Decentralization and Economic Growth: Specification, Measurement, and Direction of Causal Relationship

ABSTRACT

The concept of decentralization has attracted the attention of scholars and policy makers alike for number of decades. Yet, there still remains a significant amount of confusion over its measurement and its contribution to an economy. Current literature on decentralization is characterized by the multitude of conflicting definitions and measurement instruments. Current literature on the relationship of decentralization and economic growth is also mixed. This article builds on the existing literature and develops a decentralization index that includes its most frequently mentioned dimensions. We find that our newly developed index captures decentralization concept better than other tools and that there is no significant relationship between decentralization and economic growth.

KEYWORDS:

• Decentralization measurement
• economic growth
• comparative studies

Notes

^1. This article does not examine the relationship between governance, institutional arrangements, and EG. The focus of this article is D and its relationship with EG.

^2. Administrative, political, and economic D; the World Bank, among many others, makes exactly this division of the D concept on its webpage http://www1.worldbank.org/publicsector/decentralization/

^3. Review is not intended to be exhaustive. The purpose of the review is to provide theoretical justification for model specification of the proposed D measurement.

^4. This definition is not new. It was previously adopted and used by multiple authors/sources (e.g., Bahl & Martinez-Vazquez, 2005; Oates, 1993; Schneider, 2003; Tanzi et al., 2008; World Bank, 2003; Yilmaz et al., 2010; etc.).

^5. Such relationship is viewed as a continuum of the subnational governments’ autonomy. De-concentration represents a bureaucratic and hierarchical relationship; delegation implies a contractual rapport; and devolution is an arm’s-length connection between levels of government.

^6. An example of such demands in the contemporary political context is the unrecognized secession of Crimean peninsula from Ukraine that is partially explained by an alleged local populace’ demand for self-governance.

^7. The evidence of such influence is extensively documented in institutionalism-inspired studies of D (Lankina et al., 2007; Yilmaz et al., 2010).

^8. Detailed description and review of Fiscal Federalism is beyond the purpose of this article.

^9. The in-depth discussion of both ex ante and ex post arguments supporting D is provided in Brennan and Buchanan (1980), Latkina (2008), Oates (1972), Tanzi (1995, 2008), and Yilmaz et al. (2010).

^10. For detailed discussion see Campbell and Mankiw (1987), De Long (1988), Easterly (1990), Lucas (1990), Romer (1990), Renelt (1991), and Quah (1989).

^11. Lin and Liu (2000) follow Mankiw et al. (1992) and specify a Solow (1956) model of EG that assumes decreasing returns to all forms of reproducible capital.

^12. Results are available upon request.