The global crisis and intergovernmental relations: centralization versus decentralization 10 years on

ABSTRACT

There is a growing empirical literature on the effects of the global financial and economic crisis on intergovernmental relations. This paper contributes to this literature by focusing on conventional budgetary aggregates and institutional indicators of subnational authority in policy-making and fiscal–financial management. The empirical analysis is carried out for a large set of advanced and emerging-market/developing economies between 1990 and 2015, and it shows that the crisis has been associated with an increase in the subnational shares of general government spending and revenue. The findings for subnational authority over policy and fiscal–financial management are more nuanced and suggest that increases in government indebtedness (spending) since the crisis have been associated with greater (weaker) subnational authority. It is possible that the need to deliver debt reductions through medium-term fiscal consolidation calls for greater intergovernmental coordination, which enhances the bargaining power of the subnational jurisdictions to broaden their prerogatives in fiscal matters and influence national policy-making.

KEYWORDS:

• federalism
• decentralization
• intergovernmental relations

JEL:

• C33
• H11
• H72
• H77

ACKNOWLEDGEMENTS

This paper was prepared for presentation at the 3rd International Conference on Decentralisation after the Great Recession: Fine-Tuning or Paradigm Shift?, Santiago de Compostela, Spain, 26–27 October 2017. The authors are indebted to the editor and two anonymous referees for comments made on an earlier version of the paper. Thanks also to Oriol Roca, Andreas Kyriacou, Pablo Beramendi, Jorge Martinez-Vazquez and Santiago Lago-Peñas for their valuable suggestions. The authors remain solely responsible for any remaining errors and/or omissions. The views expressed in this paper are the authors’ own and do not necessarily reflect those of the organizations to which they are affiliated and their member countries.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. For analyses of the fiscal impacts of the global financial and economic crisis on subnational governments, see, for example, Ter-Minassian and Fedelino (2009) and OECD (2009a, 2009b).

2. Appendix A in the supplemental data online presents for each data source the countries covered as well as summary statistics and correlation matrices amongst the different variables used.

3. Data were collected mostly from the IMF’s Government Finance Statistics and World Economic Outlook databases, the World Bank’s World Development Indicators, as well as Eurostat and OECD databases.

4. We thank the authors for kindly sharing their data.

5. The coverage of both indicators differs in that the Hooghe et al. (2016) indicators exclude local governments, or jurisdictions with < 150,000 inhabitants, whereas the fiscal decentralization indicators include both middle-tier and local governments.

6. For example, see the analysis reported by Jametti and Joanis (2009) based on the IMF’s Government Finance Statistics database, and OECD and KIPF (2016) based on OECD data.

7. Countries where legislatures are not competitively elected are considered those where only the executive wields a check.

8. For further details, see the codebook (https://publications.iadb.org/handle/11319/7408).

9. Recent evidence on the links between economic development and decentralization include Panizza (1999) and Arzaghi and Henderson (2005). Both studies focus on expenditure centralization and find that income (as well as land area) is negatively associated with centralization.

10. Stegarescu (2009) uses OECD data to assess the effect of economic and political integration on decentralization and finds that trade openness is associated with a higher degree of decentralization.

11. We experimented with adding the share of general government capital spending in GDP in the baseline regressions. The results (available from the authors upon request) confirm the increase in the subnational share of transfers and revenue after the crisis associated with the post-crisis investment drive. However, capital spending data are available only for a significantly smaller sample of country-years; the indicator was therefore omitted from the baseline specification.

12. Incidentally, Bordo, Markiewicz, and Jonung (2011) investigate the consequences of the Great Depression and also find a centralizing effect on federal relations.

13. In some specifications the number of observations drops considerably due to data availability constraints; hence, our discussion of the results should be taken with care.

14. For a recent paper on the topic of jobless recoveries, see Plotnikov (2014), who develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate.