Explaining Fiscal Decentralisation: Geography, Colonial History, Economic Development and Political Institutions

Abstract

Why are some countries more fiscally decentralised than others? Scholars have attributed such differences to geographical, cultural, institutional and economic factors. Using a dataset of 66 countries, I test various hypotheses. The results suggest territorially larger–but not necessarily more populous–countries are more fiscally decentralised. Former colonies of Spain or Portugal are more centralised, while former Soviet states are particularly decentralised. Economic development leads to greater expenditure decentralisation, but affects revenue decentralisation less, rendering local governments in richer countries more dependent on central transfers. Federal states are more decentralised, in part because federalism is more common among more developed countries. Ethnolinguistic divisions did not correlate with decentralisation. Neither the level nor duration of democracy had any clear effect. Longitudinal analysis suggested democratisation is associated with a significant but tiny increase in decentralisation.