Decentralization (Localization) & Corruption: New Cross-Country Evidence

This paper attempts to improve our understanding and measurement of decentralization and its relationship with corruption in a worldwide context. This is done by presenting the conceptual underpinnings of such relationship as well as using superior and more defensible measures of both decentralization in its various dimensions as well as corruption for a sample of 182 countries. It is the first paper that treats various tiers of local governments (below intermediate order of government) as the unit of comparative analysis. In contrast, previous analyses had erroneously focused on subnational governments as the unit of analysis which yields invalid cross-country comparisons. By pursuing rigorous econometric analysis, the paper demonstrates that decentralization, when properly measured to mean moving government closer to people by empowering of local governments, is shown to have significant negative effect on the incidence of corruption regardless of the choice of the estimation procedures or the measures of corruption used. In terms of various dimensions of decentralized local governance, political decentralization matters even when fiscal decentralization is controlled for. Further voice (political accountability) is empirically shown to be more important in combating corruption than exit options made available though competition among jurisdictions.