A multicountry analysis of local government financial vulnerability during the 2020 pandemic considering systemic factors

How the COVID-19 Pandemic Tested the Financial Resilience of Local Governments

The COVID-19 pandemic dramatically impacted both society and the economy, disrupting lives and livelihoods worldwide. Among the entities that felt this disruption acutely were local governments. These governments, tasked with delivering essential services and fostering local development, faced unique challenges during the crisis. The pandemic's financial impact on local governments varied significantly across different regions, even when the adopted measures were similar.

Understanding Financial Vulnerability During a Crisis

This study delves into how local governments in various countries managed their finances during the first wave of the COVID-19 pandemic. It seeks to understand what preexisting conditions made some local governments more financially vulnerable than others and what measures were effective in mitigating this vulnerability.

A Multicountry Perspective

Most existing studies on financial vulnerability due to crises tend to focus on single countries, looking at specific issues or responses. This research, however, takes a broader approach. By examining seven countries with distinct local government administrative systems, varying levels of financial autonomy, and different cultural contexts, the study provides a comprehensive view of the pandemic's impact on local finances.

Key Findings

1. Preexisting conditions matter: Local governments with higher initial levels of financial vulnerability faced greater challenges. This finding underscores the importance of understanding “path dependency”, i.e. how past financial health and decisions shape current resilience.
2. Systemic factors are crucial: Beyond the immediate, crisis-induced changes, systemic factors like the overall financial structure and administrative setup of local governments played a significant role in their ability to respond effectively.
3. Cross-country comparisons: The study’s multicountry approach revealed that local governments in different countries responded differently based on their administrative and financial frameworks. For instance, those with greater financial autonomy were generally better equipped to manage the crisis.
4. Cultural influences: National culture also influenced the effectiveness of local government responses. Different cultural attitudes towards governance and crisis management shaped how quickly and efficiently local governments could act.

Implications for Policymakers and Financial Analysts

The findings of this study are crucial for policymakers aiming to enhance the financial resilience of local governments against future shocks. By learning from the experiences of 2020, policymakers can develop strategies that account for both contingent and systemic factors, ensuring that local governments are better prepared for any future crises. Financial analysts may benefit from this contribution by gaining a deeper understanding of the key dimensions necessary to assess systemic financial risk in local governments across different countries.

Conclusion

The COVID-19 pandemic presented unprecedented challenges to local governments worldwide. This study highlights the importance of considering both the immediate effects and the broader systemic context in which local governments operate. By doing so, it offers valuable insights for building more resilient local government financial systems, capable of withstanding future global crises.

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Authors at the Department of Management

EMANUELE PADOVANI – professor, public management & accounting

Academic disciplines: Business Administration and Accounting Studies

Teaching areas: Public management & accounting, Public financial management, Management Accounting

Research fields: Public management & accounting, Public financial management, Cost management in healthcare

Emanuele has extensive expertise in public management & accounting, public financial management, and cost management in healthcare. He has authored nearly a hundred publications in these areas and has served as a leading expert and advisor on public management & accounting, financial management, and risk analysis for numerous public and private institutions across Europe and internationally.