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The Consequences of Fiscal Decentralization on Poverty and Income Inequality

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Abstract

Many countries around the world are currently pursuing policies for poverty reduction and improving income distribution. Many of these same countries are also aggressively implementing fiscal decentralization reforms. Although fiscal decentralization, poverty and the distribution of income have been the subject of extensive separate theoretical and empirical research, to date we have little understanding of what may be the impact of fiscal decentralization on poverty and inequality. This paper sets out to shed some light on those relationships. After reviewing the literature addressing different aspects of these relationships, the paper describes the possible channels through which fiscal decentralization might affect poverty and income inequalities. We also carry out an empirical analysis with panel data for a large number of countries at different stages of development covering the period 1971-2000. We find that fiscal decentralization may have significant effects on poverty and inequality. In particular, fiscal decentralization appears to reduce poverty as long as the share of sub-national expenditures is not greater than one third of total government expenditures. Fiscal decentralization appears to also help reduce income inequality only if the general government represents a significant share of the economy (twenty percent or more).

Suggested Citation

  • Cristian Sepúlveda & Jorge Martinez-Vazquez, 2010. "The Consequences of Fiscal Decentralization on Poverty and Income Inequality," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1002, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper1002
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    File URL: http://icepp.gsu.edu/files/2015/03/ispwp1002.pdf
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    Cited by:

    1. Jorge Martínez-Vázquez & Violeta Vulovic & Blanca Moreno Dodson, 2012. "The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries," Hacienda Pública Española, IEF, vol. 200(1), pages 95-130, March.
    2. Fabio Sánchez & Irina España, 2013. "Estructura, Potencial y Desafíos del Impuesto Predial en Colombia," DOCUMENTOS CEDE 011893, UNIVERSIDAD DE LOS ANDES-CEDE.
    3. Tarkan Cavusoglu & Oguzhan Dincer, 2015. "Does decentralization reduce income inequality? Only in rich states," Southern Economic Journal, Southern Economic Association, vol. 82(1), pages 285-306, July.
    4. Caroline-Antonia Goerl & Mike Seiferling, 2014. "Income Inequality, Fiscal Decentralization and Transfer Dependency," IMF Working Papers 14/64, International Monetary Fund.
    5. Cristian Sepulveda & Jorge Martinez-Vazquez, 2012. "Explaining property tax collections in developing countries: the case of Latin America," Chapters,in: Decentralization and Reform in Latin America, chapter 7, pages iii-iii Edward Elgar Publishing.
    6. Irina N. Ilina & Carol S. Leonard & Evgenij E. Plisetskij, 2014. "Russian Regional Resilience: Finance, Cooperation And Resource Abundance (A Case Study Of Khanty-Mansiysk)," HSE Working papers WP BRP 15/PA/2014, National Research University Higher School of Economics.
    7. repec:jns:jbstat:v:237:y:2017:i:3:p:225-273:n:5 is not listed on IDEAS
    8. Gustavo Canavire-Bacarreza & Jorge Martinez-Vazquez & Bauyrzhan Yedgenov, 2017. "Reexamining the determinants of fiscal decentralization: what is the role of geography?," Journal of Economic Geography, Oxford University Press, vol. 17(6), pages 1209-1249.
    9. Hernandez-Trillo, Fausto, 2016. "Poverty Alleviation in Federal Systems: The Case of México," World Development, Elsevier, vol. 87(C), pages 204-214.
    10. Yasna Cortés Garriga & Dusan Paredes Araya, 2013. "The Common Municipal Fund: What is the role in the convergence of local incomes?," Documentos de Trabajo en Economia y Ciencia Regional 45, Universidad Catolica del Norte, Chile, Department of Economics, revised Apr 2013.
    11. Reingewertz, Yaniv, 2014. "Fiscal Decentralization - a Survey of the Empirical Literature," MPRA Paper 59889, University Library of Munich, Germany.
    12. Juan Mauricio Ramirez & Yadira Diaz & Juan Guillermo Bedoya, 2014. "Decentralization in Colombia: Searching for social equity in a bumpy economic geography," Working Papers 337, ECINEQ, Society for the Study of Economic Inequality.
    13. José Roberto Afonso & Sulamis Dain & Vivian Almeida & Kleber Castro & Ana Cecília Faveret, 2012. "Reflections on two decades of social-spending decentralization," Chapters,in: Decentralization and Reform in Latin America, chapter 4, pages iii-iii Edward Elgar Publishing.
    14. Baja Daza, Gover & Villarroel Böhrt, Sergio & Zavaleta Castellón, David, 2012. "Diseño institucional e incentivos implicitos en la descentralización Boliviana (1994-2008)
      [Institutional design and implicit incentives in Bolivia's decentralization model (1994-2008)]
      ," MPRA Paper 48598, University Library of Munich, Germany.
    15. Sarah Flèche, 2015. "Distaste for Centralization: Evidence from a Quasi-Natural Experiment in Switzerland," CEP Discussion Papers dp1383, Centre for Economic Performance, LSE.
    16. Ramírez, Juan Mauricio & Díaz, Yadira & Bedoya, Juan Guillermo, 2017. "Property Tax Revenues and Multidimensional Poverty Reduction in Colombia: A Spatial Approach," World Development, Elsevier, vol. 94(C), pages 406-421.
    17. Davide Furceri & Agnese Sacchi & Simone Salotti, 2016. "Can Fiscal Decentralization Alleviate Government Consumption Volatility?," Open Economies Review, Springer, vol. 27(4), pages 611-636, September.
    18. Stossberg Sibylle & Blöchliger Hansjörg, 2017. "Fiscal Decentralisation and Income Inequality: Empirical Evidence from OECD Countries," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 237(3), pages 225-273, June.
    19. repec:pid:journl:v:55:y:2016:i:4:p:781-802 is not listed on IDEAS
    20. Makreshanska, Suzana & Petrevski, Goran, 2016. "Decentralization, fiscal transfers and income inequality in Central and Eastern European countries," MPRA Paper 82181, University Library of Munich, Germany, revised 16 Oct 2017.

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    Keywords

    fiscal decentralization; poverty reduction; income inequality;

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