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Fiscal decentralization in Eastern Europe: a twenty-year perspective

  • Aristovnik, Aleksander

The paper attempts to provide an overview of the fiscal decentralization process in emerging market economies in Eastern Europe in the last 20 years. Using methodology developed by Vo (2009), the paper assesses the degree of fiscal decentralization in the region. Conceptually, the measurement of fiscal decentralization focuses on fiscal autonomy and the fiscal importance of subnational governments. The empirical analysis reveals that according to our definition of fiscal decentralization the highest level of (average) fiscal decentralization (centralization) is found in Russia (Armenia) among non-EU members and in Estonia (Slovak Republic) among EU members of the Eastern European. In addition, the empirical results show that, in general, the degree of fiscal decentralization is higher in developed OECD countries than in most Eastern European countries (EECs). However, in contrast to our expectations, there has been an alarming downward trend of FDI in most of the region over the last two decades. Moreover, the paper also examines the effects of fiscal decentralization on growth and public sector size in EECs. The analysis provides some evidence that increases in public sector decentralization are associated with higher income levels. However, the growth-enhancing effects of fiscal decentralization are expected to be much greater when supported by a sound institutional environment. Therefore, EECs, in particular non-EU member states, should improve their administrative and technical capability in order to establish sound and effective fiscal decentralization. Finally, our results suggest that fiscal decentralization in EECs generally leads to an increase in the size of government, albeit there are some significant differences between EU and non-EU member states.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39316.

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Date of creation: 08 Jun 2012
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Handle: RePEc:pra:mprapa:39316
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  1. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  2. Ernesto Stein, 1999. "Fiscal Decentralization and Government Size in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 357-391, November.
  3. Jin, Jing & Zou, Heng-fu, 2002. "How does fiscal decentralization affect aggregate, national, and subnational government size?," Journal of Urban Economics, Elsevier, vol. 52(2), pages 270-293, September.
  4. Jorge Martinez-Vazquez & Robert McNab, 2001. "Fiscal Decentralization and Economic Growth," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0101, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  5. Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, vol. 57(04), pages 695-729, September.
  6. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
  7. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1027-56, November.
  8. Baskaran, T., 2009. "Fiscal decentralization, ideology, and the size of the public sector," MPRA Paper 30188, University Library of Munich, Germany.
  9. Lars P. Feld & Gebhard Kirchgässner & Christoph A. Schaltegger, 2003. "Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments," CESifo Working Paper Series 1087, CESifo Group Munich.
  10. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
  11. Enikolopov, Ruben & Zhuravskaya, Ekaterina, 2007. "Decentralization and political institutions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2261-2290, December.
  12. Aurélie Cassette & Sonia Paty, 2010. "Fiscal decentralization and the size of government: a European country empirical analysis," Public Choice, Springer, vol. 143(1), pages 173-189, April.
  13. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, vol. 89(7), pages 1157-1189, July.
  14. 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.
  15. Thushyanthan Baskaran, 2010. "On the link between fiscal decentralization and public debt in OECD countries," Public Choice, Springer, vol. 145(3), pages 351-378, December.
  16. Zhang, Tao & Zou, Heng-fu, 2001. "The growth impact of intersectoral and intergovernmental allocation of public expenditure: With applications to China and India," China Economic Review, Elsevier, vol. 12(1), pages 58-81.
  17. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
  18. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  19. John Ashworth & Emma Galli & Fabio Padovano, 2013. "Decentralization as a constraint to Leviathan: a panel cointegration analysis," Public Choice, Springer, vol. 156(3), pages 491-516, September.
  20. Whitney Buser, 2011. "The impact of fiscal decentralization on economics performance in high-income OECD nations: an institutional approach," Public Choice, Springer, vol. 149(1), pages 31-48, October.
  21. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  22. Thushyanthan Baskaran & Lars P. Feld, 2009. "Fiscal Decentralization and Economic Growth in OECD Countries: Is there a Relationship?," CESifo Working Paper Series 2721, CESifo Group Munich.
  23. Ulrich Thießen, 2000. "Fiscal Federalism in Western European and Selected Other Countries: Centralization or Decentralization? What Is Better for Economic Growth?," Discussion Papers of DIW Berlin 224, DIW Berlin, German Institute for Economic Research.
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