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Does decentralization matter for regional disparities? A cross-country analysis

This paper looks at the relationship between fiscal and political decentralization and the evolution of regional inequalities in a panel of 26 countries -- 19 developed and 7 developing -- for the period between 1990 and 2006. Using an instrumental variables method, it finds that whereas for the whole sample decentralization is completely dissociated for the evolution of regional disparities, the results are highly contingent on the level of development, the existing level of territorial inequalities, and the fiscal redistributive capacity of the countries in the sample. Decentralization in high income countries has, if anything, been associated with a reduction of regional inequality. In low and medium income countries, fiscal decentralization has been associated with a significant rise in regional disparities, which the positive effects of political decentralization have been unable to compensate. Policy preferences by subnational governments for expenditure in economic affairs, education, and social protection have contributed to this trend.

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Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2009-04.

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Date of creation: 14 May 2009
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Publication status: Published in Journal of Economic Geography 10(5), September 2010: 619-644
Handle: RePEc:imd:wpaper:wp2009-04
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