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Fiscal decentralisation, efficiency, and growth

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Author Info

  • Andrés Rodríguez-Pose

    ()
    (London School of Economics)

  • Sylvia A. R. Tijmstra

    ()
    (London School of Economics)

  • Adala Bwire

    ()
    (London School of Economics)

Abstract

Much of the recent worldwide trend towards devolution has been driven by the belief that fiscal decentralization is likely to have a positive effect on government efficiency and economic growth. It is generally assumed that the transfer of powers and resources to lower tiers of government allows for a better matching of public policies to local needs and thus for a better allocation of resources. These factors, in turn, are expected to lead to an improvement in regional economic performance, if subnational authorities shift resources from current to capital expenditures in search of a better response to local needs. This paper tests these assumptions empirically by analysing the evolution of subnational expenditure categories and regional growth in Germany, India, Mexico, Spain, and the USA. We find that, contrary to expectations, decentralisation has coincided in the sample countries with a relative increase in current expenditures at the expense of capital expenditures, which has been associated with lower levels of economic growth in countries where devolution has been driven from above (India and Mexico), but not in those where it has been driven from below (Spain). The paper hypothesises that the differences in legitimacy between the central or federal government and subnational governments in top-down and bottom-up processes of devolution may be at the origin of the diverse capacity to deliver greater allocative and productive efficiency and, eventually, greater economic growth by devolved governments.

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Bibliographic Info

Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2007-11.

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Date of creation: 26 Apr 2007
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Publication status: Published in Environment and Planning A 41(9), September 2009: 2041-2062
Handle: RePEc:imd:wpaper:wp2007-11

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Keywords: devolution; fiscal decentralisation; subnational expenditure; economic growth; Germany; India; Mexico; Spain; United States;

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References

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  1. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
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  5. Kevin Morgan, 2002. "English Question: Regional Perspectives on a Fractured Nation," Regional Studies, Taylor & Francis Journals, vol. 36(7), pages 797-810.
  6. A Rodr�guez-Pose, 1996. "Growth and institutional change: the influence of the Spanish regionalisation process on economic performance," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 14(1), pages 71-87, February.
  7. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February.
  8. Akai, Nobuo & Sakata, Masayo, 2002. "Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States," Journal of Urban Economics, Elsevier, vol. 52(1), pages 93-108, July.
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  11. Tao Zhang & Heng-fu Zou, 2000. "The growth impact of intersectoral and intergovernmental allocation of public expenditure: With applications to China and India," CEMA Working Papers 30, China Economics and Management Academy, Central University of Finance and Economics.
  12. repec:rus:hseeco:126457 is not listed on IDEAS
  13. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, April.
  14. Andr�s Rodr�guez-Pose & Nicholas Gill, 2003. "The global trend towards devolution and its implications," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 21(3), pages 333-351, June.
  15. Ulrich Thießen, 2003. "Fiscal Decentralisation and Economic Growth in High-Income OECD Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 237-274, September.
  16. Gary Woller & Kerk Phillips, 1998. "Fiscal decentralisation and IDC economic growth: An empirical investigation," Journal of Development Studies, Taylor & Francis Journals, vol. 34(4), pages 139-148.
  17. Jeni Klugman, 1994. "Decentralization: A Survey of Literature from a Human Development Perspective," Human Development Occasional Papers (1992-2007) HDOCPA-1994-05, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
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Citations

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Cited by:
  1. Andy Pike & Andrés Rodríguez-Pose & John Tomaney & Gianpiero Torrisi & Vassilis Tselios, 2010. "In Search of the Economic Dividend of Devolution: Spatial Disparities, Spatial Economic Policy and Decentralisation in the UK," SERC Discussion Papers 0062, Spatial Economics Research Centre, LSE.
  2. Andrés Rodríguez-Pose & Roberto Ezcurra, 2010. "Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries," Working Papers 2010-09, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  3. Roberto Ezcurra & Andrés Rodríguez-Pose, 2011. "Can the economic impact of political decentralisation be measured?," Working Papers 2011-02, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  4. Vassilis Monastiriotis & Yiannis Psycharis, 2011. "Without purpose and strategy? A spatio-functional analysis of the regional allocation of public investment in Greece," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 49, Hellenic Observatory, LSE.
  5. Anping Chen & Nicolaas Groenewold, 2011. "The National and Regional Effects of Fiscal Decentralisation in China," Economics Discussion / Working Papers 11-18, The University of Western Australia, Department of Economics.
  6. Darius Tirtosuharto, 2010. "The Impact Of Fiscal Decentralization And State Allocative Efficiency On Regional Growth In Indonesia," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 1(02), pages 287-307.
  7. Anping Chen & Nicolaas Groenewold, 2013. "The national and regional effects of fiscal decentralisation in China," The Annals of Regional Science, Springer, vol. 51(3), pages 731-760, December.
  8. Sacchi, Agnese & Salotti, Simone, 2014. "The asymmetric nature of fiscal decentralization: theory and practice," MPRA Paper 54506, University Library of Munich, Germany.

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