize that its effectiveness may vary between municipalities.

Brazil has two prominent examples in the realm of public sector control through social observatories, namely the OSB network and the Observatório Social de Maringá. The Observatory of Maringá, as the first of its kind in Brazil, has played a pivotal role in shaping the creation of the OSB network and inspiring numerous independent observatories to adopt its guidelines and adapt them to their specific needs. Both the Maringá Observatory and the OSB network employ similar methodologies for monitoring the municipal public sector, focusing on bid inspections and fostering a culture of transparency and accountability in collaboration with civil society and local public entities (Schommer et al., 2012).

Regarding bid monitoring, the president of the OSB unit in Brasília, Antônio de Barros, outlines the OSB network’s approach as a two-step process. Initially, the OSB unit ensures that the procurement aligns with the municipality’s price, quality, and quantity requirements. Subsequently, the observatory oversees various aspects such as supplier selection, delivery, payment, and even product distribution (Controladoria-Geral da União, 2016, p. 3). On the other hand, in an interview with the journal of the Brazilian “National Council of Justice,” Fábia Sacco, the president of the Social Observatory of Maringá, provides insight into their method of bid monitoring.

The first phase analyses the bid notice and, when necessary, asks the public authorities to challenge or amend the clauses of the bidding. After concluding that the public notice is transparent, it is disclosed to as many companies as possible. The second phase focuses on the bidding process, the prices, quantities, and quality of the products and services purchased. The third phase monitors the delivery of products or services and verifies whether it complies with the bidding specifications. It also evaluates inventory control and effective consumption. (Fernandes, 2015, p. 1)

In terms of fostering a culture of transparency and accountability, the OSB places significant emphasis on the value of transparency as a fundamental component of social control. It acknowledges that many municipalities comply with legislation by making fiscal information available on their transparency websites. However, the technical nature of this data often presents challenges for the average citizen to grasp. To address this, the OSB offers citizen qualification courses and undertakes awareness-raising initiatives highlighting the importance of monitoring public spending. They also diligently monitor municipal transparency websites to ensure adherence to legislative requirements. Similarly, in Maringá, there is a strong commitment to raising public awareness and promoting fiscal education. Recognizing that these topics can be less engaging, they employ creative resources such as plays, informal debates, and writing contests. These interactive activities aim to captivate participants and underscore the social significance of taxes while emphasizing the role of citizen involvement in monitoring public spending (Secretaria da Educação de Maringá, 2017).

DATA

Our research used an extensive dataset from the Brazilian National Treasury Secretariat from 2002 to 2017 to assess the impact of observatories on municipal expenditures. This dataset facilitated the construction of a panel encompassing 5,532 municipalities across 16 years. Addressing computational limitations due to the extensive data volume, we grouped municipalities into “Immediate Regions,” which are clusters of interconnected municipalities linked by economic dependencies. We then focused our analysis exclusively on municipalities belonging to at least one Immediate Region. This refinement led to a reduced sample size of 1,463 municipalities, ensuring a more manageable and analytically robust dataset for our research.

In our analysis, we broke down the overarching “Total expenditures” category into two components: “Current” and “Capital” expenditures, as elaborated in Table 1. The “Current” expenditures were subdivided into “Personnel” expenditures, encompassing salaries and labor-related charges for municipal staff; “Interest” expenditures, pertaining to debt payments; and a diverse range of “Other current expenditures.” This latter category further encompassed subcategories such as “Consumption of Materials” (items like uniforms, medical supplies, and fuel), “Freely Distributed Materials” (including textbooks and food provisions for public schools), “Services Outsourced to Individuals or Legal Entities,” and “Per Diem,” allowances for public officials” work-related travel. Additionally, the “Capital” expenditures were divided into “Amortization,” relating to the payment or refinancing of municipal debts, and “Investments” in infrastructure projects. The “Investments” were further detailed into “Equipment and Permanent Materials” for long-term acquisitions and “Construction and Installations,” covering a range of infrastructural developments. To ensure comparability, all financial values were adjusted for annual inflation and presented on a per capita basis, using population estimates from the Brazilian Institute of Geography and Statistics (IBGE).

Table 1
Municipal Expenditures

EXPENSE		GROUP	SUBGROUP
TOTAL	Current	Personnel	-
		Interest	-
		Other	Consumption of Materials
			Freely Distributed Materials
			Services Outsourced to Individuals
			Services Outsourced to Legal Entities
			Per diems
	Capital	Amortization	-
		Investment	Equipment and Permanent Material
			Construction and Installations

• Source: Seixas & Banhos, 2021.

The list of municipalities housing established OSB units, along with their respective dates of establishment, was obtained from the secretariat of the Social Observatory of Brazil. We submitted a formal request via phone and email to obtain this information. To identify independent observatories, we searched the “Rede Sim” internet portal of the Federal Revenue Service. By using the search function with the term “Social Observatory,” we successfully identified all institutions currently operating or previously operating under the name “Social Observatory” in Brazil. The Rede Sim portal also furnished registration data for these institutions, including the issuance date of their CNPJ numbers (the identification numbers for legal entities in Brazil), which we deemed as the foundation dates for the independent social observatories. In total, we identified 163 observatories, comprising 136 OSB units and 27 independent observatories, scattered across 17 states.

To avoid selection bias, we excluded data from all state capitals. This decision was made because the treatment group encompassed the most significant capitals of Brazil in terms of population and GDP, including São Paulo, Rio de Janeiro, Belo Horizonte, Brasília, Recife, and Curitiba. In these cities, the volume of expenditures, the complexity of fiscal processes, and the oversight challenges are substantially higher than those in smaller capitals, which were part of the control group. Therefore, this qualitative difference could compromise the use of the control group as a valid counterfactual. Following the exclusion of the capitals and the reduction of the sample to municipalities within the “Immediate Regions,” our database consisted of 122 treated municipalities (106 monitored by the OSB network observatories and 16 by independent observatories) spread across 11 states.

In addition to these variables, the estimated models also incorporate controls for the mayor’s political affiliation during their term in office. The period from 2002 to 2017 encompasses five terms: 2001-2004, 2005-2008, 2009-2012, 2013-2016, and 2017-2020. Information on incumbent mayors and their political affiliation was obtained from the municipal election results available on the websites of the Superior Electoral Court (TSE) and the Regional Electoral Courts (TREs).

EMPIRICAL STRATEGY

Estimating the causal impact of social observatories on municipal expenditures requires special attention due to the non-random nature of their implementation in municipalities. The OSB network units and independent observatories are established based on citizens’ interest and initiative in promoting social control of public spending. As a result, municipalities’ unobservable characteristics can influence both the decision to establish an observatory and the quality of fiscal management. In a municipality, if the population exhibits political and economic preferences that favor stricter public administration, it can drive the emergence of a collective of citizens with a vested interest in establishing a social observatory and electing more upright and capable politicians. Therefore, this unobservable cultural characteristic can introduce a downward bias in average expenditures, as the greater fiscal management efficiency observed in municipalities with social observatories may not be solely attributed to oversight activities but also to a tendency for greater fiscal austerity by elected representatives. Furthermore, various local cultural elements and specific temporal factors can introduce confounding effects, including unit and time-specific fixed effects, which can bias the estimates if not adequately considered. Therefore, it is imperative to employ a rigorous methodology that effectively neutralizes these effects (Angrist & Pischke, 2015; Imbens & Wooldridge, 2009). In this study, we adopt the difference-in-differences (DD) approach to isolate the intervention’s effect by eliminating time-fixed effects and temporal trends (Cunningham, 2021).

In its standard formulation, the difference-in-differences approach involves two groups, two time periods, and two treatment states. The treatment group, denoted as G = 1, is compared to the control group, denoted as G = 0. The post-intervention period is represented by T = 1, while the pre-intervention period is represented by T = 0. The states where the treatment is applied are labeled as (1), while the untreated states are labeled as (0). In this framework, the intervention effect, known as the “Average Treatment on the Treated” (ATT), is captured by equation 2, which compares the average outcome of the treatment group in the treated state during the post-intervention period (the first term of the subtraction) with its counterfactual (i.e., the average outcome that the treatment group would have had in the absence of treatment).

(2) $ATT=E\left[Y_{i,1}\left(1\right)|G_i=1\right]-E\left[Y_{i,1}\left(0\right)|G_i=1\right]$

As it does not belong to the realm of empirical reality, the counterfactual is naturally unknown and not calculable. However, assuming the hypothesis of parallel trends, which, as shown in equation 3, presumes that in the absence of treatment, the temporal evolution of the results of the treatment and control groups would be the same, it becomes possible to estimate the ATT.

(3) $E\left[Y_1\left(0\right)-Y_0\left(0\right)|G=1\right]=E\left[Y_1\left(0\right)-Y_0\left(0\right)|G=0\right]$

When the pre-intervention trends of the treatment and control groups are very similar, as if they result from the same set of influences, it is possible to assume that the averages would evolve parallel in the intervention’s absence (Cunningham, 2021). Thus, when the hypothesis of parallel trends is verified, the double subtraction strategy of the difference-in-differences approach (see equation 4) allows the identification of the intervention effect, isolating it from time and unit fixed effects. The treatment effect is identified in a two-step process. The first calculates the difference between the pre-and post-intervention periods of the empirical mean of the outcome variable, both for the treatment group and the control group. This first pair of subtractions eliminates any effects that remain fixed in time. The second step calculates the difference in difference, isolating the treatment from its counterfactual. Thus, isolating the treated group results evolution from what would happen had the treatment not occurred, identifying the treatment’s average effect on the treated (Callaway & Sant’Anna, 2020).

(4) $\widehat{ATT}=E_n\left[Y_1-Y_0|G_i=1\right]-E_n\left[Y_1-Y_0|G_i=0\right]$

Equation 4, where the ATT is calculated by hand, is algebraically convertible into the DD regression equation (equation 5), in which represents the expected value of the per capita municipal expenditures over time, ε_it is the stochastic error term, POST_t and TREAT_i are dummies for treatment period and status, and the coefficient δ represents the ATT, i.e., the average difference between treated and untreated, in the post-intervention period (Sant’Anna & Callaway, 2020).

(5) $y_{it}={\gamma }_{t}POS{T}_t+{\gamma }_{i}TREA{T}_i+\delta POS{T}_t\times TREA{T}_i+{\epsilon }_{it}$

However, as the observatories of the different municipalities are implemented at different moments in time, subject to differential treatment time, we are forced to move away from the 2×2 approach, with two groups (treatment and control) and two periods (pre and post), adopting the difference-in-differences Two Way Fixed Effects approach, which uses dummies for individuals (γ_i) and time periods (λ_t) as fixed effects, in addition to the treatment dummies (D_it) (Goodman-Bacon, 2021).

(6) $y_{it}=\alpha +{\gamma }_i+{\lambda }_t+{\delta }^{DD}{D}_{it}+u_{it}$

In addition to the traditional structure of the TWFE model, our models incorporate a specific linear trend for each municipality, along with a vector of control variables (X_it), as indicated in equation 7.

(7) $y_{it}=\alpha +{\gamma }_i+{\lambda }_t+\delta O{S}_{it}+\theta X_{it}+{\displaystyle {\sum }_{i=1}^n{\beta }_i\left(Municipalit{y}_i\times t\right)}+u_{it}$

In our models, the coefficient δ serves as a measure of the effect of the observatory (OS_it) on the dependent variable (municipal expenditure). Including fixed effects and linear trends makes it possible to better control for the effects of unobservable variables correlated with the observatory’s presence and to the dependent variables, avoiding the omitted variables bias. In the vector Xit, we include control variables that shift the demand for public services, and that may be correlated to observatories presence, such as: per capita municipal GDP and the added value of the agricultural, industrial, and service sectors. We further incorporate a dummy variable for the mayor’s party to control for any effects emerging from the ideological-party orientation.

As previously mentioned, our analysis involves a two-fold approach. Besides the initial examination, we conducted a secondary analysis, applying a population threshold to the data. This involved focusing exclusively on municipalities with fewer than 50,000 inhabitants to determine whether observatories exert a particularly pronounced effect in smaller towns.

In both analyses, ensuring the dependent variable trends were parallel before the intervention is a crucial prerequisite for accurately estimating the impact of the observatories. While we cannot directly test the assumption of parallel trends, we can infer its plausibility through event study methodologies. An event study graphically represents the coefficients’ point estimates and confidence intervals in the Two-Way Fixed Effects (TWFE) model for both pre and post-intervention periods, as detailed by Cunningham (2021). These studies are vital in difference-in-differences analyses; the point estimates illustrate the average differences between treatment and control groups at each time point. If the pre-intervention point estimates are statistically non-significant, with confidence intervals intersecting zero, it implies no substantial difference over time between the groups, supporting the parallel trends assumption. On the other hand, significant point estimates in the pre-intervention period indicate non-parallel trends, as discussed by Huntington-Klein and McDermott (2021).

Sun and Abraham (2021) demonstrated that in contexts where there is a difference in treatment timing between units, the use of the TWFE/event study specification may cause contamination of the estimated coefficients for one or more “leads” and “lags” by the treatment effects of other periods. Thus, they propose a new estimator that is free from contamination. The event studies we report show (superimposed on the same graph) the TWFE/event study version (point estimates represented by circles) and the Sun and Abraham event study estimator (triangles). Out of the fifteen per capita expenditures analyzed in our models, the parallel trends hypothesis is refuted for only two variables: “Services Outsourced to Individuals” and “Amortization” (shown in Figures 1 and 2). Therefore, the estimates for these expenditures become suspicious of bias and are not considered in subsequent analyses. Due to space constraints, the event studies associated with the remaining per capita expenditures analyzed in our models have been omitted.

Figure 1
Event Study – Expenditures with Services Outsourced to Individuals

Figure 2
Event Study – Expenditures with Amortization

ANALYSIS OF RESULTS BY STATED HYPOTHESIS

The effectiveness of social observatories

The first hypothesis posits that social observatories play an effective role in reducing per capita expenditures in the Brazilian context. This implies that the estimated coefficients of the difference-in-differences analysis will be negative and statistically significant. Tables 2a, 2b, and 2c present the results of our model (equation 7) for fifteen different expense items. As anticipated, nine of these items exhibit negative and statistically significant coefficients at a 5% significance level, providing strong support for the effectiveness of the observatories. Conversely, one item, “Services Outsourced to Individuals,” shows a positive and statistically significant coefficient, challenging the hypothesis. However, as shown in Figure 1, there is suspicion of non-parallelism of trends in this specific expense. Thus, the evidence overwhelmingly supports the hypothesis that Brazilian social observatories effectively control municipal public spending.

Table 2a
Impact of Observatories on Per Capita Expenditures (BRL/Inhabitants)

	TOTAL EXPENSE	CURRENT EXPENSE	INTEREST	PERSONNEL	OTHER CURRENT EXP.
Observatory	−96,208**	−59,625*	−0,939	−78,882***	20,196
	(38,682)	(32,257)	(1,122)	(19,930)	(21,315)
N	23.011	23.011	23.011	23.011	23.011
R2	0,137	0,152	0,053	0,176	0,110

• Note: *p < ,1; **p < ,05; ***p < ,01

Table 2b
Impact of Observatories on Per Capita Expenditures (BRL/Inhabitants)

	CONSUMPTION OF MATERIALS	FREELY DISTRIBUTED MATERIALS	SERVICES OUTSORCED TO INDIVIDUALS	SERVICES OUTSORCED TO LEGAL ENTITIES	PER DIEMS
Observatory	−13,096**	−4,688**	15,086***	9,113	−2,038***
	(6,631)	(1,989)	(2,676)	(17,347)	(0,729)
N	23.011	23.011	23.011	23.011	23.011
R2	0,052	0,114	0,074	0,083	0,050

• Note: *p < ,1; **p < ,05; ***p < ,01

Table 2c
Impact of Observatories on Per Capita Expenditures (BRL/Inhabitants)

	CAPITAL EXPENDITURES	AMORTIZATION	INVESTMENT	EQUIPMENT AND PERMANENT MATERIAL	CONSTRUCTION AND INSTALLATIONS
Observatory	−36,721**	2,606	−40,049***	−22,380***	−45,962***
	(16,273)	(2,837)	(14,511)	(3,402)	(9,875)
N	23.011	23.011	23.011	23.011	23.011
R2	0,049	0,037	0,050	0,037	0,033

• Note: *p < ,1; **p < ,05; ***p < ,01

Social observatories small town greater effectiveness hypothesis

This second study focuses on municipalities with populations under 50,000. As previously discussed, these smaller towns often suffer from a pronounced lack of institutional controls. Both internal (managed by Federal and Municipal Executives) and external controls (under the Legislature, executed by TCU and TCEs) are markedly weak in these areas. Consequently, it’s reasonable to posit that introducing a new control mechanism, like a social observatory, could yield a significant marginal impact. Particularly in smaller municipalities, social observatories are presumed to be more effective in controlling public expenditures than larger Brazilian regions with established observatories. However, a potential counterpart to this hypothesis is the increased likelihood of observatory members being influenced or co-opted by local political and economic elites, possibly leading to less effective operations (Olken, 2007; Prud’homme, 1995).

At first glance, the evidence might seem ambiguous. Tables 3a, 3b, and 3c indicate that only three out of fifteen per capita expenditure categories showed significant declines postimplementation: “Current Expenditures,” “Personnel Expenditures,” and “Equipment and Permanent Material.” The effects on the remaining categories were statistically null. Yet, despite the limited range of categories with negative and significant coefficients, these impacts are notably profound. In the small municipalities, the current per capita expenditure comprises, on average, 88.4% of the total per capita expenditure. Thus, a significant reduction in this category alone robustly supports the efficacy of social observatories in enhancing municipal public expenditure efficiency. Furthermore, a statistically significant decline in per capita personnel expenditures hints at a decrease in clientelistic practices, where public employment is traded for political support (Firjan, 2017). Similarly, the reduction in spending on equipment and permanent material might indicate a decline in corruption associated with government bids and purchases, as evidenced by Tanzi (1998), which highlights the vulnerability of such expenditures to corrupt practices.

Table 3a
Impact of Observatories on Per Capita Expenditures (BRL/Inhabitants)

	TOTAL EXPENSE	CURRENT EXPENSE	INTEREST	PERSONNEL	OTHER CURRENT EXP.
Observatory	−140,742	−132,986**	1,817	−112,492***	−22,311
	(91,633)	(64,326)	(2,243)	(38,710)	(41,300)
N	19.029	19.029	19.029	19.029	19.029
R2	0,141	0,164	0,049	0,180	0,119

• Note: *p < ,1; **p < ,05; ***p < ,01

Table 3b
Impact of Observatories on Per Capita Expenditures (BRL/Inhabitants)

	CONSUMPTION OF MATERIALS	FREELY DISTRIBUTED MATERIALS	SERVICES OUTSOURCED TO INDIVIDUALS	SERVICES OUTSOURCED TO LEGAL ENTITIES	PER DIEMS
Observatory	−5,504	−3,011	18,127***	−16,871	0,651
	(14,329)	(4,600)	(6,392)	(33,582)	(2,486)
N	19.029	19.029	19.029	19.029	19.029
R2	0,057	0,126	0,080	0,091	0,066

• Note: *p < ,1; **p < ,05; ***p < ,01

Table 3c
Impact of Observatories on Per Capita Expenditures (BRL/Inhabitants)

	CAPITAL EXPENDITURES	AMORTIZATION	INVESTMENT	EQUIPMENT AND PERMANENT MATERIAL	CONSTRUCTION AND INSTALLATIONS
Observatory	−8,837	−2,512	−10,396	−25,027***	−17,954
	(39,946)	(5,460)	(32,707)	(7,788)	(15,324)
N	19.029	19.029	19.029	19.029	19.029
R2	0,049	0,049	0,049	0,031	0,035

• Note: *p < ,1; **p < ,05; ***p < ,01
• Source: Created by the authors using the “plm” and “stargazer” packages in R language.

When we compare these specific coefficients to those estimated for similar expenditures at the national level (as shown in Tables 2a, 2b, and 2c), the reductions in smaller municipalities are notably more marked. Post-treatment, the average declines in “Current Expenditures” (BRL-132.98), “Personnel” (BRL -112.49), and “Equipment and Permanent Material” (BRL −25.02) in these smaller towns are 123%, 42.6%, and 11.8% more pronounced, respectively, than those observed nationally. These findings bolster the hypothesis, suggesting that social observatories are more impactful in smaller municipalities than in a broader context that includes larger towns.

FINAL REMARKS

Corruption and administrative inefficiencies in Brazil’s municipal public sector, often overlooked by the press, cause significant harm, particularly to the most vulnerable groups in economically and socially underdeveloped cities. The limited authority and resources of the General Comptroller of the Union, combined with inefficiencies in audit courts and a general lack of oversight by council members, create an environment where corruption, negligence, indolence, and insufficient professional capacity can thrive.

Despite challenges such as recruiting and retaining dedicated volunteers, effectively disseminating financial literacy to citizens, and, most importantly, resisting coercion and co-optation attempts by corrupt officials and local elites, social observatories have demonstrated transformative potential in fostering more transparent and accountable governance.

In our initial investigation, we assessed the impact of social observatories on municipal public spending in Brazil. Analyzing fifteen per capita expenditure categories using a difference-in-differences approach, we found significant reductions in approximately 67%, providing robust evidence of the observatories’ effectiveness.

A particular dilemma arises when evaluating the effectiveness of social observatories in smaller, less populated municipalities. Theoretically, increased monitoring — given the weaknesses in institutional control systems — should lead to notable reductions in per capita spending. Conversely, the close ties between local bureaucrats and politicians increase the risk of co-optation of observatory representatives, potentially undermining their effectiveness. Our research sheds light on which outcomes prevail in the Brazilian context.

The oversight conducted by social observatories resulted in statistically significant decreases (at the 5% level) in 20% of the fifteen analyzed per capita expenditure categories, particularly in Current, Personnel, and Investments in Permanent Material and Equipment expenditures. These categories are especially relevant, as they represent nearly 90% of typical spending in small municipalities and are associated with reducing clientelism and improving the efficiency of investment project funds. Importantly, as Tanzi and Davoodi (1998) note, investment spending is often closely associated with corruption.

Interestingly, our findings reveal that these reductions are more pronounced in smaller municipalities, supporting the hypothesis that social observatories are especially effective in towns with populations of 50,000 inhabitants or fewer. In a country like Brazil, where 90% of municipalities fall into this size category, social observatories significantly improve governance.

Although our study provides valuable insights, it has its limitations. By focusing exclusively on expenditures, the study does not fully capture the broader benefits that oversight by social observatories can promote. Future research should explore other dimensions of public administration, such as improvements in access to public goods and services and the quality of service delivery.

In conclusion, our findings suggest that social observatories, particularly in smaller municipalities, can significantly enhance public spending efficiency by mitigating corruption and administrative inefficiencies. This study contributes to the growing body of evidence on the effectiveness of citizen-led oversight initiatives in promoting good governance. We hope our findings resonate with organized civil society institutions, inspiring collaboration in the social control of public expenditure and improving the lives of those affected by corruption and inefficiencies in the public sector.

Avaliadores/as

Evaluated through a double-anonymized peer review.

Associate editor: Fabiano Maury Raupp The reviewers did not authorize disclosure of their identity and peer review report.

• FUNDING
  This study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior – Brasil (CAPES) – Finance Code 001.

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Publication Dates

• Publication in this collection
  20 Jan 2025
• Date of issue
  2025

History

• Received
  23 Jan 2024
• Accepted
  06 Nov 2024