Measuring and explaining fiscal de/centralization: Empirical evidence from Ethiopia, 1995–2020

Abstract

This article provides an in‐depth analysis of fiscal decentralization in Ethiopia from 1994/95 to 2019/20, focusing on five fiscal categories: regional own‐source revenues, regional tax autonomy, regional borrowing, federal grants, and conditional grants. To measure fiscal de/centralization, the study constructs original data sets based on reports from various organizations over multiple years. The analysis results demonstrate that fiscal de/centralization varies temporally and spatially. While improved capacity is associated with enhanced own‐source revenue, the desire to improve regional fiscal management often results in fiscal centralization. Further, although Ethiopian regions have constitutional powers to determine the bases and rates of regional taxes, the central government has significant influence in such matters, often manipulating regional affairs in disregard of the constitution. The article reveals substantial variations of own‐source revenues across regions attributed to regional differences in capacity, development, location, and investment distribution. The article highlights the importance of a systematic understanding of region‐specific challenges to accurately assess the effectiveness of decentralization policies in the global South. Insights from Ethiopia are of great importance to policymakers looking to embrace fiscal decentralization in developing countries.

The political economy of fiscal transfers: The case of Ethiopia

“…This embrace of fiscal decentralisation across the global North and South states reflects its recognised potential benefits (Boex & Simatupang, 2008, p. 436). Fiscal decentralisation encompasses the devolution of revenue-raising powers, expenditure responsibilities, and borrowing authority to subnational governments (Rodden & Wibbels, 2010;Yimenu, 2023b). Crucially, it also necessitates fiscal transfers from higher to lower government tiers, as the revenue capacities of constituent units in federations are typically insufficient to fully cover their expenditure obligations (Boadway et al, 2011;Rodden, 2004).…”

“…Political factors or short-term budget concerns may influence grant amounts, risking long-term planning. This approach might be problematic in federations like Ethiopia, Nigeria, and South Africa, where subnational units heavily rely on federal transfers (Hobdari et al, 2018;Yimenu, 2023aYimenu, , 2023b.…”

“…Under Ethiopia's Constitution, regional governments have broad responsibilities, such as agriculture, education, healthcare, road construction, regional police, regional civil service, security, and culture. However, despite these constitutional mandates, regional funding has not adequately matched the expanding responsibilities (Chanie, 2007a;Mesfin & Teka, 2023;Yimenu, 2023b).…”

“…Similarly, India's Finance Commission has faced criticism for its grants approach due to arbitrary criteria and economic assumptions (Zahir, 2020). Given the substantial reliance of Ethiopian regions on federal grants (Chanie, 2007a;Yimenu, 2023b), the stability and flexibility of the grant system are crucial for regional planning and fiscal viability. Thus, exploring Ethiopia's approach to determining the transfer pool is imperative to analyse the fiscal transfer trends, predictability, and stability.…”

“…Crucially, Ethiopian regions rely heavily on federal grants, which account for over 75% of their expenditure funding (Yimenu, 2023b).…”