Skip to main content
SpringerLink
Log in

Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?

  • Original Paper
  • Published:
Constitutional Political Economy Aims and scope Submit manuscript

Abstract

The relationship between decentralization and economic growth is generally studied from a perspective stressing universal or quasi-universal regularities across jurisdictions. That approach has generated many insights but seems to reach its limits. The paper explains why it allows contrasting positions with regard to the benefits of decentralization even among proponents of free and competitive markets. And it seems from the empirical literature that no robust and economically significant cross-jurisdiction relation between decentralization and economic performance or growth, except perhaps their independence, has been found. The absence of a relation valid across jurisdictions, however, does not entail the absence of relations specific to each. When jurisdiction specificity is very strong, it is normally difficult to say if there is a relation between observable decentralization arrangements in a jurisdiction and its observable economic performance. However, this may be different under particular circumstances reflecting disequilibrium. Episodes of growth acceleration, when they follow persistent underperformance and include changes in decentralization arrangements, may provide some empirical support to the claim that the relation exists.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

Notes

  1. Single-country studies concerned with the relation between decentralization and growth in subnational jurisdictions are a significant part of the literature to be discussed here. They share a common structure with cross-country studies (although the problems they encounter may be somewhat different). This explains why I refer to jurisdictions rather than to countries.

  2. See, e.g. Woller and Phillips (1998), Xie et al. (1999), Thiessen (2003), Thornton (2007), Baskaran and Feld (2009), Bodman (2011). Some other studies do find a significant relation, positive (e.g. Lin and Liu 2000; Akai and Sakata 2002; Iimi 2005; Jin et al. 2005; Stansel 2005) or negative (e.g. Davoodi and Zou 1998; Zhang and Zou 1999). For references to the empirical literature, see Breuss and Eller (2004), Feld et al. (2008), Feld and Schnellenbach (2011) and Esteban-Laleona et al. (2011). See note 15 below for some additional references.

  3. No criticism of the paper, which is particularly interesting and convincing, is implied by the fact that it is used as an example. Similar ways to summarize negative findings are current in applied economics.

  4. The position can be ascribed also to the political economy analysis of Acemoglu and Robinson (2012), in which centralized governance is necessary for the enhancement of markets and of growth.

  5. See Breton and Salmon (2001). Genuine political decentralization both fragments markets and distorts competition among firms. This is necessarily so whenever subcentral governments are given significant powers and autonomy, and in particular are encouraged to undertake innovative policies. Even when efficiency-enhancing and market-friendly, these policies generate differences in regulation and taxation across regions. Such differences may also be a consequence of differences across jurisdictions in the political equilibrium. Whatever their causes, regional differences in regulation will generate non-tariff impediments to the exchange of services and the movement of factors across regional borders. Competition among subcentral governments to attract people or investments takes the form of state aids, tax holidays and various forms of in kind support. All have in common the consequence, at least as a side effect, of distorting competition among firms—and thus of precluding the maintenance or establishment of a perfectly “level-playing field.” Observation of very decentralized federations such as Canada and Switzerland, in which the question of the internal common market is recurrently on the agenda, confirms these facts.

  6. For Reagan, see Rose-Ackerman (1991, p. 163).

  7. See Bird and Vaillancourt (2006).

  8. In recent years, there has been a shift in Weingast’s analyses. In his more recent writings (Jin et al. 2005; Weingast 2009), markets are less central, the effect of decentralization on growth depending mainly on the distribution of fiscal incentives among levels of government—see also Lin and Liu (2000).

  9. Bottom-up yardstick competition is when comparisons are made by voters, or more generally from below, top-down yardstick competition when they are made by officials higher up in some hierarchy.

  10. See also Caldeira (2012).

  11. To some extent, the difficulties experienced in the search for a causal relation between decentralization and growth reflect a more general phenomenon. As Bazzi and Clemens (forthcoming) say, “running regressions seeking the causes of growth is not for the meek.” See in particular the pessimistic comments of Roodman (2007) on the cross-country work on aid.

  12. Common pool problems affect growth directly in Madies and Ventelou (2005).

  13. Even in the case of complex decentralization arrangements, changes in degrees of decentralization or centralization may not be ambiguous if there is sufficient commensurability. A sufficient condition for commensurability involves a ceteris paribus clause: nothing changes except along the dimension(s) discussed.

  14. According to Nijkamp and Poot (2004), meta-analyses “provide a more systematic and objective assessment of an existing body of findings than a traditional narrative literature survey”.

  15. To mention some recent contributions, a positive relation between decentralization and growth is found by Ding (2007), Hammond and Tosun (2011), Hatfield and Kosec (2013), as well as by Enikolopov and Zhuravskaya (2007) provided there is also political centralization and by Buser (2011) when in conjunction with economic liberty. A negative relation is found by Im (2010) and Rodriguez-Pose and Ezcurra (2011). Martinez-Vazquez and McNab (2006) find an indirect relation through macroeconomic stability mitigating a negative effect of decentralization. Both Carrion-i-Silvestre et al. (2008) and Gemmell et al. (2012) find a negative effect of expenditure decentralization (the latter find a positive effect of revenue decentralization). No significant relation is found by Thornton (2007), Baskaran and Feld (2009) and Bodman (2011).

  16. Given the frequent substitutability in policy-making between fiscal and regulatory means, extending the analysis to regulatory decentralization could also be fruiful. The extension is implicit in the argument presented in subsection 2.1.

  17. See also Voigt and Blume (2012).

  18. Judgements of inconclusiveness such as the one formulated by Feld et al. (2008) covers also the work done in these more favourable contexts. Besides, with regard to single-country studies, the meaning and implications of economic growth at the subnational level may be quite different from what they are at the national level. As noted, yardstick competition at the subnational level typically operates over variables other than growth.

  19. Another method is to introduce fixed effects at the level of a more encompassing space than that of the jurisdictions studied. For example, in their study on the effect on growth of decentralization in U.S. states, Akai et al. (2007) employ regional rather than state dummies.

  20. The 2011 version of FEVD corrects the attractive but mistaken way standard deviations were estimated in the 2007 version. See the symposium published in 2011 in Political Analysis (19-2).

  21. There are other important substantive problems. The relationship between growth and levels is generally dealt with swiftly with the help of control variables and convergence assumptions. But it deserves more attention. In particular, the determinants of growth are certainly quite dependent on the income level already reached. Saving may be essential, as assumed in some of the work discussed above, at one level of income, and innovation or ‘creative destruction’ at another. This may have important implications on the decentralization-growth relationship, even assuming the usual distinction between the two large categories of developing and OECD countries.

  22. In part, this reflects the influence of international organizations such as the World Bank, which have been stressing over many decades the merits of decentralization in general and its favourable effects on development in particular (see the references in Treisman 2007).

  23. The following citation from a well known philosopher of science (Giere 1988, p. 101) illustrates one of these traditions: “For any real system of the relevant type… functional relationships… represent causal relationships not because they hold among the actual values in all such real systems, but because they hold among all possible values in this particular system” (my emphasis).

  24. ‘Between’ effects which, of course, may be interesting in themselves.

  25. It would be more plausible, but also inconvenient, to suppose a growth-maximizing range rather than level.

  26. The expression ‘decentralization arrangements’ is the proper one to designate the variable whose influence on growth I am concerned with in reality. As explained in Sect. 3.1, it reflects the multidimensional characteristics of decentralization. In this subsection, however, it is convenient to refer to a degree or level of decentralization as a single meaningful variable (also see footnote 13). Also for convenience, it is assumed that it makes sense to speak of a degree of decentralization measured in a way common to all jurisdictions.

  27. To simplify, the curves depict equilibrium states in a comparative statics and ceteris paribus sense.

  28. Almost. To be fair, some of the characteristics of jurisdictions supposed time invariant are in reality more amenable to voluntary change than their temperature.

  29. If I am correct, among the references cited Xie et al. (1999) is the only one based on an attempt to do that.

  30. I refer to voters for convenience. In fact, what must be assumed is only that governments need some support from the population, whatever the transmission channel of that support (Breton 1996).

  31. They use general thresholds or filters whereas we would need comparative ones.

  32. For instance, growth accelerations manifestly explained by other factors (changes in terms of trade, etc.) could be excluded or controlled for. Or it could be specified when in the trajectory decentralization changes must take place to be taken into account.

References

  • Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. New York: Crown Business.

    Google Scholar 

  • Ahmad, E., Li, K., & Richardson, T. (2002). Recentralization in China. In E. Ahmad & V. Tanzi (Eds.), Managing fiscal decentralization (pp. 205–224). London and New York: Routledge.

    Chapter  Google Scholar 

  • Akai, N., Nishimura, Y., & Sakata, M. (2007). Complementarity, fiscal decentralization and economic growth. Economics of Governance, 8(4), 339–362.

    Article  Google Scholar 

  • Akai, N., & Sakata, M. (2002). Fiscal decentralization contributes to economic growth: Evidence from state-level cross-section data for the United States. Journal of Urban Economics, 52, 93–108.

    Article  Google Scholar 

  • Ashworth, J., Galli, E., & Padovano, F. (2009). Government decentralization and public spending programs, MS.

  • Ashworth, J., Galli, E., & Padovano, F. (2012). Decentralization as a constraint to Leviathan: A panel cointegration analysis. Public Choice (on line).

  • Barankay, I., & Lockwood, B. (2007). Decentralization and the productive efficiency of government: evidence from Swiss cantons. Journal of Public Economics, 91, 1197–1218.

    Article  Google Scholar 

  • Baskaran, T., & Feld L. P. (2009). Fiscal decentralization and economic growth in OECD countries: is there a relationship? CESifo working paper p 2721.

  • Bazzi, S., & Clemens M.A. (forthcoming). Blunt instruments: avoiding common pitfalls in identifying the causes of economic growth. American Economic Journal: Macroeconomics.

  • Bell, A., & Jones, K. (2012). Explaining fixed effects: Random effects modelling of time-series cross-sectional and panel data, MS.

  • Bird, R. M., & Vaillancourt, F. (2006). Changing with the times: Success, failure and inertia in Canadian federal arrangements, 1945–2002. In J. S. Wallack & T. N. Srinivasan (Eds.), Federalism and economic reforms: International perspectives (pp. 189–248). Cambridge and New York: Cambridge University Press.

    Chapter  Google Scholar 

  • Blume, L., & Voigt, S. (2011). Federalism and decentralization: A critical survey of frequently used indicators. Constitutional Political Economy, 22, 238–264.

    Article  Google Scholar 

  • Bodman, P. (2011). Fiscal decentralization and economic growth in the OECD. Applied Economics, 43(23), 3021–3035.

    Article  Google Scholar 

  • Brennan, G., & Buchanan, J. M. (1980). The power to tax: Analytical foundations of a fiscal constitution. Cambridge and New York: Cambridge University Press.

    Google Scholar 

  • Breton, A. (1996). Competitive governments: An economic theory of politics and public finance. Cambridge and New York: Cambridge University Press.

    Google Scholar 

  • Breton, A., & Salmon, P. (2001). External effects of domestic regulations: Comparing internal and international barriers to trade. International Review of Law and Economics, 21(2), 135–155.

    Article  Google Scholar 

  • Breuss, F., & Eller, M. (2004). Fiscal decentralization and economic growth: Is there a link? CESifo DICE Report, Journal for Institutional Comparisons, 2(1), 3–9.

    Google Scholar 

  • Brosio, G. (2006). The assignment of revenue from natural resources. In E. Ahmad & G. Brosio (Eds.), Handbook of fiscal federalism (pp. 431–458). Cheltenham: Edward Elgar.

    Google Scholar 

  • Brueckner, J. K. (2006). Fiscal federalism and economic growth. Journal of Public Economics, 90, 2107–2120.

    Article  Google Scholar 

  • Buser, W. (2011). The impact of fiscal decentralization on economic performance in high-income OECD nations: An institutional approach. Public Choice, 149, 31–48.

    Article  Google Scholar 

  • Caldeira, E. (2012). Yardstick competition in a federation: Theory and evidence from China. China Economic Review, 23, 878–897.

    Article  Google Scholar 

  • Carrion-i-Silvestre, J. L., Espasa, M., & Mora, T. (2008). Fiscal decentralization and economic growth in Spain. Public Finance Review, 36(2), 194–218.

    Article  Google Scholar 

  • Cassette, A., & Paty, S. (2010). Fiscal decentralization and the size of government: A European country empirical analysis. Public Choice, 143(1–2), 173–189.

    Article  Google Scholar 

  • Davoodi, H., & Zou, H. F. (1998). Fiscal decentralization and economic growth: A cross-country study. Journal of Urban Economics, 43(2), 244–257.

    Article  Google Scholar 

  • Diaz-Cayeros, A., Gonzalez, J. A., & Rojas, F. (2006). Mexico’s decentralization at a crossroads. In J. S. Wallack & T. N. Srinivasan (Eds.), Federalism and economic reforms: International perspectives (pp. 364–406). Cambridge and New York: Cambridge University Press.

    Chapter  Google Scholar 

  • Dincer, O. C., Ellis, C. J., & Waddell, G. R. (2010). Corruption, decentralization and yardstick competition. Economics of Governance, 11, 269–294.

    Article  Google Scholar 

  • Ding, Y. (2007). Fiscal decentralization and economic growth in China, 1994–2002. Journal of Chinese Economic and Business Studies, 5, 243–260.

    Article  Google Scholar 

  • Enikolopov, R., & Zhuravskaya, E. (2007). Decentralization and political institutions. Journal of Public Economics, 91, 2261–2290.

    Article  Google Scholar 

  • Esteban-Laleona, S., de Frutos-Madrazo, P., & de Miguel-Bilbao, M. C. (2011). A review of the empirical literature about the relationship between fiscal decentralization and economic growth. Economia, Sociedad y Territorio, 11(36), 349–381.

    Google Scholar 

  • Feld, L. P., Baskaran, T., & Schnellenbach, J. (2008). Fiscal federalism, decentralization and economic growth: a meta-analysis, MS.

  • Feld, L. P., & Schnellenbach, J. (2011). Fiscal federalism and long-run macroeconomic performance: A survey of recent research. Environment and Planning C: Government and Policy, 29, 224–243.

    Article  Google Scholar 

  • Gemmell, N., Kneller, R., & Sanz I. (2012). Fiscal decentralization and economic growth: spending versus revenue decentralization, MS.

  • Giere, R. N. (1988). Explaining science: A cognitive approach. Chicago and London: The University of Chicago Press.

    Book  Google Scholar 

  • Hammond, G. W., & Tosun, M. S. (2011). The impact of local decentralization on economic growth: Evidence from U.S. counties. Journal of Regional Science, 51(1), 47–64.

    Article  Google Scholar 

  • Hatfield, J. (2006). Federalism, taxation, and economic growth, MS.

  • Hatfield, J. W., & Kosec, K. (2013). Federal competition and economic growth. Journal of Public Economics, 97, 144–159.

    Article  Google Scholar 

  • Hausmann, R., Pritchett, L., & Rodrik, D. (2005). Growth accelerations. Journal of Economic Growth, 10(4), 303–329.

    Article  Google Scholar 

  • Heckman, J. J. (2010). Building bridges between structural and program evaluation approaches to evaluating policies. Journal of Economic Literature, 48(2), 356–398.

    Article  Google Scholar 

  • Hooghe, L., Marks, G., & Schakel, A. H. (2008). Regional authority in 42 democracies, 1950–2006: A measure and five hypotheses. Regional and Federal Studies, 18(2–3), 111–302.

    Google Scholar 

  • Iimi, A. (2005). Decentralization and economic growth revisited: An empirical note. Journal of Urban Economics, 57, 449–461.

    Article  Google Scholar 

  • Im, T. (2010). Does decentralization reform always increase economic growth? A cross-country comparison of the performance. International Journal of Public Administration, 33(10), 508–520.

    Article  Google Scholar 

  • Jin, H., Qian, Y., & Weingast, B. R. (2005). Regional decentralization and fiscal incentives: federalism, Chinese style. Journal of Public Economics, 89, 1719–1742.

    Article  Google Scholar 

  • Koethenbuerger, M., & Lockwood, B. (2010). Does tax competition really promote growth? Journal of Dynamics and Control, 34(2), 191–206.

    Article  Google Scholar 

  • Lin, J. Y., & Liu, Z. (2000). Fiscal decentralization and economic growth in China. Economic Development and Cultural Change, 49, 1–21.

    Article  Google Scholar 

  • Madden, J. R. (2006). Australia: Central fiscal dominance, collaborative federalism and economic reforms. In J. S. Wallack & T. N. Srinivasan (Eds.), Federalism and economic reforms: International perspectives (pp. 85–142). Cambridge and New York: Cambridge University Press.

    Chapter  Google Scholar 

  • Madies, T., & Ventelou, B. (2005). Federalism in an endogenous growth model with tax base sharing and heterogeneous education services. Papers in Regional Science, 84, 1–19.

    Article  Google Scholar 

  • Markevich, A., & Zhuravskaya, E. (2011). M-form hierarchy with poorly-diversified divisions: A case of Khrushchev’s reform in Soviet Russia. Journal of Public Economics, 95(11–12), 1550–1560.

    Article  Google Scholar 

  • Martinez-Vazquez, J., & McNab, R. M. (2003). Fiscal decentralization and economic growth. World Development, 31(9), 1597–1616.

    Article  Google Scholar 

  • Martinez-Vazquez, J., & McNab, R. M. (2006). Fiscal decentralization, macrostability, and growth. Revista de Economia Publica, 179(4–2006), 25–49.

    Google Scholar 

  • Maskin, E., Quian, Y., & Xu, C. (2000). Incentives, information, and organizational form. Review of Economic Studies, 67(2), 359–378.

    Article  Google Scholar 

  • Montinola, G., Qian, Y., & Weingast, B. R. (1996). Federalism, Chinese style: The political basis for economic success. World Politics, 48(1), 50–81.

    Article  Google Scholar 

  • Nijkamp, P., & Poot, J. (2004). Meta-analysis of the effect of fiscal policies on long-run growth. European Journal of Political Economy, 20(1), 91–124.

    Article  Google Scholar 

  • Oates, W. E. (1993). Fiscal decentralization and economic development. National Tax Journal, 46, 237–243.

    Google Scholar 

  • Ogawa, H., & Yakita, S. (2009). Equalization transfers, fiscal decentralization, and economic growth. Finanzarchiv, 65(1), 122–140.

    Article  Google Scholar 

  • Pelkmans, J. (2006). European integration: methods and economic analysis (3rd ed.). Harlow and New York: Pearson Education.

    Google Scholar 

  • Plümper, T., & Troeger, V. E. (2007). Efficient estimation of time-invariant and rarely changing variables in finite sample panel analyses with unit effects. Political Analysis, 15, 124–139.

    Article  Google Scholar 

  • Plümper, T., & Troeger, V. E. (2011). Fixed-effects vector decomposition: Properties, reliability, and instruments. Political Analysis, 19, 147–164.

    Article  Google Scholar 

  • Pritchett, L. (2000). Understanding patterns of economic growth: Searching for hills among plateaus, mountains, and plains. World Bank Economic Review, 14(2), 221–250.

    Article  Google Scholar 

  • Rauscher, M. (2005). Economic growth and tax-competing Leviathans. International Tax and Public Finance, 12, 457–474.

    Article  Google Scholar 

  • Riddell, P. (1989). The Thatcher decade. Oxford: Blackwell.

    Google Scholar 

  • Rodden, J. (2003). Reviving Leviathan: Federalism and the growth of government. International Organization, 57(Fall), 695–739.

    Google Scholar 

  • Rodden, J., & Rose-Ackerman, S. (1997). Does federalism preserve markets? Virginia Law Review, 83, 1521–1572.

    Article  Google Scholar 

  • Rodriguez-Pose, A., & Ezcurra, R. (2011). Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries. Journal of Economic Geography, 11(4), 619–643.

    Article  Google Scholar 

  • Roodman, D. (2007). The anarchy of numbers: Aid, development and cross-country empirics. World Bank Economic Review, 21(2), 255–277.

    Article  Google Scholar 

  • Rose-Ackerman, S. (1991). Rethinking the progressive agenda: The reform of the American regulatory state. New York: The Free Press.

    Google Scholar 

  • Salmon, P. (1987). Decentralisation as an incentive scheme. Oxford Review of Economic Policy, 3(2), 24–43.

    Article  Google Scholar 

  • Salmon, P. (2011). Yardstick competition among national governments: Reflections on a research programme that does not exist, MS.

  • Salmon, P. (forthcoming). Reforms and decentralization: Friends or foes? In: F. Cabrillo & M. A. Puchades-Navarro (Eds). Constitutional economics and public institutions. Cheltenham: Edward Elgar.

  • Sato, M., & Yamashige, S. (2005). Decentralization and economic development: An evolutionary approach. Journal of Public Economic Theory, 7(3), 497–520.

    Article  Google Scholar 

  • Singh, N., & Srinivasan, T. N. (2006). Indian federalism, economic reform, and globalization. In J. S. Wallack & T. N. Srinivasan (Eds.), Federalism and economic reforms: International perspectives (pp. 301–363). Cambridge and New York: Cambridge University Press.

    Chapter  Google Scholar 

  • Stansel, D. (2005). Local decentralization and local economic growth: A cross-sectional examination of US metropolitan areas. Journal of Urban Economics, 57, 55–72.

    Article  Google Scholar 

  • Stegarescu, D. (2005). Public sector decentralization: Measurement concepts and recent international trends. Fiscal Studies, 26(3), 301–333.

    Article  Google Scholar 

  • Thiessen, U. (2003). Fiscal decentralization and economic growth in high income OECD countries. Fiscal Studies, 24(3), 237–274.

    Article  Google Scholar 

  • Thornton, J. (2007). Fiscal decentralization and economic growth reconsidered. Journal of Urban Economics, 61(1), 64–70.

    Article  Google Scholar 

  • Treisman, D. (2007). The architecture of government: Rethinking political decentralization. Cambridge and New York: Cambridge University Press.

    Book  Google Scholar 

  • Voigt, S., & Blume, L. (2012). The economic effects of federalism and decentralization—a cross-country assessment. Public Choice, 151, 229–254.

    Article  Google Scholar 

  • Weingast, B. R. (1995). The economic role of political institutions: Market-preserving federalism and economic development. Journal of Law Economics and Organization, 11(1), 1–31.

    Google Scholar 

  • Weingast, B. R. (2009). Second generation fiscal federalism: The implications of fiscal incentives. Journal of Urban Economics, 65, 279–293.

    Article  Google Scholar 

  • Woller, M., & Phillips, K. (1998). Fiscal decentralization and LDC economic growth: An empirical evaluation. Journal of Development Studies, 34(4), 139–148.

    Article  Google Scholar 

  • Xie, D., Zou, H. F., & Davoodi, H. (1999). Fiscal decentralization and economic growth in the United States. Journal of Urban Economics, 45(2), 228–239.

    Article  Google Scholar 

  • Xu, C. (2011). The fundamental institutions of China’s reforms and development. Journal of Economic Literature, 49(4), 1076–1151.

    Article  Google Scholar 

  • Zhang, T., & Zou, H. F. (1999). Fiscal decentralization, public spending and economic growth in China. Journal of Public Economics, 67, 221–240.

    Article  Google Scholar 

  • Zuravskaya, E. (2010). Federalism in Russia, MS.

Download references

Acknowledgments

Many thanks to Ehtisham Ahmad, Albert Breton, Giorgio Brosio, Fabio Padovano and several anonymous referees for helpful comments and suggestions on earlier versions of the paper. The usual disclaimer applies.

Author information

Authors and Affiliations

  1. Laboratoire d’Economie et de Gestion, CNRS, Université de Bourgogne, Dijon, France

    Pierre Salmon

Authors
  1. Pierre Salmon
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Pierre Salmon.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Salmon, P. Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?. Const Polit Econ 24, 87–107 (2013). https://doi.org/10.1007/s10602-013-9137-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10602-013-9137-8

Keywords

JEL Classification

Search

Navigation