Is Federalization a Corruption-Abatement Strategy in Developing Countries?

Would a shift to a Federal system raise or lower corruption in low-income countries? Local ownership, which is a strong argument for control of corruption under a Federal system, may not always be effective in jurisdictions with weak institutions. Our theoretical model shows that the net effect of these conflicting pressures cannot be determined a priori. Thus, we test empirically whether de jure federalism and/or de facto federalism are each a good predictor of control of corruption. We find that in countries with sufficiently high quality of governance or levels of development, neither de jure federalism nor de facto federalism matters as much as other dimensions of governance. However, in countries with poor governance, de jure federalism may have an adverse effect on control of corruption. A developing economy, which ranks poorly in terms of governance, cannot expect a reduction in corruption to follow a shift to a Federal system.