This paper looks at the relationship between fiscal and political decentralization and the evolution of regional inequalities in a panel of 26 countries -19 developed and 7 developing -for the period between 1990 and 2006. Using an instrumental variables method, it finds that whereas for the whole sample decentralization is completely dissociated for the evolution of regional disparities, the results are highly contingent on the level of development, the existing level of territorial inequalities, and the fiscal redistributive capacity of the countries in the sample. Decentralization in high income countries has, if anything, been associated with a reduction of regional inequality. In low and medium income countries, fiscal decentralization has been associated with a significant rise in regional disparities, which the positive effects of political decentralization have been unable to compensate. Policy preferences by subnational governments for expenditure in economic affairs, education, and social protection have contributed to this trend.JEL Classifications: H11, H71, R11

The global drive towards decentralization has been increasingly justified on the basis that greater transfers of resources to subnational governments are expected to deliver greater efficiency in the provision of public goods and services and greater economic growth. This article examines whether this is the case, by analysing the relationship between decentralization and economic growth in 21 Organization for Economic Cooperation and Development countries during the period between 1990 and 2005 and controlling not only for fiscal decentralization, but also for political and administrative decentralization. The results point towards a negative and significant association between fiscal decentralization and economic growth in the sample countries, a relationship which is robust to the inclusion of a series of control variables and to differences in expenditure preferences by subnational governments. The impact of political and administrative decentralization on economic growth is weaker and sensitive to the definition and measurement of political decentralization.

IntroductionOver the last three decades, interest in fiscal decentralization has grown worldwide (World Bank, 2000). Evidence of this interest is to be seen in the large proportion of developing countries that have embarked on some form of devolution of fiscal responsibilities from central to regional and local governments (Dillinger, 1994), while many developed nations are reviving the debate on fiscal decentralization (Oates, 1999). Thus, for example, Belgium became a federal state in 1993, and Italy is currently moving in that direction. Likewise, in Spain and Portugal fiscal decentralization is an ongoing process. Meanwhile, the United States Congress has been contemplating over the last several years the elimination of numerous federal programmes, replacing them with block grants to subnational governments, and ending the so-called unfunded federal mandates (Xie et al, 1999).This global trend is closely related to the belief that fiscal decentralization contributes to economic development (Oates, 1993), and, eventually, to the reduction of regional disparities (Qian and Weingast, 1997). This suggests that the devolution of fiscal power to subnational governments might generate a more balanced distribution of resources across space. Before accepting this argument, however, it should be noted that fiscal decentralization could have spatially regressive effects, as a result of the weakening of the equalization role of central government (Prud'homme, 1995). In light of these contrasting theoretical positions, detailed examination of the available empirical evidence on the relationship between fiscal decentralization and regional inequality becomes indispensable. Despite its potential importance, however, surprisingly little attention has been paid to this issue in the literature. Indeed, so far only Shankar and Shah (2003), Gil et al (2004) and Rodr|¨guez-Pose and Gill (2004) have investigated this issue with cross-country data. (1) The results of these studies are, however, inconclusive and present a mixed picture of the effect of fiscal decentralization on regional disparities.

This paper examines the relationship between quality of government and regional resilience in the European Union during the Great Recession. The results show that the quality of government is an important factor when shaping the regional reaction to the crisis. Our estimates reveal that higher quality of government is associated with greater regional resilience over the Great Recession. This is partly due to the role played in this context by spatial spillovers induced by the quality of government in neighbouring regions. The observed link between governance and regional resilience is robust to the inclusion in the analysis of different explanatory variables that may affect both government quality and regional resilience. Likewise, our findings do not depend on the specific dimension of governance considered, the estimation method or the econometric specification employed to capture the nature of spatial spillovers.

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