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Reexamining The Determinants Of Fiscal Decentralization: What Is The Role Of Geography?

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Abstract

This paper contributes to the existing literature on the determinants of fiscal decentralization by motivating theoretically and exploring in depth the empirical relevance that geography has as determinant of fiscal decentralization. The relationship between decentralization and geography is based on the logic that more geographically diverse countries show greater heterogeneity among their citizens, including their preferences and needs for public goods and services provision. Communications and physical distance are also a very important issue and play a key role on the effect of geography over time. The theoretical model builds on the work by Arzaghi and Henderson (2002) and Panizza (1999). For the empirical estimation we use a panel data set for approximately 91 countries for the period 1960-2005. Physical geography is measured along several dimensions including elevation, land area, and climate. We construct a geographical fragmentation index and test its effect on fiscal decentralization. In addition, we interact the geographical fragmentation index with time variant infrastructure variables, in order to test the effect that infrastructure and communications have on the relationship between geography and fiscal decentralization. For robustness, we construct Gini coefficients for in-country elevation and climate. We find a positive and strong correlation between geographical factors and fiscal decentralization. We also find that while the development of infrastructure (in transportation, communications, etc.) tends to reduce the effect of geography on decentralization, this effect is rather small and mostly statistically insignificant, meaning that the impact of geography survives over time. The additional value added of this strategy is that geography and its interaction with infrastructure development may be used as an instrument for decentralization in future econometric estimations, where decentralization is used as an explanatory variable but it may be suspected to be endogenous to the economic process being studied (economic growth, political instability, macroeconomic stability, income distribution, etc.)

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  • Gustavo Canavire-Bacarreza & Jorge Martinez-Vazquez, 2012. "Reexamining The Determinants Of Fiscal Decentralization: What Is The Role Of Geography?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1211, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper1211
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    Cited by:

    1. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    2. Harry Pickard, 2020. "Explaining fiscal decentralization and the role of ethnic Diversity," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(5), pages 469-485, November.
    3. Vincent, Rose Camille, 2023. "Vertical taxing rights and tax compliance norms," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 443-467.
    4. Canavire-Bacarreza, Gustavo & Martinez-Vazquez, Jorge & Yedgenov, Bauyrzhan, 2020. "Identifying and disentangling the impact of fiscal decentralization on economic growth," World Development, Elsevier, vol. 127(C).
    5. Zheng Li & Jorge Martinez-Vazquez, 2018. "Fiscal Decentralization and Interregional Capital Misallocation: Evidence from China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1816, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    6. Leonardo E Letelier-Saavedra & José L Sáez-Lozano, 2015. "Fiscal decentralization in specific areas of government: an empirical evaluation using country panel data," Environment and Planning C, , vol. 33(6), pages 1344-1360, December.
    7. Rodríguez-Pose, Andrés & Vidal-Bover, MIquel, 2022. "Unfunded mandates and the economic impact of decentralisation. When finance does not follow function," CEPR Discussion Papers 17613, C.E.P.R. Discussion Papers.
    8. Feld, Lars P. & Frey, Christian & Schaltegger, Christoph A. & Schmid, Lukas A., 2021. "Fiscal federalism and income inequality: An empirical analysis for Switzerland," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 463-494.
    9. Alexeev, Michael & Mamedov, Arseny, 2017. "Factors determining intra-regional fiscal decentralization in Russia and the US," Russian Journal of Economics, Elsevier, vol. 3(4), pages 425-444.
    10. Francisco J. Delgado, 2021. "On the Determinants of Fiscal Decentralization: Evidence From the EU," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 23(56), pages 206-206, February.
    11. Norman V. Loayza & Jamele Rigolini & Oscar Calvo-González, 2014. "More Than You Can Handle: Decentralization and Spending Ability of Peruvian Municipalities," Economics and Politics, Wiley Blackwell, vol. 26(1), pages 56-78, March.
    12. Maria Cadaval Sampedro & Ana Herrero Alcalde & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2022. "Extreme events and the resilience of decentralized governance," Working Papers. Collection A: Public economics, governance and decentralization 2212, Universidade de Vigo, GEN - Governance and Economics research Network.
    13. Tobias Arnold & Sean Mueller & Adrian Vatter, 2021. "Shock or Design: What Drives Fiscal De/Centralization? A Comparative Analysis of Twenty-Nine OECD Countries, 1995–2017," Publius: The Journal of Federalism, CSF Associates Inc., vol. 51(1), pages 1-26.
    14. Roberto Ezcurra, 2017. "Is government decentralization useful in the fight against domestic terrorism? A cross-country analysis," Environment and Planning C, , vol. 35(5), pages 872-897, August.
    15. Akalbeo, Benard & Martinez-Vazquez, Jorge & Yedgenov, Bauyrzhan, 2023. "Fiscal decentralization and structural versus cyclical unemployment levels," European Journal of Political Economy, Elsevier, vol. 80(C).
    16. Mohammad Arzaghi & Andrew Balthrop, 2018. "No taxation, no representation: An investigation of the relationship between natural resources and fiscal decentralization," Environment and Planning C, , vol. 36(7), pages 1234-1255, November.
    17. Milan Jílek, 2015. "Factors of Tax Decentralization in OECD-Europe Countries," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2015(2), pages 33-49.
    18. Nataliya Trusova, 2019. "Development of the Fiscal Consolidation of Local Budgets of Regional Level," Oblik i finansi, Institute of Accounting and Finance, issue 1, pages 105-113, March.
    19. Bruno Emmanuel ONGO NKOA & Derick Ulrich YOUNDA, 2022. "L’urbanisation accroît-elle l’assiette fiscale locale dans un contexte de décentralisation en Afrique subsaharienne ?," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 55, pages 93-111.
    20. Umaima Arif & Eatzaz Ahmad, 2018. "A Framework For Analyzing The Impact Of Fiscal Decentralization On Macroeconomic Performance, Governance And Economic Growth," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 3-39, May.
    21. Antonio Nicolás Bojanic, 2020. "The empirical evidence on the determinants of fiscal decentralization," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 12(1), pages 271-302, June.
    22. Yannis Psycharis & Maria Zoi & Stavroula Iliopoulou, 2016. "Decentralization and local government fiscal autonomy: evidence from the Greek municipalities," Environment and Planning C, , vol. 34(2), pages 262-280, March.
    23. Gustavo Canavire-Bacarreza & Alejandra Montoya-Agudelo & Felipe Bedoya-Maya, 2017. "An Uphill Battle: The Relationship Between Geography and Terrorism," Documentos de Trabajo CIEF 15759, Universidad EAFIT.

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    Keywords

    revenue mobilization; fiscal decentralization; Peru;
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