condition of decentralization, because in order for local governments to be responsive, they require sufficient resources and autonomy. Without this, engagement may lead to citizens' frustration and disappointment (WBI 2003 and Heymans and Mussa 2004). From a rational perspective, this is self-evident. If there are no resources to distribute, people will be unwilling to bear the cost of engagement.

According to this rationale, budget size is positively associated with the level of citizens’ empowerment. Several studies have already found evidence of this association, but they have not yet found the threshold at which budget size becomes associated with citizen empowerment. Souza (2001), for example, found that an increase in local revenues was one of the main reasons why two Brazilian cities adopted participatory budgeting. The cities of Porto Alegre and Belo Horizonte started participatory budgeting during the 1990s and experienced the two highest average annual rates of increase in per capita total revenue from 1989 to 1994 (Box 4). Some similar, but contrasting, cases are those of Ethiopia, India, Mongolia and Mexico, where lack of resources is associated with low levels of empowerment. A number of World Bank studies (WB 2001 and Heymans and Mussa 2004), found that local budgets in Ethiopia are too small to stimulate citizen participation. Similarly, another World Bank study in India (2004a) found that the goals of better accountability and citizen engagement are unmet because local budgets are too small to attract the attention of the local population. A report on fiscal decentralization in Mongolia (Center of Mongol Management 2005) also found that the fact that _soum_ economies are weak and their revenues limited has a preventive impact on encouraging participation. Finally, Fox and Aranda (1996) found that in the State of Oaxaca in Mexico the very small budgets of rural and indigenous communities prevented them from participating and making community contributions.

# **_Box 4. Budget size and local participation: Participatory Budget in two Brazilian cities_**

Between the 1970s and the 1980s all Brazilian cities, especially large ones, were in financial disarray. The 1988 Constitution introduced a series of reforms which allowed many municipalities to improve their financial situation, particularly of state capitals. These reforms and the increase in local revenues had a direct impact on the widespread adoption of participatory budgeting (PB) in Brazilian cities.

Participatory budgeting began in Porto Alegre (PA) in 1989 and in Belo Horizonte (BH) in 1993. Jayme Jr. and Marquetti (1998) show that –between 1989 and 1994– PA rose from 10<sup>th</sup> in the ranking of state capitals’ per capita total revenue to 5th. More strikingly, BH jumped from 22<sup>nd</sup> to 4<sup>th</sup> over the same period. According to the authors, the average annual rate of increase in per capita total revenue between 1989 and 1994 reached 24.45%; in BH, (the first in the ranking) and 13.54% in PA, (the second in the ranking).

BH’s performance shows that local taxpayers in several state capitals were under-taxed. It also shows that many popularly elected mayors, as opposed to appointed mayors who had governed state capitals during the military regime, opted to raise taxes in order to fulfill their commitments to their electorate. However, PA and BH have <u>better economic and social indicators than the average Brazilian city. This has allowed</u> often unpredictable, and (ii) there are substantive differences between budgets that are planned, authorized, and executed. In particular, there are often substantive gaps between the authorized and the executed budgets. This results either from unrealistic revenue forecasts or because expenditure demands are so high that local governments are forced to authorize budgets that they know in advance that they will not be able to meet. For example, a study on Kenya found that treasuries effectively operate a shadow budget to track the actual available budget, because forecasted revenues are unrealistic and cannot be collected (DFID 2002).

15