Abstract
The economic effects of federalism are unclear: some papers find that federalism has strong positive effects on a number of economically relevant variables, others find negative effects. The results often crucially hinge on the proxies for federalism used. In this paper, we critically survey the existing indicators for both federalism and fiscal decentralization. We argue that federalism is a constitutional institution, whereas decentralization is the outcome of a policy choice, and that the two ought to be systematically distinguished because decentralization can also occur in nonfederally structured states. We further argue that institutional details are very important with regard to federalism and that dummy variables usually capture only very specific aspects of these institutional details. We use factor analysis to test whether the latent variables behind the observed indicators support these assumptions. More than two important factors are derived, implying that a more fine-grained differentiation beyond simply “‘federalism” and “decentralization” might be in order. The correlations of the most important proxies for various aspects of federalism and decentralization with a number of quasi-exogenous variables, as well as with institutional variables, are usually rather modest.
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Notes
These new factors are employed as explanatory variables in a companion paper (Voigt and Blume 2011) that also contains a theoretical section in which the potential effects of federal structure on a number of economically relevant variables are described in detail.
Correlations with economic variables vary depending on the variables chosen to measure economic effects, e.g., happiness, output per worker, or government expenditure. This is relevant for our companion paper (Voigt and Blume 2011), in which we estimate the economic effects of federalism and decentralization.
Kyriacou and Roca (2010) demonstrate that the concrete aspect of decentralization analyzed also matters a great deal: They find that fiscal decentralization is positively correlated with a broad indicator of the quality of governance whereas various measures of political decentralization (such as regional elections or bicameralism) are negatively correlated with that indicator.
Of course, we are not the first to emphasize the necessity to distinguish between federalism and decentralization. Previous papers that have—at least implicitly—acknowledged the difference include Besley and Coate (2003), Blankart (2000), Döring and Schnellenbach (2010) and Feld et al. (2008, 2010). None of them has, however, tried to separate the two concepts empirically by drawing on factor analysis.
A referee wasn’t convinced pointing at the lingering threat of a central veto (by an autocrat) should the lower-level governments use their autonomy in a way not in line with the central government’s objectives. This danger is always present no matter whether the central government is autocratic or not. Further, federally structured autocracies might be composed of different clans, factions etc. that are geographically delineated. If none of these groups is close to dominate the rest and coalitions are not stable than a factual federation might well be sustainable. Historically, the Holy Roman Empire comes to mind. Table 1 below contains a list of countries conventionally coded as federal. Argentina and Brazil were included into this list even during their various stints of military dictatorship. Other countries on that list have also experienced periods of autocracy such as Ethiopia, Nigeria and Pakistan. Drawing on available data from Polity IV, the United Arab Emirates have always been highly autocratic.
The distinction between constitutional vs. post-constitutional choice is fundamental in constitutional political economy (see, e.g., Buchanan 1975).
Analyzing the variation of the share of subnational government spending over total government spending for the period 1975–1995 and a sample of 120 states (18 of which are federal in the sense of Table 1) shows that variation in nonfederal states is on average 25% higher than in federal states.
Voigt (2008) discusses some of the difficulties of measuring real-world institutions.
A referee pointed out that Schneider (2003) draws on the same categorization. He is also concerned with the possibility to clearly separate between the three concepts. But federalism does not play any role in his paper.
Due to the very few countries for which this indicator has been coded, we do not include it in the factor analysis in the next section.
The DPI codebook stresses that autonomous regions are not the same as states or provinces. To be coded as “1” here, the constitution must mention these regions as either “autonomous,” “independent,” or “special.” Prima facie, this indicator bears little relationship to federalism.
The dummy is the answer to the question: “Does the country have a federal constitution?” Her codebook does not specify any criteria.
In the literature on fiscal federalism, the credibility of the national government’s claims that it will not bail out subnational governments is hotly debated. We refrain from entering this debate here, but will just mention that a high degree of borrowing autonomy can become a big problem if the central government cannot credibly commit to non-bail-out policies.
In case of missing values in the original variables, we imputed mean values.
The two subsequent components not documented in Table 4 have an eigenvalue of <1 and could be interpreted as proxying for “autonomous region” and “number of administrative units.”
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The authors thank Anne van Aaken, Sang-Min Park, Hafiz Rahman, and Janina Satzer for critical comments on a first draft of this paper.
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Blume, L., Voigt, S. Federalism and decentralization—a critical survey of frequently used indicators. Const Polit Econ 22, 238–264 (2011). https://doi.org/10.1007/s10602-011-9105-0
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DOI: https://doi.org/10.1007/s10602-011-9105-0