Decentralization and Corruption: New Cross-Country Evidence

Abstract

Introduction During the past two decades a silent revolution has swept the globe and a large number of industrial and developing countries have pursued decentralization reforms [see Boadway and Shah (2009) and Shah (1998) for motivations for such a change]. The reform agenda has been pursued through varying combinations of political, administrative, and fiscal decentralization initiatives. These reforms have proven to be controversial. This is because decentralization is perceived as a solution to both problemsösuch as a dysfunctional public sector, lack of voice, and exit öas well as a source of new problems ösuch as capture by the local elite, aggravation of macroeconomic management due to lack of fiscal discipline, and perverse fiscal behavior by subnational units. The impact of decentralization on corruption (defined as the abuse of public office for private gain or exercise of official powers against public interest) is an area of growing interest inviting much controversy and debate. However, the empirical literature on this subject is scant, and much of the discussion is grounded in selective anecdotal evidence at the microlevel or macrolevel. In this paper we use new crosscountry data on decentralization and corruption to synthesize and strengthen the empirical foundations of this debate by trying to isolate the role of decentralized decision making in creating an enabling environment for an accountable public sector. With this paper we make several contributions to the existing literature. The existing literature uses subnational governance as an indicator of decentralization. This is not appropriate in many situations as provinces and states in federal countries are typically larger than nation-states in many unitary countries. Therefore, simply shifting responsibilities to an intermediate tier may not represent strengthened local decision making. This paper overcomes this problem by focusing on decentralized

Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?

“…Fisman and Gatti (2002) obtain a strong and significant effect of government expenditure decentralization on reducing corruption. Along similar lines, Ivanyna and Shah (2010), focusing on the local government level for a large sample of countries, find that local fiscal decentralization has a significant negative effect on the incidence of corruption. This would accord with the prediction of theoretical models such as the ones by Shleifer and Vishny (1993) and Kotsogiannis and Schwager (2006) for which greater decentralization limits corruption by raising competition among subnational governments.…”

A Comparative View on the Tax Performance of Developing Countries: Regional Patterns, Non-Tax Revenue and Governance

“…If their presumed GG tax revenues were comparable to the GG expenditures reported by Ivanyna and Shah (2010), local government in an average 'CG only' country would collect 9.7 per cent * 0.57 = 5.5 per cent of GG tax revenues. This means that, by using CG data, we are underestimating the actual GG tax revenue for an average 'CG only' country by 16.3 per cent * 0.055 = 0.9 per cent.…”

“…• Data from Ivanyna and Shah (2010) reveal that, in 2005, the average subnational government (SNG) expenditures of countries reporting GG data was 23.7 per cent of total expenditures (comparable to total revenue). For countries that only report CG data, the figure is 9.7 per cent, and for countries whose data we derive from ASDB or ColTax, it is 9.6 per cent.…”

“…Ivanyna and Shah (2010) have estimated the vertical gap -the difference between a country's SNG expenditures and own SNG revenues (excluding intergovernmental transfers). According to these estimates, SNG in countries which report GG finance 56 per cent of their expenditures with own revenues.…”

The Political and Economic Consequences of Decentralization

“…All in all, this negative impact of political decentralization on government quality disappears when controlling for the extent of experience with statehood or public administration. A more positive perspective on the effects of decentralization on corruption is provided in the paper by Ivanyna and Shah (2011). Relying on data from 182 countries, the authors build a new composite index of decentralization, capturing political, fiscal, and administrative autonomy of local governments, and show that not only fiscal decentralization but also political decentralization in the form of`voice' (or political accountability) have a significant negative effect on reducing corruption`exit' options, as measured, for example, by competition among jurisdictions, are less effective in reducing corruption.…”