Municipal Fragmentation and Economic Performance of OECD TL2 Regions

The present work investigates the relationship between municipal fragmentation and regional per capita GDP growth rate, using a panel of OECD TL2 regions in the period 1996-2011. According to the fiscal decentralisation literature, fragmentation should enhance growth as local government closer to citizens can implement policies that better match their needs, thus providing services and public goods in a more efficient way. The presence of many local governments, however, may create problems in terms of overlapping functions, (dis)economies of scale, and policy fragmentation. The results of the empirical analysis show that municipal fragmentation has a negative impact on per capita GDP growth, thus supporting the view that costs prevail on benefits. The introduction of regional territorial characteristic – namely, the share of population living in rural areas – provides a different picture, however. The negative impact of fragmentation decreases with the share of population living in rural areas. Indeed, in extremely “rural” regions the effect turns mildly positive. This is because the costs and benefits of fragmentation have a different weight in urban and rural regions. The key insight is the different distribution of the population over the territory: more concentrated in urban than in rural regions. This implies that, for a given level of municipal fragmentation overlapping of function is more severe in urban regions (where people are likely to commute over municipal boundaries) than in rural area. In the same vein, for the same level of municipal fragmentation access to the local government is more difficult in rural areas (where people is sparsely located within municipal boundaries) than in urban areas. The policy implications of the analysis are twofold. Firstly, reducing municipal fragmentation may have a heterogeneous impact within the country, thus raising concern for one-size-fits-all policies of municipal agglomeration in favour of a place-based approach to institutional reform. For instance, the principle guiding municipal amalgamation should not be the average municipal size at the country level, but it should be weighted for the rural/urban characteristics of each region. Secondly, the analysis suggests that processes of agglomeration of people should be accompanied by a consistent amalgamation of the local administration, otherwise representing an obstacle to the full realisation of agglomeration economies.