Chapter 12: Are Culturally Diverse Countries More Fiscally Decentralized?
Harry F. Campbell INTRODUCTION The hypothesis that cultural diversity leads to fiscal decentralization was perhaps most recently restated by Watts (1999, p. 35): ‘Generally the more the degree of homogeneity within a society the greater the powers that have been allocated to the federal government, and the more the degree of diversity the greater the powers that have been allocated to the constituent units of government.’ The hypothesis is based on the view that decentralized government is best able to meet the varied needs for public goods of a diverse population. However, Watts also recognizes (p. 35) an alternative view that ‘it may be considered desirable that the federal government should have sufficient powers to resist tendencies to balkanization’. This latter view is consistent with the hypothesis of government as Leviathan, intent on maximizing its own utility (Oates, 1985). Earlier studies by Oates (1972) and Pommerehne (1977) were unable to find support for the hypothesis that cultural diversity leads to fiscal decentralization, or for the alternative hypothesis that some degree of centralization is required to hold culturally diverse countries together. However, Panizza (1999) found some evidence that cultural diversity tends to be associated with fiscal decentralization. If there is an underlying process of decentralization in heterogeneous societies then, other things being equal, a positive correlation between a measure of heterogeneity (homogeneity) and a measure of decentralization (centralization) would be expected in a cross-sectional sample of states at similar stages of development. This paper generates measures of diversity and decentralization for...
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