On The Measurement And Impact Of Fiscal Decentralization

The typical post-Bretton Woods era development approach that emphasized central government-led development efforts has changed dramatically, and local governments have clearly emerged as players in development policy. The thinking about what is important to achieve in development objectives is changing as fiscal decentralization reforms are being pursued by many countries around the world. In this context, a number of studies have attempted to quantify the impact of decentralization by relating some measure of it to economic outcomes of fiscal stability, economic growth, and public sector size. But decentralization is surprisingly difficult to measure. Nearly all cases examining the relationship between decentralization and macroeconomic performance have relied on the Government Finance Statistics (GFS) of the International Monetary Fund. However, despite its merits, GFS falls short in providing a full picture of fiscal decentralization. For some countries, however, there is data that more accurately captures fiscal responsibilities among different types of governments.

This paper examines the importance of fiscal autonomy in the analysis of decentralization. Using new data published by the OECD (2001 and 2002), it reproduces several indicators and proposes new measures of decentralization that take into consideration subnational governments' autonomy over their revenues. Two models are reproduced: Davoodi and Zou (1998) on decentralization and economic growth, and Oates (1985), on decentralization and public sector size. Some evidence suggests that fiscal autonomy positively affects economic growth. Also, it seems to affect the size of the state, but evidence on this relation is limited. Despite some statistical weaknesses, there are sufficient indications to argue that subnational governments' fiscal autonomy should be a major concern when measuring decentralization. This paper - a product of the Poverty Reduction and Economic Management Division, World Bank Institute - is part of a larger effort in the institute to take a critical look at the nature and implications of measuring the fiscal dimension of decentralization.

March 1998 Applying an index for the quality of governance reveals a surprisingly strong positive correlation between fiscal decentralization and quality of governance. Debates about the appropriate role, policies, and institutions of the state are often hampered by the lack of a definition for good government. To provide a quantifiable measure of good government, Huther and Shah develop an index for the quality of governance for a sample of 80 countries. They apply the index to the debate on the appropriate level of fiscal decentralization. In measuring the quality of governance, the authors develop indices for the government's ability to: * Ensure political transparency and a voice for all citizens (the citizen participation index measures political freedom and political stability). * Provide effective public services efficiently (the government orientation index measures judicial and bureaucratic efficiency and the absence of corruption). * Promote the health and well-being of its citizens (the social development index measures human development and equitable distribution of income). * Create a favorable climate for stable economic growth (the economic management index measures outward orientation, independence of the central bank, and an inverted debt-to-GDP ratio). In relating the index of governance quality to degree of fiscal decentralization for the 80 countries, Huther and Shah are not surprised to find a positive relationship between fiscal decentralization and quality of governance. But the strength of the correlation is surprising. This paper-a product of Country Evaluation and Regional Relations Division, Operations Evaluation Department-is part of a larger effort in the department to examine the role of the authorizing environment in public sector performance.

Conventional wisdom postulates that there are benefits from decentralizing government finances but there is little empirical evidence about actual country practices. This paper presents data on fiscal decentralization for about 80 countries over a period of about 20 years (1990-2008) from the IMF’s Government Finance Statistics Yearbook (GFSY), the only global database with fiscal data for several levels of government. The data show that in many countries, revenue collection remains relatively more centralized than expenditures and that employment tends to be concentrated in lower levels of government. Except for transition economies, the levels of decentralization are relatively stable over the time period. The findings are shown by degree of economic development, constitutional power arrangements, and geographic area, broadly confirming key factors identified in the literature as determining the extent of fiscal decentralization.

This paper explores the impact of fiscal decentralization on the efficiency of public service delivery. It uses a stochastic frontier method to estimate time-varying efficiency coefficients and analyzes the impact of fiscal decentralization on those efficiency coefficients. The findings indicate that fiscal decentralization can improve the efficiency of public service delivery but only under specific conditions. First, the decentralization process requires adequate political and institutional environments. Second, a sufficient degree of expenditure decentralization seems necessary to obtain favorable outcomes. Third, decentralization of expenditure needs to be accompanied by sufficient decentralization of revenue. Absent those conditions, fiscal decentralization can worsen the efficiency of public service delivery.

Decentralization of fiscal responsibilities has emerged as a primary objective on the agendas of national governments, and international organizations alike. Yet there is little empirical evidence on the potential benefits of this intervention. The authors fill in some quantitative evidence. Using panel data on infant mortality rates, GDP per capita, and the share of public expenditures managed by local governments, they find greater fiscal decentralization is consistently associated with lower mortality rates. The results suggest that the benefits of fiscal decentralization are particularly important for poor countries. They suggest also that the positive effects of fiscal decentralization on infant mortality, are greater in institutional environments that promote political rights. Fiscal decentralization also appears to be a mechanism for improving health outcomes in environments with a high level of ethno-linguistic fractionalization, however, the benefits from fiscal decentralization tend to be smaller.