Transcript Decentralization and Political Institutions in Developing

Decentralization and Political
Institutions in Developing
Countries
Ekaterina Zhuravskaya
New Economic School
ESNIE, May 19, 2008
Motivation
• Decentralization has been at the center of the
stage of policy experiments in the last three
decades in a large number of developing and
transition countries
– Latin America, Africa, Asia, CE Europe
• On account of its many failures, centralized state
everywhere has lost legitimacy
• The world bank, for example, has embraced
decentralization as one of the major governance
reforms on its agenda (World Bank 2000)
Ekaterina Zhuravskaya ESNIE 2008
2 of 44
Goal and Roadmap
Questions:
– “Is decentralization good or bad?”
– “Does it result in more efficient governance, higher
economic growth, and/or better public goods?”
• Virtue of decentralization is a very popular notion, but often this
notion is driven by a series of misconceptions
– E.g., Dictators (Hitler, Stalin, etc) chose centralization and they are
vicious, but that does not necessarily imply any causality from
centralization to outcomes
– Discuss:
• Arguments for and against decentralization and (rather scares)
empirical evidence
• Generalizations (if any) that one could make about “when” and
“for what”
– Background material:
• Treisman (2007) “Architecture of Government” Cambridge UP
• Bardhan (2002) JEP
Ekaterina Zhuravskaya ESNIE 2008
3 of 44
Defining terms
Lots of scholarly arguments about
decentralization are characterized by different
sides having different things in mind
 One must define terms!
Types of decentralization:
1.Administrative decentralization
2.Political decentralization
1.Decision-making decentralization
2.Appointment decentralization
3.Constitutional decentralization
3.Fiscal decentralization
Ekaterina Zhuravskaya ESNIE 2008
4 of 44
Defining terms:
Administrative decentralization
• At least one policy is implemented not by
the central government directly but by
locally based agents appointed by and
subordinate to the central government
Ekaterina Zhuravskaya ESNIE 2008
5 of 44
Defining terms:
Political decentralization
•
Decision-making decentralization
–
•
At least one subnational tier of government has excusive authority
to make decisions on at least one policy issue
Appointment decentralization
–
Government officials at one or more subnational tiers are selected
by local residents independent of higher level governments
•
•
via democratic elections or a non-democratic selection by local elites
– Federal state:
a) Decision-making decentralization (e.g., China)
b) Decision-making decentralization + Appointment
decentralization (at the same tier) (e.g., Argentina)
Constitutional decentralization
–
Subnational governments (or their representatives) have a formal
right to participate in non-trivial way in central policy-making (e.g.,
US Senate)
Ekaterina Zhuravskaya ESNIE 2008
6 of 44
Defining terms:
Fiscal decentralization
a) Theory: Decision-making decentralization on
tax and/or expenditure issues
b) Empirics: Subnational governments account
for a large share of total government revenues
or spending
• Very little connection between the two
Ekaterina Zhuravskaya ESNIE 2008
7 of 44
(Theoretical) reasons for and
against various kids of
decentralization
1st (potential) advantage:
Administrative efficiency
“How could the general of an army be
instantaneously obeyed by all its solders if the
army were not divided into regiments, the
regiments into companies, the companies into
squadrons? But the effect of order is still more
admirable in a state than in an army [because of
higher territory and longer horizon]”
Charles Loyseau (1610)
Ekaterina Zhuravskaya ESNIE 2008
9 of 44
Administrative efficiency 1:
optimal scale
• Technology of public goods provision varies
– National defense vs. garbage collection (economies
of scale)
 In a multi-tier structure, provision of different PG
can be assigned to most efficient level
• Is political decentralization necessary?
– If one concerns with just technical costs of PG provision political
decentralization is not needed, just administrative
decentralization is sufficient
• Optimal scale argument implies, however, that all
jurisdictions at a certain level should be the same
– which certainly is not true
Ekaterina Zhuravskaya ESNIE 2008
10 of 44
Administrative efficiency 2:
Heterogeneous tastes and policy differentiation
• Another (potential) reason for decentralization – preference
heterogeneity
– Hayek (1945): local governments have more information about people’s
preferences and lower costs of acquiring it
• Alesina and Spolaore (2003) -- size of countries and degree of
decentralization depends on:
– a tradeoff b/w economies of scale (favors large size and central
provision) and heterogeneity (small size and decentralized provision)
• Defense of ethnic groups against each other
• Is administrative decentralization sufficient?
– Technically, the central government is able to give different orders to
its alderman in different regions, and collect information from them
• USSR, Persian Empire, etc.
Ekaterina Zhuravskaya ESNIE 2008
11 of 44
Administrative efficiency 3:
Agency costs - theory
• Do the agency costs multiply with added tiers?
– If yes, above a certain number of tiers, it may be too
expensive to pay the subordinates enough so that they
do not cheat
• then, administrative centralization may not work
– Persson and Tabellini (2000) present several models
which say “yes”
– The answer, however, depends on incentive structures
• How could hierarchy solve agency problems?
– Career concerns (Holmstrom 1999)
– Yardstick competition (Maskin, Qian, Xu 2000)
» Chinese provincial leaders vs. Russian governors (1 vs.
120 criteria)
Ekaterina Zhuravskaya ESNIE 2008
12 of 44
Administrative efficiency:
Agency costs - practice
• Large bureaucracies with many tiers have
extremely bad reputation
– However, they occur in very autocratic regimes (i.e.,
USSR, medieval Europe, imperial China)
– It might be the case that bad performance is due to
problems with accountability of the central
government rather than inefficiency of hierarchy
• Counter example to both – Chinese miracle
• But, it is also true that many bureaucratic
hierarchies do accumulate agency costs
Ekaterina Zhuravskaya ESNIE 2008
13 of 44
Turning to political decentralization
• Are there advantages to letting local
communities choose their own political
leaders and policies?
– whatever the technical efficiency of different
administrative structures
• What are the costs?
Ekaterina Zhuravskaya ESNIE 2008
14 of 44
2nd (potential) advantage:
Competition among governments
“Competition forces governments to avoid all sorts
of taxation which would drive capital or labor
elsewhere”
Hayek (1939)
1. Does competition occur under political
decentralization?
2. If yes, is it beneficial?
• Consider separately: competition for residents
and competition for capital
Ekaterina Zhuravskaya ESNIE 2008
15 of 44
Competing for mobile residents
• Tiebout (1956): under decentralization citizens sort
themselves into local communities with efficient taxation/PG
mix
– Local governments’ competition for citizens has three effects:
• (1) Reveals information about preferences; (2) induces efficient
sporting; and (3) enhances accountability
– Restrictive assumptions:
• Mobility (in many developing countries restricted)
• No land (if real estate prices reflect efficiency of PG provision,
pressure on governments may be reduced)
• Constant returns in PG provision (if there are economies of scale,
there may be multiple equilibria, including inefficient ones)
• Externalities (consider below)
Ekaterina Zhuravskaya ESNIE 2008
16 of 44
Competing for mobile capital
• Capital is more mobile than residents
– Qian&Roland (1998), Qian&Weingast (1998): Tiebout logic can be
generalized to mobile capital (local governments reduce corruption
and offer better business environment to attract capital)
• Main conceptual difference with Tiebout:
– Preferences of capital owners are homogenous, i.e., best riskadjusted return
• This generates problems with this argument:
– “Race to the bottom” in PG provision, particularly, if local
governments get private benefits of investment => distortions
– Large differences in initial conditions (i.e., infrastructure) =>
backward regions give up (even with t=0, capital flows elsewhere)
– Externalities (consider below)
Ekaterina Zhuravskaya ESNIE 2008
17 of 44
1st (potential) disadvantage:
Externalities
In order to attract residents and capital local governments
pursue policies with external effects:
• “Beggar your neighbor” policies
– Attract firms with high pollution
– Erect inter-jurisdictional trade barriers
» China: Young (2000), Poncet (2004)
» Russia: Guriev, Yakovlev and Zhuravskaya (2008)
• “Beggar your superior” policies
– Compete in protection from paying federal taxes and ignoring federal
regulation
» Russia: Ponomareva and Zhuravskaya (2004); Sonin (2008)
 “State-corroding” federalism (Cai and Treisman 2004)
Ekaterina Zhuravskaya ESNIE 2008
18 of 44
Externalities in fiscal policy
2 fiscal policy examples of “state-corroding federalism”
(a la Cai and Treisman 2004):
1. “Common pool”: Local governments may consider
central budget as the “Common pool”
•
Each locality bears a fraction of the cost of spending from
central budget, but enjoys the full benefit
–
Argentina (Saliehg & Tommasi 2001)
2. “Soft Budget Constraints”: local governments may
blackmail the central government if they can commit to a
policy undesirable to the center (but center cannot
commit)
•
•
Russian Far North (Tanzi 1996)
Bailouts under local insolvency
Ekaterina Zhuravskaya ESNIE 2008
19 of 44
3rd (potential) advantage:
Policy experimentation
Justice Brendeis called decentralized governments “local
laboratories for policy experiments”
– Completely wrong argument:
• As long as central government can pursue different policies
in different parts of the country
– Risk-aversion
• Centralized government bares less electoral risk when
experimenting in one locality
– Positive information externality
• Local governments do not take into account that other local
governments benefit from learning from their failures when deciding
whether to experiment – a version of free-rider problem
• Central authorities can design randomization experiments to
maximize useful information from experimentation
– In reality, it actually is a disadvantage (!)
Ekaterina Zhuravskaya ESNIE 2008
20 of 44
4th (potential) advantage: Effect of
bundling of policy on accountability
• Besley and Coate (2003):
• When both local and central public officials are elected,
their respective policy areas are the only salient issues
at their respective elections
• When local public officials are appointed, in the central
elections, local policy area (e.g., local roads) becomes
bundled with central policy issues (e.g., foreign policy)
which may be more salient during the central elections
– Appointment centralization => capture of local policies
by special interests
• No informational asymmetries necessary to generate this result
Ekaterina Zhuravskaya ESNIE 2008
21 of 44
5th (potential) advantage:
Checks and balances
• Weingast (1995), Tsebelis (2002): Number
of veto players in forming central
governments’ policy increases with
constitutional decentralization
• This increases stability of local policies
– But it is not clear if stability is a good thing:
• decreases likelihood of changes both for the better
and for the worse
Ekaterina Zhuravskaya ESNIE 2008
22 of 44
2nd (potential) disadvantage:
Fiscal coordination
Berkowitz and Li (2000): Vertical competition
– Overlapping tax bases for central and local
governments may result in “vertical overgrazing,”
i.e., over-taxation, as each level of government
tries to extract as much and as fast as possible
– Shared responsibility over some PG may result in
free riding on each other’s contribution
• Not overlapping tax bases and expenditure
responsibilities
– In practice, hard, different taxes often have effect on the same
tax base
Ekaterina Zhuravskaya ESNIE 2008
23 of 44
3rd (potential) disadvantage:
State capture
• Federalism often leads to local tyranny in developing
countries
– Bardhan and Mookherjee, 2000; Sonin, 2003; Slinko, Yakovlev,
and Zhuravskaya, 2005
• Bardhan and Mookherjee (2000) write down conditions
under which local governments are more captured by
special interests than central governments
– Intuition: local capture is higher when local markets for influence
are more concentrated while the central is not
• Russia – many cities are built around one plant
• India – local land inequality is very high
– At the central, dissipation of rent make lead to
breakdown of the market for influence
Ekaterina Zhuravskaya ESNIE 2008
24 of 44
Ethnic conflict, secession, and
decentralization
• Example: Iraq
• “It is virtually impossible to make broad generalizations
about effectiveness of federalism in multinational
societies” (Simeon and Conway 2001)
– Political decentralization may help to:
• satisfy moderate demands for autonomy of geographically
concentrated ethnic minorities
• reduce social tension of “winner takes all” by splitting the political
prizes
• to resist discriminatory central policies
– But it also may:
• enable local majorities to abuse local minorities and inflame local
cleavages that are salient at the local and not central level
• empower local majorities to mobilize for succession
• trigger inefficient redistribution under secession threat
• increase “regionalist” mentality
– Stepan and Linz (2008):
• “Coming-together” vs. “Holding-together” federalism
Ekaterina Zhuravskaya ESNIE 2008
25 of 44
Pitfalls of empirical research
• Different measures should have different effects in theory
–
–
–
–
–
–
•
•
•
•
Average size of a jurisdiction
Number of tiers
Number of jurisdictions
Mode of subnational appointments
Subnational expenditure and revenue share
Constitutional arrangements
Very scares data on decision-making decentralization
Little panel data (more being collected)
Little over time variation for political decentralization
Most of the literature focused on the subnational revenues
and expenditures (very imperfect)
Ekaterina Zhuravskaya ESNIE 2008
26 of 44
Evidence before EZ2007 was inconclusive;
Treisman (2007) things it is still the case
Results vary with samples and time periods
Effect of decentralization on
Growth:
(-): Zhang and Zou, 1998 (Chinese provinces); Davoodi and Zou, 1998
(developing countries)
(0): Woller and Phillips, 1998 (developing countries);
(+): Jin et al., 1999 and Lin and Liu, 2000 (Chinese provinces);
Corruption:
(-): Fisman and Gatti, 2002; de Mello and Barenstein, 2001 (X-country)
(0): Treisman, 2000 (X-country)
These papers overlooked importance of political
institutions
Ekaterina Zhuravskaya ESNIE 2008
27 of 44
William Riker (1964) “Federalism:
Origins, Operation, and Significance”
• To sum up:
– both centralization and decentralization have costs and
benefits:
• Information, inter-jurisdictional competition, less policy bundling
vs. externalities and local capture
• Riker: One could get the best of both worlds by
providing local politicians with national career
concerns, but preserving political decentralization
– Strong national political parties
• Reduce both “local capture” and “externalities”
• But leave incentives to cater well to the needs of the citizens
Ekaterina Zhuravskaya ESNIE 2008
28 of 44
Appointment centralization vs.
decentralization
Why strong national political parties help?
– Local officials need financial and political
support of national parties during elections
– Career concerns
Why administrative centralization will not?
•
Riker’s view: administrative centralization
undermines the benefits of decentralization in the
first place
– Politicians will stop caring for the preferences of local
population and only care for pleasing superior
» All would depend on incentives of the superior and
superior’s informational disadvantage
Ekaterina Zhuravskaya ESNIE 2008
29 of 44
Russia vs. China
Blanchard and Shleifer (2001):
• Fiscal decentralization occurred in both countries during
transition
• Decentralization was a major growth-promoting factor in
China and an obstacle to growth in Russia
– Jin, Qian, Weingast (2005) on China
– Zhuravskaya (2000) on Russia
• The reason is the difference in the strength of national
political parties and administrative centralization (in
different periods):
– China - tight administrative and political control of the communist
party
– Yeltsin’s Russia - large-scale political decentralization and no
national parties
Ekaterina Zhuravskaya ESNIE 2008
30 of 44
Argentina vs. Chile
Enikolopov and Zhuravskaya (2007): Both countries undertook
fiscal decentralization in the 80s and 90s
– Chile - improved provision of public health and education
– Argentina - macroeconomic destabilization and a large-scale economic
crisis
• Chile - strong party system with national parties and strong
career concerns
– Mayors of Santiago
• Argentina - national political parties are weak; provincial
parties dominate political arena at the national and provincial
level
– Career concerns in Argentina work the other way:
• Those national politicians who managed to produce more benefits to their
provincial constituencies (possibly at expense of other regions) can return
back home after serving in the national government
Ekaterina Zhuravskaya ESNIE 2008
31 of 44
Enikolopov & Zhuravskaya (2007):
Measures of Political institutions
1. Age of main parties
–
–
Intuition: career concerns
Control for: the age of democracy and time since
independence
2. Fractionalization of governing parties
–
–
Intuition: career concerns
Control for:
•
•
•
majoritarian vs. proportional electoral rule
presidential vs. parliamentary regime
–
Persson & Tabellini 2003
secessionist tendencies
–
–
segregation of voting patterns at the local level
presence of contiguous autonomous regions
3. Administrative centralization
–
–
Are municipal executives appointed?
Are province-level
executives appointed?
Ekaterina Zhuravskaya ESNIE 2008
32 of 44
Measures of decentralization and
outcomes
Fiscal Decentralization
• Subnational revenue share
• Subnational exp. share
Quality of government
•
•
•
•
•
Corruption indices
Control over corruption
Government effectiveness
Regulatory quality
Rule of law
Growth
• GDP per capita growth rate,
PPP
Public goods provision
•
•
•
•
Infant mortality
DPT Immunization
Illiteracy rate
Pupil to teacher ratio
Ekaterina Zhuravskaya ESNIE 2008
33 of 44
Empirical Methodology
• Standard methodology for growth and the quality of governance
regressions
– Treisman (2000); La Porta et al. (1999); Barro and Sala-i-Martin (1995)
• Add fiscal decentralization measure and political institutions
measures and their interaction:
• How results of fiscal decentralization are affected by political
institutions?
• Sample of developing and transition countries (73 countries)
– In OECD, our measures poorly reflect career concerns
• Use geographical area of countries as an instrument for
decentralization
• Initial levels of political institutions as an instrument for current
political institutions (corrects only measurement error)
Ekaterina Zhuravskaya ESNIE 2008
34 of 44
Standard control variables
•
•
•
•
•
•
•
•
•
•
Fixed investments
Population
Openness
Fertility
Current level of democracy
Democratic tradition
Ethno-linguistic fractionalization
Protestants share
Latitude
Legal origin
Ekaterina Zhuravskaya ESNIE 2008
35 of 44
1
Residual partial plots – party strength
80% of the developing countries
have parties younger than needed
for decentralization to have a
positive effect on indices of
government quality
Gov. fractionalization
measure
-1
0
HRV
DOM
MNG
CHL
ARM
EST
CHN
CRI
IDN
TTO
MEX
AZE
ARG
BGR
THA
HUN
NIC
MUS
ISR
POL IND
SVK
MDA
ALB
SVN
CZE MY S
PAK
ROM
PER
BOL
LVA
ZAF
GEO
BLR
KAZ
BRA
-2
UKR
3
RUS
2
CHN
30
IND
ARG
MNGPAK
MEX
BRA
1
10
20
government parties fractionalization * Subnational revenues share
0
POL MY S
EST
KAZ
HRV
THA
HUN
BOL
AZE
LVA
ISR
TJK
GEO
CZE
DOM
MUS
RUS
SVN UKR MDA
IDN
ARM
CRI
PER
BLR
ROMNIC
SVK BGR
TTO
ZAF
ALB
-1
0
Residuals of Rule of Law index
-3
Party age measure
0
50
100
150
Logarithm of age of the main parties * Subnational revenues share
Ekaterina Zhuravskaya ESNIE 2008
200
36 of 44
.2
.2
Within country relationship
IRN
ZAF
IRN
-4
IND ISR
IRN
CRI IRN
MUS
IND
ARG MEX
MYS
DOM
URY
BGR
HUN
MEX
ISR
IND
MNG
MYS
IND
BGR
DOM
ZWE
PRY
BRA
IDN
NIC MYS
MEX
MWI
THA
MYS
IDN
MNG
IRN
IND
IDN
MUS
MEX SVN
MYS
MDG
ZWE
IDN
ZWE
MUS
TTO
CHL
ISR
KEN
MEX
ISR
MWI
ISR
PHL
IDN
MYS
PRY
IND
IDN
MEX
CRI
KEN
ZWE
BRA
IND
ROM
TTO
MEX
KEN
LKA
ISR
PAN
BRA
FJI
CRI
MYS
IDN CRIGTM
IND
NIC
CHL
SVN
BRA
BRA
KEN
HRV
MEX
BRA
MEX
FJI
IDN
PER
PHL
ROM
FJI
LTU
CRI
LVA CRI GTM
IDN
ROM
KEN
GMB
PHL
COL
ARG
PRY
BOL
KEN
PHL
CZE
CHL
MEX
FJI
COL
IDN
COL
GMB
ISR
LKA
PRY
PHL
KEN
MDG
PAN
KEN
COL
IDN
CHN
EST
MDA
POL
TUN
ZMB
CBLR
OL
PRY
ISR
MEX
BLR
PAN
COL
MUS
PRY
IDN
URY
CRI
LKA
PHL
FJI
ROM GTM MUS
MWI
KEN
CRI
LTU
BRA
ZWE
PHL
PHL
CRI
LKA
CRI
PRY
CZE
CRI
LTU
PRY
BRA
BOL
PAN
ROM
MUS
ARG
KEN
PAN
IDN
LVA
MUS
PHL
PER
ZWE
PRY
GMB
FJIPHL
HRV
LKA
BRA BRA
ISR CRIZWE
COL
ZWE
MEX
SVN
BRA
KEN
MWI
HUN
CRI
NIC
IDN
CRI
MYS
CRI
MUS
BRA
KEN PHL
ROMSVN
FJI
ZWE
MEX
ISR
BRA
GTM
NIC HUN
MDG
ZAF
CRI
ISRISR
THA
BGR
MWIKEN
ISR
MUS
IDN
TTOMYS
CHLMEX
MYS
ZWE
MUS
PRY
MYS
MUS
MYS
URY
ZAF
ARG
MYS
ISR MEX
IND BGRMEX MEX
IDN
IDN
MNG
IRN
IND
IND
IRN
DOM
IRN
-2
0
Government parties fractionalization * Subnational Revenues
2
.1
ISR
IND
-.1
0
COL
IRN
IND
ISR
MEX
DOM
HUN
BGR
MNG BGR
MYS
ARG
NIC
IRN
IDN
MYS
MYS
MUS
MEX
DOM
MYSINDMYS
MNG ISR
IDN
MWI MEX
MYS MYS
PHL
MYS
MDG
MEX
SVN
TTO
SVN
IDN
MEX
TTO
ROM
KEN
ZWE
IDN
BRA
LKA
CRI
PAN
ISR KEN
MWI
CRI
BRA
MUS
NIC
PHL
IDN
IND
IDN
ROM
ISR
MEX
FJI
MEX
IRN
ZWE
KEN COL
ISR
IND
MUS
CRI
PHL
ZWE
PHL
FJI
CRI
FJI
FJI
BRA
PHL
MUS
LVA
PHL
ZWE
PER
MEX
KENIND
LTU
HRV
CRI
CZE
KEN
BRA
BRA
KEN
MEX
PNG
IDN
ROM
ZWE
GMB
KEN
IDN
PHL
ZWE
IDN
BOL
AZE
PAN
MUS
PHL
BRA
BRA
BRA
IDN
MEX
ARG
BRA
IDN
GMB
MEX
CHN
EST
GTM
MDA
POL
THA
ZMB
TUN
ZWE
MWI
CRI
KEN
ISR
BRA
LKA
ZWE
CRI
CRI
AZE
MDG
BOL
LTU
LKACOL
ISR
LTU
GMB
PNG
ISR
FJI
COL
MUS
NIC
IDN
KEN
MUS
LKA
KEN
LKA
PAN
CZE
CRI
HRV
COL
BRA
PER
LVA
COL
IDN
ROM
MWI
IDN
ROM
MEX
SVN
KEN
FJI ARG
PAN
PHL
CRI CRI
ROM
PHL
CRI
NIC
HUN
KEN
MEX BRAPHL
MDG
KEN
FJI
ISR
IDN
ZWE
MUS
HUN BRA
ZWEISR
MYS
ZAF
NIC
ARG
PHL
SVN
MWI
MEX MUS
ISR MEXMEX
TTO
BGR
MYSISR BGR
MEX
IDN
MYS MYS
ZAF
IDN
ISR MYSMYS
COL
IND
MNG
IND
DOM
-.2
-.2
-.1
0
GTM
Residuals of ln(Pupil to Teacher Ratio)
.1
ZAF
IRN
-.2
IND
IRN
-.1
0
.1
Age of main parties * Subnational Revenues
• Sufficient data only for PG, not QG or growth
• All outliers work against the results
• Immunization and pupil to teacher ratio are significant;
literacy and infant mortality are not.
– Short term vs. long term effect
Ekaterina Zhuravskaya ESNIE 2008
37 of 44
.2
Residual partial plots – state-level
appointment decentralization
.5
HRV
SVK
URY
0
MEX
KOR
ALB
ZAF
-.5
ARG
BRA
-1
10
20
State executives
appointed
30
40
50
60
2
Subnational expenditures share
1.5
MNG
1
CHN
CHL
KGZ
IND
POL
.5
CRI
THA
BHR
ARM
0
Residuals of Government Effectiveness index
• Appointment
centralization also
seem to help fiscal
decentralization
• But, not robust to
controlling for FE!
• Thus, must be driven
by unobserved Xcountry heterogeneity
IDN
ISR
MY S
CZE PAK
EST
GEO
HUN
BGR
UKR
BOL
MDA
TJK
KAZ
DOM
ROM
NIC
BLR
-.5
Residuals of Government Effectiveness index
1
State executives elected
0
Ekaterina Zhuravskaya ESNIE 2008
20
40
Subnational expenditures share
60
38 of 44
Results - Solid support Riker’s theory
Neg_Illiter
Neg_P_to_T
+* +** +** +*** +* +*** +
+
gov_frac* rev_dec
-
-*** -*** -** -*** -*** -*** -*** -** -***
Immun
+*
GDP_grwth
Reg_Quality
0
Rule_Law
Gov_Effect
party_age* rev_dec
Cont_Cor
TI - Cor
Neg_Inf_Mort
1. Strong parties (low government fractionalization and high
party age) make decentralization more efficient: improve
quality of government, growth, public goods
2. No robust evidence for the effect of administrative
centralization
–
Results depend on the set of controls and particular samples
Ekaterina Zhuravskaya ESNIE 2008
39 of 44
Economic significance - example
A 10%  in decentralization:
• at a level of party age lower than the mean by
1/2 of its SD
 in government quality indices of 1/2 of their SDs
• at a level of party age higher than the mean
by 1/2 of its SD
 zero change on government quality
Ekaterina Zhuravskaya ESNIE 2008
40 of 44
Sensitivity analysis
• Influential observations
– China is influential; without China results go
through
• Controlled for other possible driving forces for
results
– Transition
• Additional controls
– Initial GDP per capita squared, federation dummy,
regional dummies, colonial origin, etc.
• Results are stable
Ekaterina Zhuravskaya ESNIE 2008
41 of 44
Endogeneity of political institutions
Economic performance can have different effect on political
institutions in fiscally centralized and decentralized states
1. Government fractionalization:
• In centralized countries, better performance leads to relative
strengthening of the national governing parties (and  lower
fractionalization because the success is attributed to national
policies
• In decentralized countries, voters attribute success to regional
policies which leads to an increase in fractionalization due to
strengthening of local political organizations
2. Administrative centralization:
• In centralized countries, good performance may allow the central
authorities to get public support to switch from elected to
appointed subnational governments
• With decentralization, this may be harder
 OLS - an upward bias in the coefficient of the interaction term
– Story for party age?
Ekaterina Zhuravskaya ESNIE 2008
42 of 44
Conclusions from E&Z’s test of Riker
• Key finding: political institutions play an important role in
determining the results of fiscal decentralization
– Provided we buy causality
• Solid support for Riker:
– strong national party system is an effective way of securing political
accountability needed for efficient fiscal decentralization, whereas
administrative control is not
– If one does not buy causality, an interesting empirical association:
countries that make decentralization work also manage to have
stronger national political parties
• Important finding: for most of developing countries
Riker’s conditions for successful federations are not met
Ekaterina Zhuravskaya ESNIE 2008
43 of 44
Open questions
• What makes political parties stronger (positive)?
• How to strengthen political parties (normative)?
• (Related): How can one explain Chinese miracle?
– The evidence is that administrative centralization does
not guarantee good outcomes
– Why Chinese central officials seem to be growth
maximizing?
– Why there is no adverse effect of absence of local
electoral incentives?
• Low level of development
– No need to think about social safety and public good (just yet)
• Enlightened leaders
• Local capture vs. Central entrenchment
Ekaterina Zhuravskaya ESNIE 2008
44 of 44
To take away:
• Very hot topic for research
• A lot more data are becoming available
now (on political institutions and on
decentralization)
– Including time series
– There is surprisingly little good empirics done
of the subject
• Both at country-level and
• At within country level
– See Guriev, Yakovlev, Zhuravskaya for an example
» The paper (in some sense) indigenizes Riker
Ekaterina Zhuravskaya ESNIE 2008
45 of 44