Politics and fiscal decentralisation

Does fiscal decentralisation lead to more efficient governance, better public goods, and higher economic growth? Decentralization and Political Institutions (PDF) by Ruben Enikolopov and Ekaterina Zhuravskaya tests Riker’s 1964 theory that the results of fiscal decentralisation depend on the level of countries’ political centralisation:

We analyze cross-section and panel data from up to 75 developing and transition countries for 25 years. Two of Riker’s predictions about the role of political institutions in disciplining fiscally-autonomous local politicians are confirmed by the data. 1) Strength of national political parties significantly improves outcomes of fiscal decentralization such as economic growth, quality of government, and public goods provision. 2) In contrast, administrative subordination (i.e., appointing local politicians rather than electing them) does not improve the results of fiscal decentralization.

So yes, political institutions do play an important role in determining the results of fiscal decentralisation. The authors conclude:

Therefore, a remedy to poor governance in large inherently decentralized countries is building strong national political parties whenever possible. Strong parties help to provide elected local officials with efficient political incentives, because their chances of  election depend both on national party support and the satisfaction of the local constituency. This allows the striking of a balance between national objectives and local accountability.

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