Decentralization and Political Institutions

Does fiscal decentralization lead to more efficient governance, better public goods, and higher economic growth? This paper tests hypotheses posed by theoretical literature that the results of decentralization depend on features of political institutions. Using data from 95 countries for 25 years, we show that the effect of decentralization on economic growth, quality of government, and public goods provision strongly depends on two aspects of political centralization: 1) strength of national party system (measured by fractionalization of parliament and age of main parties) and 2) subordination (whether local and state executives are appointed or elected). We find solid support for Riker's theory (1964) in developing countries: strong parties significantly improve the results of fiscal decentralization in terms of economic growth, quality of government, and public goods provision. There is also some evidence that subordination of local to higher-level governments improves the effect of decetralization on growth (in developed and developing countries) and government quality (in developing countries), while its effect on public goods depends on particular type of publis goods considered.