Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries

Abstract

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.

Revisiting the link between growth and federalism: A Bayesian model averaging approach

“…On the other hand decentralized political decisions create inter-jurisdictional spillovers (Musgrave, 1959, Oates, 1972 which negatively affect growth by distorting local tax and fiscal incentives. Less conventional arguments that could go in both directions range from economies of scale (Prud'homme, 1995, Rodriguez-Pose andEzcurra, 2010) and macroeconomic stability (Ter-Minassian, 1997, Fukasaku and de Mello, 1999, Martinez-Vazquez and McNab, 2006 to government accountability (Martinez-Vazquez and McNab, 2003) and institutional quality (Ahmad and Tanzi, 2002).…”

Decentralization, Social Capital and Regional Convergence

“…In this respect, the model we develop in this paper can be relevant also for the debate about the growth effects of decentralization and fiscal federalism. Although many authors underlined the positive effects of empowering local institutions (Tiebout, 1956, Musgrave, 1959, Oates, 1972, some recent empirical contributions are less optimistic (for instance, Davvodi and Zou, 1998;Feld, Zimmermann and Döring, 2004;Rodriguez-Pose and Ezcurra, 2011). Our model provides a possible reason for these empirical findings, in that it suggests an important additional conditional variable: social capital.…”

“…While additional research is clearly needed here, 36 one interesting possibility is that by adequately controlling for social capital, some light might be shed to explain the ambiguous empirical results recently reported on the effects of fiscal federalism on cross-country growth rates (Feld, Zimmermann and Döring, 2004;Rodriguez-Pose and Ezcurra, 2011).…”

Fiscal Decentralization and Economic Growth in Selected European Countries

“…Some researches find a positive relationship (Akai, Sakata 2002;Akai et al 2004;Thiessen 2003;Iimi 2005;Buser 2011;Szarowska 2014), whereas other show that FD and economic growth are either negatively correlated (Davoodi, Zou 1998;Rodríguez-Pose, Ezcurra 2011;Baskaran, Feld 2013). There is a group of researchers who have found relation between FD and economic growth, but it is no statistically significant (Davoodi, Zou 1998;Thornton 2007;Asatryan, Feld 2015).…”