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Fiscal decentralization and regional disparities: the importance of good governance

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  • Leonel Muinelo-Gallo

    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a)

  • Andreas P. Kyriacou

    (Universitat de Girona (España). Departament d'Economia)

  • Oriol Roca-Sagalés

    (Universitat Autí²noma de Barcelona (España). Departament d'Economia Aplicada)

Abstract

In this paper we consider how government quality mediates the relationship between fiscal decentralization and regional disparities. Previous work has argued that fiscal decentralization has the potential to reduce income difference across regions but that this potential may not be realized because of governance problems associated with subnational authorities. Our empirical evidence based on a sample of 24 OECD countries over the period 1984 to 2006 lends a measure of support to this idea. We find that fiscal decentralization promotes regional convergence in high government quality settings but, worryingly, it leads to wider regional disparities in countries with poor governance. Because most poor countries are plagued with governance problems, this would caution against fiscal decentralization with a view to reducing regional disparities in these countries.

Suggested Citation

  • Leonel Muinelo-Gallo & Andreas P. Kyriacou & Oriol Roca-Sagalés, 2013. "Fiscal decentralization and regional disparities: the importance of good governance," Documentos de Trabajo (working papers) 13-03, Instituto de Economía - IECON.
    • Handle: RePEc:ulr:wpaper:dt-03-13
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    More about this item

    Keywords

    fiscal decentralization; regional disparities; government quality;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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