Theoretical Perspectives, International Experience and Policy Reform
Studies in Fiscal Federalism and State–local Finance series
Edited by Santiago Lago-Peñas and Jorge Martinez-Vazquez
Chapter 5: Do fiscal decentralization and government fragmentation affect corruption in different ways? Evidence from a panel data analysis
Are countries characterized by more decentralized fiscal and spending powers less corrupt? Or is a higher degree of government fragmentation a more effective way to reduce and deter corruption? And finally, is there any evidence that these alternative ways to enhance government accountability reinforce or hinder each other? These are the three questions that the empirical analysis presented in this chapter will try to answer. The idea that centralization brings about high levels of rent-seeking, corruption and lack of accountability of government officials is behind the demand for greater decentralization that has characterized many OECD and non OECD countries since the 1990s (Rodden et al., 2003; Arzaghi and Henderson, 2005; Bardhan and Mookherjee, 2005). These decentralization reforms have taken two main directions: the devolution of tax and spending power to sub-national governments, i.e. fiscal decentralization, and/or the increase in the number of sub-national units of government, i.e. government fragmentation. There is still much debate over which of the two facets of decentralization shows a greater effectiveness in deterring corruption and improving the quality of governance. So far neither has the theoretical literature drawn unambiguous predictions nor has the empirical one produced conclusive evidence.
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