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Fiscal decentralization and intergovernmental grants: the European regional policy and Spanish autonomous regions

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  • Juan González Alegre

    ()
    (Universidad Pablo de Olavide)

Abstract

Most of the Structural Actions are designed as an incentive to increase public investment in less-developed areas. However, we suspect that the efficiency of the policy is related to the level of fiscal autonomy of the subsidized government. In this paper we construct a paned data model in order to estimate the role of fiscal federalism on the effectiveness of the EU Structural Actions in enhancing public investment. We use data from the seventeen Spanish regions for the period 1993-2007. The estimation is run upon three alternative strategies: firstly we break the sample according to the level of fiscal autonomy of the units; secondly, we insert an interaction term capturing the join effect of both variables, fiscal decentralization and EU Structural Actions; finally, we estimate a simultaneous equation model in which public investment and the EU transfers are decided simultaneously. Results unambiguously support the hypothesis that the effectiveness of the Structural Funds decreases with larger decentralization. Our results suggest also that this could be due to the fact that regions find it more difficult to be eligible for additional EUSF as they gain fiscal autonomy. The general conclusions include the recommendation that the future design of the European Cohesion policy should take into account the heterogeneity of Fiscal Federalism across the Member States in order to the get the most out of it.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2010/6.

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Length: 46 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:ieb:wpaper:2010/4/doc2010-6

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Keywords: fiscal federalism; intergovernmental grants; European Union; regional policy; panel data; simultaneous equations for panels;

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  1. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
  2. Josep Lluís Carrion-i-Silvestre & Marta Espasa & Toni Mora, 2008. "Fiscal Decentralization and Economic Growth in Spain," Public Finance Review, , , vol. 36(2), pages 194-218, March.
  3. F. Javier Arze del Granado & Jorge Martinez-Vazquez & Robert McNab, 2005. "Fiscal Decentralization and The Functional Composition of Public Expenditures," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0501, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Juan Gonzalez Alegre, 2010. "Decentralization and the Composition of Public Expenditure in Spain," Regional Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 44(8), pages 1067-1083.
  5. Besley, Timothy & Case, Anne, 2000. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(467), pages F672-94, November.
  6. Sandy Dall'erba & Julie Le Gallo, 2008. "Regional convergence and the impact of European structural funds over 1989-1999: A spatial econometric analysis," Papers in Regional Science, Wiley Blackwell, Wiley Blackwell, vol. 87(2), pages 219-244, 06.
  7. Niloy Bose & M. Emranul Haque & Denise R. Osborn, 2007. "Public Expenditure And Economic Growth: A Disaggregated Analysis For Developing Countries," Manchester School, University of Manchester, University of Manchester, vol. 75(5), pages 533-556, 09.
  8. Joeri Gorter & S. Ederveen, 2002. "Does European cohesion policy reduce regional disparities? An empirical analysis," CPB Discussion Paper, CPB Netherlands Bureau for Economic Policy Analysis 15, CPB Netherlands Bureau for Economic Policy Analysis.
  9. Fisman, Raymond & Gatti, Roberta, 2000. "Decentralization and corruption - evidence across countries," Policy Research Working Paper Series 2290, The World Bank.
  10. Farrell, Mary, 2004. "Regional integration and cohesion--lessons from Spain and Ireland in the EU," Journal of Asian Economics, Elsevier, Elsevier, vol. 14(6), pages 927-946, January.
  11. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  12. Baltagi, Badi H., 1981. "Simultaneous equations with error components," Journal of Econometrics, Elsevier, Elsevier, vol. 17(2), pages 189-200, November.
  13. Sjef Ederveen & Henri L.F. de Groot & Richard Nahuis, 2002. "Fertile Soil for Structural Funds?," Tinbergen Institute Discussion Papers, Tinbergen Institute 02-096/3, Tinbergen Institute.
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