Decentralisation and income inequality in Central and Eastern European countries

Abstract

This paper provides empirical evidence for the association between fiscal decentralisation and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1992–2016. We focus on three research topics: the effect of decentralisation on income inequality; the effects of the structure of subnational government finance on income inequality; and the validity of the Kuznets hypothesis. The main findings from the empirical exercise are as follows: first, we provide firm evidence on the presumed favourable effects of fiscal decentralisation on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralisation on income inequality are dependent on the source of finance of subnational governments, i.e. intergovernmental transfers may have a role in income equalisation; third, we cannot confirm the validity of the Kuznets hypothesis in CEE countries.

Keywords:

• Fiscal decentralisation
• fiscal transfers
• inequality
• Central and Eastern Europe
• panel data models

Notes

1. The data on the GINI index are taken from the World Bank’s Development Indicators Database, which is available at: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators.

2. We have re-run the regressions employing a slightly different education variable (the gross rate of secondary school enrolment), which had the same sign of the regression coefficient, but appeared to be statistically insignificant.