Political decentralization and income inequality in developping countries : does governance matter ?

This paper presents the novel empirical relationship between decentralization and income inequality in 39 developing countries for the period of 1990-2017. We examine the mediating effect of governance in explaining the relationship between decentralization and income inequality. We proxy decentralization by political decentralization. We use the Gini coefficient as our primary measure of income inequality and adopt three Kaufman indicators as a measure of governance. We use Feaseble Generalized Least Square method and System Generalized Method of Moment in two steps as a technical econometric estimation. Our main finding is that the effect of political decentralization on income redistribution in developing countries depends on the quality of governance. From the interaction term, the negative effect of the political autonomy of subnational governments is high principally as the corruption contol get higher. Thus, sub-national governments in developing countries, by independently implementing their redistribution policies, can actually improve income redistribution if they achieve an optimal level of good governance by improving corruption control.