• unlimited access with print and download
    $ 37 00
  • read full document, no print or download, expires after 72 hours
    $ 4 99
More info
Unlimited access including download and printing, plus availability for reading and annotating in your in your Udini library.
  • Access to this article in your Udini library for 72 hours from purchase.
  • The article will not be available for download or print.
  • Upgrade to the full version of this document at a reduced price.
  • Your trial access payment is credited when purchasing the full version.
Buy
Continue searching

Decentralization and economic growth: Evaluation, measurement, and causality

ProQuest Dissertations and Theses, 2009
Dissertation
Author: Boris Morozov
Abstract:
The concept of decentralization is an issue that for years has attracted the careful attention of scholars, practitioners, and citizens. The general argument of the decentralization concept consists of the fact that, when properly implemented, it can facilitate the economic growth of a nation. Various international organizations (e.g. World Bank and International Monetary Fund) have identified multiple instances where decentralization was an important element of a nation's development strategy. And, although the technical assistance received by these nations from international organizations was essentially comparable, the actual outcomes have varied significantly from country to country. Thus, the relationship between fiscal decentralization and economic growth is uncertain at best. The primary contribution of this dissertation is its theoretical framework for the empirical measurement of decentralization. The dissertation's research questions are as follows: (1) What are the components of decentralization measurement given its complexity? and (2) What is the direction of causality between economic growth and decentralization? Answering these questions builds on the existing body of knowledge and should contribute to our understanding of the essence of fiscal decentralization and its relationship to economic growth. Such understanding will ultimately be helpful in the identification of specific fiscal decentralization arrangements (e.g., institutional arrangements, governance mechanisms, etc.) that are conducive to better policy decisions and governance.

Table of Contents: No.

Content Page No. 1 Chapter 1: Federalism, Decentralization and Economic Growth: The Importance of and Necessity for Better Understanding 1

Introduction: Importance of the Decentralization Concept 1

Conceptually Positive Influence of the Decentralization Process 3

Arguments against the Decentralization Movement 11 Statement of the Research Problem and Structure of the Dissertation

16 2 Fiscal Federalism and Decentralization: Review of the Literature 19

Introduction 19

Fiscal Federalism and Decentralization: Origins and Essence 21 Public Administration and Political Science Views on Decentralization 36

Major Elements of Decentralization and its Taxonomy 41

Fiscal Decentralization, Preference Matching, Service Delivery, and Economic Growth: Summary of the Current Literature 47 Theories of Economic Growth

62 3 Chapter 3: A Conceptual and Measurement Model of Decentralization and Its Relation with Relationship to/with Economic Growth 68 Introduction: A Theoretical Model of Decentralization: Three Dimensions 68

Definitions of Concepts 69

Economic implications of decentralization. 70

Administrative implications of decentralization. 73

Political implications of decentralization. 76

Potential negative impacts of decentralization. 78 On Interrelationships of Dimensions and Their Influence on Economic Growth 79

Conceptual Map of the Research 81 Importance of Decentralization System and Contribution to the Field 83

Model of Economic Growth: Measurement and Variables 85

Measurement of Decentralization 91

Economic components of decentralization system. 93

Administrative components of decentralization system. 95

Political components of decentralization system. 99 Interrelations among dimensions.

100

v

4 Chapter 4: Data and Methodology 103

Introduction 103

Sources of Data 104

Potential sources of data and description of datasets. 104

GFS dataset. 105

“Governance matters” (GM) dataset. 109

Initial Population and Sample Selection Process 111

Imputations and finalization of the sample. 115

Analysis of GFS data availability for FY 2000-2007. 117

General Data Description 119

Economic dimension decentralization data. 121

Administrative component of decentralization. 123

Political component of decentralization. 125

Description of the sample by income group. 127

Data description according to IMF geographical classification. 139

Methodology: Confirmatory Factor Analysis and Panel Data 139 5 Chapter 5: Results 142

Introduction 142

Decentralization Index 142

Technique and methodology. 142

Model specification. 145 Identification and convergence of the CFA model for decentralization process. 147

Decentralization index results. 150

Goodness-of-fit statistics (fit of the model to data). 154 Decentralization Index - Evolution of the Index by Income Group and by Region. 159

Economic Growth Model: Issues and Estimation Diagnostics 167

Methodology. 167

Issues involved in utilizing panel data. 168

Estimation of panel models: random versus fixed-effects. 169

Regression Diagnostics 173

Multicolliniarity. 173

Heteroskedasticity. 175

Normality of the distribution. 176

Economic Growth Estimation Results 178

Aggregated decentralization index results. 178

Separate decentralization indexes results. 179

2 Stages Least Squares Results 182

Unit Roots, Autocorrelation and Co-integration. 185

vi

6

Chapter 6: Conclusions, Implications for Theory and Practice, and Final Remarks on the Process of Decentralization and its Importance 187

Theoretical Discussions and Relevance of Decentralization 187

Decentralization Study: Summary and Overall Findings 189 Decentralization Process and Economic Growth – Evidence and Consequences 194

Discussion of arguments for the benefits of decentralization. 197

Discussion of arguments cautioning against decentralization. 201

Limitations of the Current Study 204

Significance of the Research and Concluding Remarks

207

7

References

212

8 Appendix 218 Appendix A: Figures and Descriptive Statistics of the Sample According to IMF Regional Classification 219 Appendix B: Descriptive Statistics of Decentralization Variables by IMF Regional Classification: 224

Appendix C: Goodness-of-Fit Statistics for Decentralization Model 227

Appendix D: Test for fixed vs random effects 228

Appendix E: Ramsey's RESET Print Out 229

Appendix F: 2SLS Correlations 230

Appendix G: 2SLS Results 232

Appendix H: ADF Results 233

Appendix I: Decentralization Index Values 236

Appendix J: t Test: Paired Two Sample for Means 244

vii

List of Tables No. Title Page No. Table 2.1: Components of Fiscal Decentralization System by Bahl and Martinez-Vazquez 42 Table 2.2: Dimensions of Decentralization Process 46 Table 2.3: Selected Literature on Decentralization, Service Efficiency and Delivery 51 Table 2.4: Decentralization and Economic Growth Literature – Major Elements 59 Table 3.1: Economic Variables of the Model 89 Table 3.2: Dimensions and Specific Variables of Decentralization Process

102 Table 4.1: GFS Variables of Interest 113 Table 4.2: Pre-Imputations Sample 1996-2007 114 Table 4.3: Missing GFS Variables Summary 116 Table 4.4: Final Sample for FY 2000-2007 118 Table 4.5: Final Sample Description by IMF Income Group and IMF Region 120 Table 4.6: Decentralization Variables 121 Table 4.7: Descriptive Statistics of Sub-national Expenditures 121 Table 4.8: Descriptive Statistics of Sub-national Revenues 122 Table 4.9: Correlations of Economic Dimension Variables 123 Table 4.10: Correlations of Administrative Decentralization Variables 125 Table 4.11: Political Decentralization Variables - Descriptive Statistics 126 Table 4.12: Correlations of Political Decentralization Variables 127 Table 4.13:

Sample Structure by IMF Income Groups 127 Table 4.14:

Income Groups Composition 128 Table 4.15: Descriptive Statistics of Sub-national Expenditures by Income Group 2000-2007 129 Table 4.16: Descriptive Statistics of Sub-national Revenues by Income Group 2000-2007 130 Table 4.17: Descriptive Statistics of Sub-national Revenues Derived from Taxes by Income Group 2000-2007 131 Table 4.18: Sub-national Revenues by Income Group - ANOVA Summary 132 Table 4.19: Descriptive Statistics of Government Efficiency by Income Group 2000-2007 133 Table 4.20: Descriptive Statistics of Quality of Regulations by Income Group 2000-2007 134 Table 4.21: Descriptive Statistics of Rule of Law by Income Group 2000- 2007 135 Table 4.22: Descriptive Statistics of Control of Corruption by Income Group 2000-2007 136 Table 4.23: Descriptive Statistics of Voice and Accountability by Income Group 2000-2008 138

viii

Table 4.24: Descriptive Statistics of Political Stability by Income Group 2000-2007 138 Table 4.25: Sample Structure According to IMF Regional Classification 139 Table 5.1 Eigenanalysis of the Correlation Matrix of Different Transformations 150 Table 5.2 Eigenvalues of Primary Component Analysis 151 Table 5.3 Rotated Component Matrix 154 Table 5.4 Sample Structure According to IMF Regional Classification (Table 4.25) 159 Table 5.5 Statistical Description of Decentralization Index Organized by Geographic Regions 2000-2007 162 Table 5.6 Income Groups Composition 163 Table 5.7 Statistical Description of Decentralization Index Organized by Income Groups 2000-2007 166 Table 5.8 Decentralization Index Independent Variable Correlations 167 Table 5.9 Correlations among Independent Variables of the Model 174 Table 5.10 Economic Growth Panel Multicolliniarity Statistics 175 Table 5.11 Economic Growth Model Summary Using Aggregated Index 178 Table 5.12 Separate Indexes of D-I EG Model Summary: Results and Statistics 181 Table 5.13 Separate Indexes of D-II EG Model Summary: Results and Statistics 181 Table 5.14 Correlations of Dependent Variables’ Residuals and Independent Variables 183 Table 5.15 Explanatory Variables and Instruments for 2SLS 183

ix

List of Graphs and Figures

No. Item Page No. Chart 1.1 USA Government Expenditures by Level of Government 1930-2008 1 Figure 2.1 Accountability Chains in Decentralized Contexts 37 Figure 3.1 Economic Aspect of Decentralization Concept 73 Figure 3.2 Administrative Aspect of Decentralization Concept 75 Figure 3.3 Political Aspect of Decentralization Concept 78 Figure 3.4 Conceptual Map of the Research 82 Graph 3.5 Dimensions of Decentralization. 92 Graph 3.6 Hypothesized Relationship between Sub-national Governments’ Share in an Economy and Economic Growth. 93 Figure 3.7 Graphical View of Decentralization System 101 Figure 4.1 GFS Structure of Reporting 106 Figure 4.2 Initial Analysis of Missing GFS Values for FY 1996-2007 115 Figure 4.3 Initial Analysis of Missing GFS Values for FY 2000-2007 117 Figure 4.4 Evolution of Sub-national Expenditures and Revenues 2000- 2007 122 Figure 4.5 Share of Sub-national Revenues Derived from Taxes 124 Figure 4.6 Evolution of Qualitative Descriptors of Administrative Decentralization 124 Figure 4.7 Evolution of Qualitative Descriptors of Political Decentralization 126 Figure 4.8 Evolution of Sub-national Expenditures by Income Group 2000-2007 128 Figure 4.9 Evolution of Sub-national Revenues by Income Group 2000- 2007 130 Figure 4.10 Evolution of Sub-national Revenues Derived From Taxes by Income Group 2000-2007 131 Figure 4.11 Evolution of Government Efficiency by Income Group 2000- 2007 132 Figure 4.12 Evolution of Quality of Regulations by Income Group 2000- 2007 134 Figure 4.13 Evolution of Rule of Law by Income Group 2000-2007 135 Figure 4.14 Evolution of Control of Corruption by Income Group 2000- 2007 136 Figure 4.15 Evolution of Voice and Accountability by Income Group 2000-2007 137 Figure 4.16 Evolution of Political Stability by Income Group 2000-2007 137 Figure 5.1 CFA Model of Decentralization Process over 3 Year Period 145 Figure 5.2 Dimensions and Specific Variables of Decentralization Process 146

x

Figure 5.3 Scree Plot of Logarithms of Decentralization Data 152 Figure 5.4 Schematic Model of Decentralization Measurement 153 Figure 5.5 Final Model of Decentralization Process 155 Figure 5.6 Evolution of Economic Dimension of Decentralization by Region 2000-2007 160 Figure 5.7 Evolution of Administrative-Political Dimension of Decentralization by Region 2000-2007 160 Figure 5.8 Evolution of Decentralization Index by Region 2000-2007 161 Figure 5.9 Evolution of Economic Dimension of Decentralization Process by Income Group 2000-2007 164 Figure 5.10 Evolution of Administrative-Political Dimension of Decentralization Process by Income Group 2000-2007 164 Figure 5.11 Evolution of Decentralization Index by Income Group 2000- 2007 165 Figure 5.12 Plotted Residuals 176 Figure 5.13 Expected vs Observed Plots of Dependent Variable 177 Figure 5.14

Histogram of Regression Standardized Residuals 177

1

Chapter 1: Federalism, Decentralization and Economic Growth: The Importance of and Necessity for Better Understanding

Introduction: Importance of the Decentralization Concept Since the beginning of the 20 th century, governments have performed an increasing share of services. Central governments around the world are expected to provide more services to their citizens today than they did 100 years ago. For example, a brief look at the US government’s share in the economy (the government’s share in GDP) reveals that it rose from roughly 9% in 1930 to almost 20% in 2008. This increase in the government’s participation in the economy does not fully represent the complexity of the process without identification of the structure of these government expenditures. The United States Bureau of Economic Analysis provides data on government expenditures according to the level of government. The data are summarized in chart 1.1:

Chart 1.1: USA Government Expenditures by Level of Government 1930-2008

Source: BEA Table 1.1.5. Retrieved 03/05/2009 1 .

1 http://bea.gov/national/nipaweb/SelectTable.asp?Selected=N URL Retrieved 03/05/2009.

2

Chart 1.1 shows an interesting dynamic of government expenditures. Over time, the US federal government’s share in the economy has decreased. In other words, more and more publicly provided services are delivered by sub-national (state and local) governments. Somewhat similar developments can be observed around the world. Thus, it is obvious that decentralized governments are performing an increasing amount of public service. Such developments explain the increased interest in the phenomenon of decentralization of the public sector, its essence, and typology. Recent research has responded to such development and deepened our understanding of decentralization and its connections with such outcomes as economic growth, inequality, and quality of governance. Despite increased attention to the phenomenon, there still remains a significant amount of confusion over decentralization, its measurement, and its overall benefits. Current research on decentralization can be characterized by the existence of numerous definitions and measurements of decentralization. Quite often these definitions and measurements are conceptually contradictory. The situation is worsened by the evaluative nature of the decentralization concept. Such evaluative essence of the concept leads researchers to conflate decentralization with other concepts, especially those that are also permeated with positive value, such as democracy or market reforms. The consequence is that there is little agreement about what constitutes an example of decentralization, what causes decentralization, or what effects it is likely to have. One might argue that such a multiplicity of definitions and measurements of decentralization is justifiable because of its cross-disciplinary nature. Decentralization is a phenomenon that occurs at the intersection of public administration, political science, and economics. At the same time, its cross-disciplinary nature does not justify the

3

existing multitude of meanings and measurements because such abundance simply impedes our ability to identify types of decentralization and then analyze their influence on various outcomes and outputs. Thus, the current situation in the field of decentralization is mixed at best. Some argue that decentralization (with its multi-faceted nature) is a positive factor. It can potentially improve the operations of the public sector as well as increase societal welfare. Others claim that the “dangers of decentralization” far outweigh the potential benefits associated with it. Thus, decentralization is an ambiguous phenomenon. Because of its contradictory nature and consequences, decentralization has attracted the attention of scholars and practitioners around the world. Thus, the importance of studying decentralization can be understood through careful analysis of the positive and negative consequences associated with the concept. This chapter has three major parts. The first part reviews the conceptual benefits of decentralization for society. The second part identifies potentially negative consequences of decentralization. After the importance and contribution of this dissertation to the field have been established, the third part of the chapter will outline this dissertation.

Conceptually Positive Influence of the Decentralization Process More and more attention is being paid to local governments and the preferences and needs of local populations. Such a shift of attention represents an interesting and challenging topic for cross-sectional scientific research. This shift raises questions about the best structures for local governance. Decisions on best local governance mechanisms

4

are based on the responsibilities attached to these mechanisms and functions. Such diversity and complexity of issues provides a unique opportunity for scholars from different disciplines to join their efforts in an attempt to find the appropriate solutions for these issues. Political explanations of the situation could be improved by explanation of the economic intricacies of processes, which, in turn, would provide significant insights on issues of best forms of political and public administration. Such dialog is known in the scientific field under the term of decentralization of the power of the central government. The first theoretical discussions of decentralization from the economic point of view date back to the middle of the twentieth century. Musgrave (1959) and Tibeout (1956) formulated the theoretical foundations of fiscal federalism. These ideas were further developed by Oates (1972, 1977, and 1993), and Buchanan and Brennan (1980). Conceptually, the fiscal federalism doctrine aimed to explain the complexity of intra- governmental relationships and the role of citizens in these interactions. Various theories regarding the size of public authority emerged. The economic efficiency theory contributed to development of the public sector economics. Public sector economic theory is based on traditional market assumptions of efficiency and effectiveness. These principles served as cornerstones for the development of theories of optimal public sector size and satisfaction of public needs. It is this theory that facilitated the emergence of the fiscal federalism concepts. At this point, it is important to emphasize that the concept of fiscal federalism was not widely accepted at its inception in the middle of the 20th century. There is a reasonable explanation for that. General thinking suggested that the central government plays an important role in economic development. The assumption behind this argument

5

was that if a country could come up with a reasonable investment plan, then that country would have met the requirements for sustainable growth and development. It would be a state-led (central government) strategy whereby the "flexibility to implement polices devised by technocrats was accorded a pride of place, and accountability through checks and balances was regarded as an encumbrance" (World Bank, 1997). Until the mid 1990s, this was the main message of not only the two Bretton Woods institutions (International Monetary Fund and World Bank) but also of other intra and supra-national organizations. For a while, such a strategy proved to be effective and efficient. A general increase of positive indicators (e.g. life expectancy at birth, population literacy and education, etc.) is associated with this type of policy. However, there were some drawbacks associated with such a strategy. These negatives of the over-centralization of the government include failures in the provision of public “local” goods and services. It became obvious that the achievement of developmental objectives through central governments alone is impossible. In such a way, the perception on the role of central public authority changed. Writing in 1994, Dillinger reported (in what has become one of the most quoted World Bank reports) that of the 75 developing countries with populations greater than 5 million, all but 12 claimed to be embarked on some form of transfer of fiscal authority from central to local governments. This transfer of power has been occurring even in "inherently centralized" states like the former Soviet Union (fSU) and Warsaw Pact countries. This decentralization movement gained a powerful momentum because of the potential benefits associated with it. The argument for the positive influence of

6

decentralization consists of 4 different hypotheses: (1) the diversification hypothesis (also known as the decentralization theorem) (Oates, 1972, 1977); (2) the Leviathan (restraint) hypothesis (Brennan & Buchanan, 1980); (3) the productivity enhancement hypothesis (Vazquez & McNab, 2001); and (4) the political and administrative improvements hypothesis (e.g. improved accountability, decreased corruption, increased citizen participation) (Bird, 2001). Briefly summarized, the central argument of fiscal federalism is that the efficiency and adequacy of locally provided public services are ensured through citizen mobility, voting power, and competition among local governments. This argument is developed and supported by Oates (1972) through his assertion that under the assumption of absence of externalities and various preferences, local governments have an informational advantage over a central authority in provision of public services, which results in a higher quality of services provided to the public. In economic terms this means that the marginal benefit received by citizens equals citizens’ marginal cost for the unit of services received. The implication of that argument is twofold. First, provision of public services at the level where marginal costs equal marginal benefits results in increased efficiency of public resource allocation. Second, such efficiency in resource allocation processes implies that decisions about these processes should be transferred to the level of government that has the best available information regarding local preferences. In other words, local governments should be able to have “own-revenues” to match local needs. The people’s belief in the concept of decentralization was of such magnitude that it was almost religiously believed that decentralization would be a cure for all societal problems. However, it is important to mention the lack of convincing and

7

conclusive empirical evidence about the positive influence of such shift of authority to local governments on economic efficiency and satisfaction of local needs. The first argument supporting decentralization is the “diversification hypothesis.” This hypothesis is also known as the decentralization theorem. According to this theorem (Koethenbuerger, 2008), the governments closest to the citizens can adjust budgets (costs) to local preferences in a manner that best leads to the delivery of a bundle of public services that is responsive to community preferences. The hypothesis maintains that uniform levels of public goods and services across jurisdictions will generally be inefficient (Oates, 1972, 1977). In a simple model of only two communities, each of which has a different demand for a single public service being offered, immobile individuals, no economies of scale in the production of the public service, and no spill- over effects from one community to the other, a uniform level of public services offered in each community is inefficient. This is because marginal benefits of the public service differ due to the different demand schedules in each community. Resources can be saved without detriment to anyone involved by diversifying government outputs in accordance with local demands. Thus, decentralized expenditures may cause greater “consumer efficiency” (Martinez-Vazquez & McNab, 2001). The potential welfare gain from this diversification may be relatively large because ceteris paribus it depends negatively on the price elasticity of demand for public goods, and empirical studies find that this demand is highly price inelastic (see Oates, 1996, for an overview). Thus, Pareto efficiency can be raised through decentralization. According to this model, the larger the variance in people’s demands for public goods, the larger the benefits of decentralization tend to be. In other words, local government outputs need to be differentiated according

8

to local tastes and circumstances, but this requires discretion of local governments over spending programs, i.e. decentralization. Introducing mobility of people into this model creates incentives for individuals to move to the community that is perceived as supplying the best combination of public service and local tax rate. By so doing, individuals contribute to efficient resource allocation. This is also the main thrust of the seminal Tiebout (1956) model. However, freedom for local communities to decide on public spending and taxation themselves inevitably results in inequities. In addition, relaxing the restrictive assumptions of the above models, such as no spill-over effects and no economies of scale, highlights the need for central government intervention. This very intervention erodes decentralization (Prud’homme, 1994, 1995), making clear a basic conflict inherent to decentralization: the more one decentralizes, the more reasons may be generated for interventions at the national level. But even if individuals have identical preferences and are relatively immobile, decentralization may still offer efficiency advantages if decisions by sub-national governments better reflect the priorities of taxpayers. For instance, it could be that central governments have a greater tendency to spend on national defense rather than on education, child care, and other local infrastructure. Oates (1993) argued that the thrust of the basic case for decentralization (greater allocative efficiency) should also apply to a dynamic framework of economic growth. It could be expected that centrally determined policies do not consider regional and local conditions in the provision of public goods and services as well as do locally determined policies, for instance regarding infrastructure and education. Economic development and

9

growth might therefore be promoted if local authorities have input into such policy decisions. The second argument supporting decentralization is known as the “Leviathan (Restraint) hypothesis” and stems from Buchanan’s Theory of Clubs (1965) and Brennan and Buchanan’s contributions (1980). Brennan and Buchanan (1980) argued that governments may behave as revenue-maximizing agents. Governmental revenue maximization would then be to the detriment of taxpayers. Horizontal and vertical competition among different levels of government may prevent this revenue maximization. Competing governments may concentrate on objectives other than revenue maximization such as maintaining stable tax rates or even lowering them and producing public goods and services efficiently under certain revenue constraints. Hence, decentralization (D) may contribute to containing the size of their budgets and thus restrain the overall size of the public sector. Ehdaie (1994) and Yilmaz (1999) present evidence supporting this hypothesis. Ehdal (1994) finds that decentralization, proxied through the share of sub-national own-source revenues in total government expenditures, results in a negative influence on the overall size of the public sector. Ehdal’s study was conducted on a sample of 30 industrial and developing countries for the period that covers the years 1977 through 1987. The influence of decentralization on public sector size appears to be stronger if both expenditure and taxing decisions are decentralized. The panel analysis of Yilmaz (1999) for 46 countries and the period 1971-1990 also finds a significant negative relationship between decentralization and public sector size. Thus, such inter-governmental competition may prevent an oversupply of public goods and

10

services and/or x-inefficiency in the public sector. Thus, ceteris paribus, decentralization should have a positive impact on per capita growth due to more efficient use of resources. The third argument supporting the benefits of decentralization is known as the “productivity enhancement hypothesis.” The main point of this hypothesis rests on the fact that decentralization implies a transfer of responsibility associated with accountability to sub-national governments. Such transfer of responsibility results in the fact that sub-national governments have direct incentives to take into account local preferences. Additionally, this incentive suggests that local governments actively look for ways to improve their operations (Thiessen, 2000). As a result of the previously mentioned incentive, production costs and prices of public goods and services could thus be lower and their quality better than in a uniform approach to providing public goods and services. In other words, decentralization may result in greater “producer efficiency” (Martinez-Vazquez & McNab, 2001). In addition, decentralization relieves the central government of many tasks. Thus, the latter may be able to concentrate better on efficient production of those public goods and services for which it still bears responsibility (ideally goods and services with large spillovers among communities and/or substantial economies of scale in production). The fourth group of arguments supporting decentralization is political in nature. The political aspect of the pro-decentralization argument is about the quality of governance. Decentralization places distributional decision-making closer to the citizenry. Such proximity results in greater responsiveness of sub-national governments and greater accountability to citizens, at least theoretically. The expectation is that local decision makers have better information about the problems and needs of their local area

Full document contains 258 pages
Abstract: The concept of decentralization is an issue that for years has attracted the careful attention of scholars, practitioners, and citizens. The general argument of the decentralization concept consists of the fact that, when properly implemented, it can facilitate the economic growth of a nation. Various international organizations (e.g. World Bank and International Monetary Fund) have identified multiple instances where decentralization was an important element of a nation's development strategy. And, although the technical assistance received by these nations from international organizations was essentially comparable, the actual outcomes have varied significantly from country to country. Thus, the relationship between fiscal decentralization and economic growth is uncertain at best. The primary contribution of this dissertation is its theoretical framework for the empirical measurement of decentralization. The dissertation's research questions are as follows: (1) What are the components of decentralization measurement given its complexity? and (2) What is the direction of causality between economic growth and decentralization? Answering these questions builds on the existing body of knowledge and should contribute to our understanding of the essence of fiscal decentralization and its relationship to economic growth. Such understanding will ultimately be helpful in the identification of specific fiscal decentralization arrangements (e.g., institutional arrangements, governance mechanisms, etc.) that are conducive to better policy decisions and governance.