Chapter 2 Decentralization and Regional Disparities: Experiences of OECD
2.2 Decentralization and Regional Inequality：Literature review
The relationship between decentralization and inequality is a relatively new topic of discussion in recent years. Theoretically, the discussions of decentralization and regional disparities originated from fiscal federalism. The representatives of federalism, Wallace E. Oates151 and Charles Tiebout152 argue that contrary to the central government, local governments can obtain more information about the diverse local public needs and enhance the efficiency of the supply of public goods;
citizens can self-supervise and motivate behaviors, and decision-making is more conveniently located with local officials than with centrally-located officials. The accountability and responsiveness of the local government’s behavior can be enhanced in a decentralized system; citizens can vote with their feet and select different public services in different regions, which can maximize the allocation of public goods and social welfare. In short, the aim is for regional disparities to be
148 OECD (2003), OECD Territorial Reviews: Oresund, Denmark/Sweden 2003, OECD Publishing, p160.
149 Hansen, T. (2013). Bridging regional innovation: cross-border collaboration in the Øresund Region. Geografisk Tidsskrift-Danish Journal of Geography, 113(1), 25-38.
150 Lovering, J. (1999). Theory led by policy: the inadequacies of the ‘new regionalism’ (illustrated from the case of Wales). International Journal of Urban and Regional Research, 23(2), 379-395.
151 Oates, W. E. (1999). An essay on fiscal federalism. Journal of Economic Literature, 37(3), 1120-1149.
152 Tiebout, C. M. (1956). A pure theory of local expenditures. The Journal of Political Economy, 64(5), 416-424.
erased through decentralized systems, by market mechanisms and local competitions.
However, some scholars argue that the fiscal federalism theory is too idealistic. In practice, there is a foundation of demanding assumptions, such as adequate market information, fully rational citizens, free migration, and regional public goods without spillovers which are difficult either to achieve or to sustain.153
Moreover, some scholars argue that a decentralized system may drive the inequality between regions. In a decentralized country, rich regions can provide high quality public services with a lower tax rate, because of larger tax bases. In this context, rich regions will attract more investment and other resources into the future, which allow these regions to continue to become more affluent, while the central government lacks sufficient redistributive powers in order to coordinate the lessening of inequalities between regions.154 On the contrary, the centralized system may possess more inspiration and better resources to manage and control the difficulties caused by regional disparities. However, other scholars, such as Qian and Weingast155 argue that the territorial competition in the decentralized system would stimulate less developed regions to offer more favorable conditions to attract more investment and other resources, such as lower tax rates, less welfare burdens, land use facilities, etc. The pressure of competition then will encourage the poor regions to catch up with rich ones, without the need for mandated coordinating programs.
Apart from these theoretical disputes, some case studies were investigated and reported on the relationship between decentralization and regional inequality. In a case in the U.S., Akai and Sakata showed that decentralization could be advantageous for economic growth and regional equality.156 In another case regarding China, Fan, anbur and Zhang proposed that the fiscal decentralized process, together with reform and opening up, may be one of the important reasons of the enlarged regional disparities.157 In a case on Italy, Calamai identified a clear link between the process
153 Prud'Homme, R. (1995). The dangers of decentralization. The World Bank Research Observer, 10(2), 201-220.
154 Sewell, D. O. (1996). “The Dangers of Decentralization" According to Prud'homme: Some Further Aspects. The World Bank Research Observer, 143-150.
155 Qian, Y., & Weingast, B. R. (1997). Federalism as a commitment to preserving market incentives. The Journal of Economic Perspectives, 11(4), 83-92.
156 Akai, N., & Sakata, M. (2002). Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States. Journal of Urban Economics, 52(1), 93-108.
157 Fan, S., Kanbur, R., & Zhang, X. (2011). China's regional disparities: Experience and policy. Review of Development Finance, 1(1), 47-56.
of devolution and the reduction of spatial inequalities.158 Finally, regarding a case of the EU, the centralized trend was seen to have fostered the catching-up of lagging countries and the reduction of the overall disparities.159 There are several other case studies, which can be divided into two groups: the first concluded that decentralization would enlarge regional disparities (such as Bonet for Colombia,160 Chakravorty for India,161 Hill for Indonesia and the Philippines162), the second group argued that decentralization is related to the decrease of regional disparities (such as Costa-Font for Spain,163 and Albrechts for Belgium.164) Taken as a whole, these case studies depict a confusing picture about the relationship between decentralization and regional disparities.
By overcoming the defects and limitations of using single case studies, other researchers have attempted to develop a comparative research model by applying cross-country data sets. By utilizing data collected from 14 developing and developed countries, Shankar and Shah165 propose that decentralized countries have performed better in restraining regional disparities, because of the greater political risk that these disparities have posed for such countries. One of the defects of this research was that decentralization, which was measured by the dummy variable of federalism, was too simplistic to effectively evaluate the actual conditions of decentralization. Moreover, the number of samples in the study was also too small to reach a clear conclusion. Canaleta, Arzoz and Garate166, by using a sample of 17 OECD countries, state that they had found a positive influence from decentralization;
particularly that of fiscal decentralization on regional convergence. The concept of
158 Calamai, L. (2009). The link between devolution and regional disparities: evidence from the Italian regions.
Environment and Planning. A, 41(5), 1129.
159 Geppert, K., & Stephan, A. (2008). Regional disparities in the European Union: Convergence and agglomeration.
Papers in Regional Science, 87(2), 193-217.
160 Bonet, J. (2006). Fiscal decentralization and regional income disparities: evidence from the Colombian experience.
The Annals of Regional Science, 40(3), 661-676.
161 Chakravorty, S. (2000). How Does Structural Reform Affect Regional Development? Resolving Contradictory Theory with Evidence from India. Economic Geography, 76(4), 367-394.
162 Hill, H. (2008). Globalization, Inequality, and Local‐level Dynamics: Indonesia and the Philippines. Asian Economic Policy Review, 3(1), 42-61.
163 Costa-Font, J. (2010). Does devolution lead to regional inequalities in welfare activity? Environment and Planning.
C, Government & Policy, 28(3), 435.
164 Albrechts, L. (2001). Devolution, regional governance and planning systems in Belgium. International Planning Studies, 6(2), 167-182.
165 Shankar, R., & Shah, A. (2003). Bridging the economic divide within countries: A scorecard on the performance of regional policies in reducing regional income disparities. World Development, 31(8), 1421-1441.
166 Canaleta, C. G., Arzoz, P. P., & Garate, M. R. (2004). Regional economic disparities and decentralisation. Urban Studies, 41(1), 71-94.
decentralization in this study was divided into a political dimension and a fiscal dimension, which then were evaluated by various indicators. However, the correlations between the different indicators were not then tested and the use of control variables also were not considered in the study. In a series of cross-country analyses performed by Rodríguez and Ezcurra167 the panel data from 26 developing and developed countries were used to overcome the shortcoming of the sectoral study, which could not be analyzed through the lack of sufficient control variables.
However, the measurement of fiscal decentralization was simplistic, reached only by applying subnational governmental expenditure as a percentage of the overall governmental expenditure. A recent study, by Lessmann168, utilized cross-section and panel data for 23 OECD countries from 1982 to 2000 and concluded that decentralization can decrease the degree of regional disparities. The study overcomes drawbacks of previous studies; however, it was flawed in that the different effects of decentralization on developing and developed countries had not been considered in the study.