A new approach to test the effects of decentralization on public infrastructure investment

ABSTRACT

This paper proposes a simple theoretical framework to obtain a tractable equation that considers the traditional criteria for allocating public infrastructure investment and variables to capture decentralization. Panel data for the regions of Spain over the period 1986–2010 are used. Positive effects of fiscal and administrative decentralization on public investment in infrastructure are found. The results are strongly robust to different relative measures of public infrastructure investment, estimation methods and databases. Moreover, in line with recent theoretical literature, additional estimations suggest that such effects are bounded and there is no long-run relationship between decentralization and public infrastructure investment.

KEYWORDS:

• decentralization
• public infrastructure
• Spain
• panel data

JEL:

• C23
• H54
• H77

ACKNOWLEDGEMENTS

The author thanks the associate editor and two anonymous referees for their comments.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

ORCID

Henry Aray http://orcid.org/0000-0001-6081-0441

Notes

1. According to the World Bank’s definition, administrative decentralization places planning and implementation responsibilities in the hands of elected local governments.

2. For a survey of the effects of public capital on the economy, see Bom and Ligthart (2014).

3. In 1996, the law was modified to make public–private partnerships (PPP) more flexible. In 2003, Act 13/2003 of 23 May extended the PPP for any kind of public infrastructure, allowing private initiative to undertake activities required to design, build, finance and operate (DBFO). It also regulated the distribution of risk between grantor and concessionaire, rates and concession time. Act 30/2007 of 30 October repelled Act 13/2003, but hardly modified the PPP (Vassallo Magro & Izquierdo de Bartolomé, 2010). Road and highways are the type of infrastructure where PPP is most common.

4. The data for Spain are currently included in the Structural Analysis database (STAN) and the Productivity database, both of the OECD and EU KLEMS.

5. It includes items 102, 103, 202, 203 and 600 of the public investment series of the BBVA Foundation–Ivie.

6. These variables were constructed based upon RULERS, World Statesmen.org and the Spanish Ministry of Home Affairs (Ministerio del Interior).

7. Rich (1989) summarizes the earlier prominent theories in the literature of distributive politics.

8. The autonomous cities of Ceuta and Melilla are not considered here owing to the lack of data for the entire period.

9. However, the estimations and testing of interregional spillover and network effects are beyond the scope of this paper. For more on this, see González-Alegre (2015).

10. The results of the two-stage least squares (2SLS) estimation are similar to Table 4. These are available from the author upon request.

11. Data come from the Bancaja Foundation–Ivie.

12. These include Aragon, Asturias, the Balearic Islands, Cantabria, Castile-La Mancha, Castile-Leon, Extremadura, La Rioja, Madrid and Murcia.

13. These include Andalusia, the Canary Islands, Catalonia, Valencia and Galicia.

14. The Basque Country and Navarre are foral communities. Formally, they also took the route of Article 151. However, because of their particular characteristics, they are usually classified in a different category.

15. Estimation across types of autonomous communities was also carried out and similar results to Table 6 were obtained. These are available from the author upon request.

Additional information

Funding

This work was supported by the Instituto de Estudios Fiscales of Spain and the Fundación Centro de Estudios Andaluces [grant number PRY108/14], for which the author gratefully acknowledges.