Fiscal Federalism, Decentralization, and Economic Growth: A Meta-Analysis

By Baskaran, Thushyanthan; Feld, Lars P. et al. | Economic Inquiry, July 2016 | Go to article overview

Fiscal Federalism, Decentralization, and Economic Growth: A Meta-Analysis


Baskaran, Thushyanthan, Feld, Lars P., Schnellenbach, Jan, Economic Inquiry


The theoretical literature on fiscal federalism has identified several channels through which government decentralization could affect economic growth. Much of the literature focuses on the efficiency aspects of a decentralized provision of public services, but decentralization may also increase growth by raising the ability of the political system to innovate and carry out reforms. In contrast, some authors argue that decentralization increases corruption and government inefficiency, and thus may diminish growth. Given this theoretical ambiguity, several studies have attempted to identify the effect of decentralization on economic growth empirically over the last two decades. We review and conduct a meta-analysis of this empirical literature. Based on our analysis, we point out open questions and discuss possible ways to answer them. (JEL H77, 043, C52)

I. INTRODUCTION

Building on various theoretical contributions, an empirical literature analyzing the effect of fiscal decentralization on economic growth has emerged since the 1990s. The relevant studies vary as to whether they use cross-sectional, time series, or panel data, as to whether they rely on cross-country or single-country samples, and they vary in estimation methods, decentralization measures, and sample composition.

Given the size and heterogeneity of the empirical literature, it is useful to review the individual studies and summarize their main findings. Conducting a comprehensive search, we identify 31 published and unpublished studies on the effect of fiscal decentralization on economic growth. Each of these studies estimates several models, resulting in over 400 individual estimates. While we first review these studies in a traditional manner, our main aim is to analyze these estimates quantitatively. Specifically, the main contribution of this article is to offer a meta-analysis of the empirical findings on fiscal decentralization and economic growth.

A meta-analysis is a useful methodology in our context as it is difficult to obtain clear-cut conclusions with only a traditional survey of empirical literature: the individual studies vary substantially in their characteristics and correspondingly in the findings they report. By conducting a meta-analysis, however, we can identify how the idiosyncratic characteristics of a particular study relate to its findings. The meta-analysis approach thus addresses model uncertainty with regard to each individual estimate. In addition, it can also serve as a partial response to the methodological critique of empirical research on fiscal decentralization by Rodden (2004), as it helps to clarify the quantitative effects of different decentralization measures and estimation techniques. Finally, as meta-analytical techniques are rarely used in economics, we also aim at contributing to the further establishment of this methodology (Stanley 2001, 2008).

The next section briefly discusses the various theoretical arguments as to why fiscal decentralization may affect economic growth. We then provide a short traditional survey of the empirical studies in Section III. We review this literature more systematically and quantitatively in Section IV. In Section V, we report the results of meta-regressions and discuss how the idiosyncratic characteristics of a given study are related to its specific findings. Finally, Section VI provides a discussion of the results and some conclusions.

II. HOW COULD FISCAL FEDERALISM AFFECT ECONOMIC GROWTH? THEORETICAL APPROACHES

Within the framework of the Solow-Swan model (Solow 1956; Swan 1956), fiscal federalism may be associated with a different level of efficiency in governance than unitary systems, leading to a different value of Solow's A, the level of technology. A regime change toward federalism would then be associated with temporarily different growth rates, and eventually different levels of income, but not with persistent growth differences. …

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