PDF Ebook Decentralization and Political Institutions
Does fiscal decentralization lead to more efficient governance, better public goods, and higher economic growth? This paper tests hypotheses posed by theoretical literature that the results of decentralization depend on features of political institutions. Using data from up to 95 countries for 25 years, we show that the effect of decentralization on economic growth, quality of government, and public goods provision strongly depends on two aspects of political centralization: 1) strength of national party system (measured by the age of the main parties and fractionalization of the government parties) and 2) subordination (whether local and state executives are appointed or elected). We find solid support for Riker’s theory (1964) in developing countries: Strong parties significantly improve the results of fiscal decentralization in terms of economic growth, quality of government, and public goods provision. There is also some evidence that subordination of local to higher-level governments improves the effect of decentralization on growth and public goods provision (in developed and developing countries) and government quality (in developing countries).
Modern economic literature has little doubt that economic decentralization affects the quality of government, economic growth, and efficiency of public goods provision. The effect of decentralization depends on political and economic incentives of local public officials. Economic incentives that help to align politicians’ private interests with public goals are provided by such mechanisms as interjurisdictional competition (Tiebout, 1956; Qian and Roland, 1998; Maskin, Qian, and Xu, 1999) and fiscal autonomy (Jin et al., 1999; Qian and Weingast, 1997; and Zhuravskaya, 2000). Political incentives, i.e., local governments’ accountability, are provided by political institutions which ensure that careers of local politicians depend on whether they pursue efficient policies. In the absence of accountability, strong economic incentives at the local level may result in corruption, provincial protectionism, and capture by vested interests (Tanzi, 1996; Sonin, 2003).
Even though accountability of local public officials is necessary to prevent inefficient local policies in a decentralized economy, there is little agreement in the literature about what institutions can effectively ensure accountability.1 On the one hand, democratic elections with free access to information and developed civil society may provide local governments with sufficient political incentives to guarantee efficient decentralization. This argument is based on the view that local governments are more accountable compared to the central governments (Seabright, 1996; Persson and Tabellini, 2000). On the other hand, democratic mechanisms fail in many developing and transition countries, leading to corruption and capture of the local governments. In this case, strong administrative control of local by central authorities is important for efficient economic decentralization (Blanchard and Shleifer, 2000). This reasoning requires lower probability of capture at the national compared to the local level.2 Riker (1964) pointed out that the structure of party system is also extremely important for the effectiveness of local governments. He argued that strength of national party systems is more important in disciplining local politicians than administrative or constitutional arrangements. Thus, decentralization may have the opposite results in countries with different sources of local governments’ accountability.
This paper sheds light on this debate by evaluating the effects of fiscal decentralization on the quality of government, public goods provision, and economic growth, taking into account the structure of political institutions. In particular, we analyze how the level of political centralization changes the results of fiscal decentralization. Previous empirical literature on the effects of decentralization produced mixed results.3 This can be partly explained by the fact that it overlooked the importance of political institutions.
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PDF Ebook Decentralization and Political Institutions
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