Thesis advisor: Robert G. Murphy / This paper seeks to further establish the effects of fiscal decentralization on income inequality. While many major world organizations, such as the United Nations, and politicians are promoting the use of decentralization policies, their effects on income inequality remain largely unstudied. I add to the literature on fiscal decentralization in order to determine if it should be used as a policy tool designed to decrease income inequality. I empirically study the effects of fiscal decentralization by using a model largely based off of Akai and Sakata (2005). I quantify fiscal decentralization with two measures in order to conclude what form of fiscal decentralization, if any, should be used in order to decrease income inequality. My hope is that this paper contributes to the literature on fiscal decentralization, specifically in providing caution to politicians who haphazardly institute policies calling for increased fiscal decentralization. / Thesis (BA) — Boston College, 2007. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Economics. / Discipline: College Honors Program.

This dissertation seeks to investigate the relationship between public sector employment and fiscal decentralization. We develop a theoretical model that helps us understand the interaction of the central executive's and subnational governor's decisions on the level of public employees at the central and subnational levels. Our empirical work shows that fiscal decentralization policy shifts central government employees to the subnational government level and that the increase in public employees at the subnational government level overwhelms the decrease in public employees at the central level. As a result, the level of total public sector employees increases with the degree of fiscal decentralization of a country. We also find that the levels of total public sector employees as a percentage of population are higher in unitary country systems than those in federal countries. The level of public employment also increases with the degree of urbanization and with the exposure to risk of a country. This is a somewhat surprising result. Typically, more public employment is associated with an excessive number of public sector employees, and, therefore, with unproductive spending. On the other hand, fiscal decentralization policy has been generally thought to result in an increase in allocative efficiency, since a decision on public expenditures made by a level of government that is closer and more responsive to a local constituency is more likely to reflect the demand for local services than a decision made by a remote central government. In addition, decentralization has been thought of as having the potential of improving competition among governments and of facilitating technical innovations. Therefore, one might expect that fiscal decentralization should help to retrench the public sector employment. However, from our empirical result, we find that subnational governors without taking full responsibility for subnational public finance tend to bloat the levels of subnational government employees and ask the central government to pay the bill. As a result, the level of total public sector employees increases with fiscal decentralization policy. These findings are much in line with Oates' and Wallis' anticipated results, but they are based on different explanations. Employing the two most commonly used spatial dependency tests, Moran's I and Getis and Ord's G statistics, we also find evidence of spatial dependency in terms of the level of public sector employees as a percentage of population among the countries in our dataset. This finding suggests that while using a country's own domestic variables to explain the level of public sector employment, we should not ignore that the neighboring countries' policies also play an important role in determining it.

This dissertation provides an empirical test of the effects of fiscal decentralization and horizontal fiscal equalization on economic growth and examines the potential trade-off between horizontal fiscal equalization and economic growth in both China and India. Chapter II examines the effects of both fiscal decentralization and horizontal fiscal equalization on economic growth in China, particularly the effect of the Tax Sharing System reform enacted in 1994. Compared with previous studies, using more complete data providing better measures and more econometrically sophisticated instrumental variable procedures, we find that there is no substantial evidence of a trade-off between horizontal fiscal equalization and growth. The 1994 Tax Sharing System reform has positively contributed to both economic growth and horizontal fiscal equalization. In addition, we find that fiscal decentralization (FD) has a non-linear effect on growth. For values of FD less than 21, fiscal decentralization has a negative effect on growth, but for values greater than 21, fiscal decentralization has a positive effect on growth. Chapter III examines the effects of both fiscal decentralization and horizontal fiscal equalization on economic growth in India, particularly the effects of the 1991 economic reforms. Using state-wide data covering the period from 1980 through 2005, we find that fiscal decentralization has a negative effect on economic growth initially but that, beyond a certain value of fiscal decentralization, the effect on growth becomes positive. However, further decentralization could have a negative effect on horizontal fiscal equalization. These results are robust. In the meanwhile, there is no evidence of a trade-off between horizontal fiscal equalization and economic growth; instead, there is evidence of a positive effect of economic growth on equalization. In addition, the 1991 economic reform has contributed to economic growth. A comparative study of China and India has shown that the degree of fiscal decentralization in both countries is far from the point where its effect on economic growth becomes positive. Despite the dangers of widening disparities in terms of interregional fiscal resource distribution from further decentralization, no substantial evidence shows a trade-off between horizontal fiscal equalization and growth in either country. An in-depth and more thorough going fiscal decentralization with greater emphasis on equalization of fiscal disparities are required in order to effect sustainable economic growth as well as social harmony in these two Asian countries.

This dissertation comprises two essays. While the topics of both essays are different both are interrelated on the base of economic development. The first essay examines ethnic wage gaps on segmented labor markets with evidence from Latin American countries. The second essay revisits the determinants of fiscal decentralization with an emphasis on the role that geography plays in determining fiscal decentralization. The first essay contributes to limited literature on ethnic wage gaps in Latin America. It examines ethnic wage gaps for workers in formal and informal labor markets. Using data from Latin American countries we estimate and examine across-ethnic wage gaps for informal and formal markets, their changes over time, factors that explain their differences, and the wage gap distribution. More specifically, we verify that different ethnic wage gaps do exist across formal and informal markets; they behave differently not only at their means but also along the wage distribution. The results indicate that higher ethnic wage gaps in informal sectors exist not only on average but also throughout the distribution. In addition, we find that wage gaps have declined significantly over the last 10 years. we explain this by examining changes in the prices of institutional factors and changes in human capital endowments. The distributional analysis shows a decrease in the unexplained component, especially in the top part of the distribution. The second essay contributes to the existing literature on the determinants of fiscal decentralization by motivating theoretically and exploiting in depth the empirical relevance that geography has as a determinant of fiscal decentralization. The relationship between decentralization and geography is based on the logic that more geographically diverse countries show greater heterogeneity among their citizens, including their preferences and needs for public goods and services provisions. Communications and physical distance are also a very important issue and play a key role on the effect of geography over time. (Lora et. al., 2003) argue geography plays a key role in economic and social development, as well as in the institutional design of the countries; yet, this effect could be enhanced (or diminished) in the presence of better physical infrastructure or communications. The theoretical model in this paper builds on the work by Arzaghi and Henderson (2002) and Panizza (1999). For the empirical estimation, we use a panel data set for approximately 91 countries for the period 1960-2005. Physical geography is measured along several dimensions, including elevation, land area and climate. We construct a geographical fragmentation index and test its effect on fiscal decentralization. In addition, we interact the geographical fragmentation index with time-variant infrastructure variables in order to test the effect that infrastructure and communications have on the relationship between geography and fiscal decentralization. For robustness, we construct Gini coefficients for in-country elevation and climate. We find a positive and strong correlation between geographical factors and fiscal decentralization. We also find that while the development of infrastructure (in transportation, communications, etc.) tends to reduce the effect of geography on decentralization, this effect is rather small and mostly statistically insignificant, meaning that the impact of geography survives over time. The strategy has additional value because geography may be used as an instrument for decentralization in future econometric estimations where decentralization is used as an explanatory variable, but may be suspected to be endogenous to the economic process being studied (economic growth, political instability, macroeconomic stability, income distribution, etc.).

Magister Artium (Development Studies) - MA(DVS) / A country's decentralization process can be one of the pillars of democratic participation, local and regional accountability, sub-national empowerment, and under certain conditions, economic growth. Fiscal decentralization, a sub-division of decentralization, plays an important role in defining the assignment of expenditure and of revenue sources to subnational levels of government. The proper assignment of revenue provides all the different governments of a country with the necessary financial resources to operate efficiently. In this mini-thesis, I analyze the assignment of taxes as revenue sources to local governments, giving special focus to the Peruvian case. It aims at proposing an optimal local taxation system for Peruvian local governments.

Decentralization is a buzzword in current discussions on Public Management and its debate has always been a contentious one. The concept involves the restructuring or reorganization of authority so that there is a system of co-responsibility between institutions of governance at the central, provincial, regional and local levels according to the principle of subsidiary, thus increasing the overall quality and effectiveness of the system of governance, while increasing the authority and capacities of sub-national levels. The dispersal of financial responsibility is a core component of decentralization. Similarly, fiscal aspect is one of the decentralization programs. Moreover, fiscal as a tool is to change from inefficient to efficient public sector functioning and to improve relations between local governments for more efficient in public service. Importantly, decentralization of fiscal responsibilities is envisaged to increase efficiency in service delivery and reduce information and transaction costs associated with the provision of public services. By implication, efficiency in this context means how a country’s public finances are structured and how nation-state that is fragmented holds its finances together in the first place. The concept of “Supply Chain Management” (SCM) is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services delivered to the ultimate customer. Public sector SCM is seen as an acquisition of goods and service which has broader social, economic and political implications. Effective public sector SCM has potential benefits such as inventory reduction, improved service delivery and cost reduction across supply chain. Despite these benefits, South African (SA) public sector encounters challenges of SCM. In Emfuleni Local Municipality (ELM), these challenges range from a paucity of human resources due to lack of skills and capacity in the implementation and execution of SCM functions, poor implementation of SCM practices, quality of service in the SCM and to poor collaborative planning. Other barriers are lack of fiscal accountability, tight budget constraints and conflict of interest in the awarding of tenders which leads to political elite and bureaucratic corruption which cascades into unethical and unfair procurement dealings. These costly burdens result in ELM’s failure to meet community needs. Due to these challenges, the Fiscal Decentralization of SCM functions currently occupies a centre stage in the financial management reform process at ELM. Evaluating the efficiency of fiscal decentralization within the Supply Chain Management Department of Emfuleni Local Municipality requires an in-depth understanding of criteria. The concepts and principles from an examination of documentary data and analysed by the researcher were applied. In addition, semi-structured interviews, focus group discussion and observation methods were conducted to solicit comments from senior managers, employees and service providers This study reports the results of a full survey among a sample of the municipality-wide customers in the study area. It was found amongst other that: • Fiscal Decentralization as SCM efficiency tool has had only marginal positive effect at ELM • Effective implementation of fiscal decentralization is a function of well trained, qualified personnel crop, an attribute which is only beginning to get at ELM • Fiscal decentralization is best promoted wish performance management, a strategy which is well performed at ELM The study ends with recommendations for management action in committing themselves to take strategic fiscal decisions and actions that hold the key to the success of decentralized decision making. / MA, Public Management and Administration, North-West University, Vaal Triangle Campus, 2011

This study examined the impact of fiscal decentralization on quality financial reporting at the local government level in Ghana. The study is important because it provides development partners with the assurance that Metropolitan, Municipal, and District Assemblies (MMDAs) funds are used for their intended purposes. The study was based on the theory of local public expenditures, which posits that fiscal decentralization may enhance local capacities for service delivery. The key research question examined the extent to which fiscal decentralization has influenced quality financial reporting at the local level. The research design was quantitative, randomly sampling stakeholders in the local government structures including traditional rulers, assembly members, principal spending officers, budget officers, auditors, and accountants (n = 65). Descriptive plots, Pearson chi-square, and multiple regression analysis were used to examine the relationship between the dependent variable of quality financial reporting and the independent variables of expenditure responsibilities, taxation powers, intergovernmental fiscal transfers, and borrowing powers. The results of the analysis revealed taxation powers to be the most significant contributor to quality financial reporting. Quality financial reporting improved internally-generated resources, reduced audit queries, and served as a basis for granting funds to MMDAs. The study recommends that MMDAs be given taxation powers to enable local assemblies to generate more revenue so as to minimize the need for the transfer of funds from development partners and central government. The significant social change implication of this study lies in giving MMDAs control of service delivery at the local level.

The purpose of this study is to investigate the influence of fiscal decentralization on the efficiency of social security in China since the realization of social security was promoted and some relevant policies were implemented in 21 century. This study uses China’s provincial-level data of 31 regions from 2000 to 2009 and uses two inputs and three outputs to calculate the efficiency scores as the dependent variables. The inputs are the proportions of expenditures for social security and employment effort to total public expenditures and the proportions of hygiene, social security, and social welfare employed people to total employed people. The outputs are the coverage rate of urban basic pension insurance, the coverage rate of unemployment insurance, and the coverage rate of urban basic medical care insurance. Then, this study establishes four specifications of the Tobit model. Other factors, gross regional product per capita (PGRP), the degree of openness (OPEN), the scale of provincial government (SOG), the quadratic term of the former (SOGSQ), area dummy variables, and time dummy variables, are added into the Tobit model. The primary finding of this study is that fiscal decentralization has a positively non-monotonic influence on the efficiency of social security. This contributes positively to the efficiency of provincial government’s social security, but this positive influence does not always exist.

This dissertation examines the effect of fiscal decentralization on poverty reduction and explores potential transmission channels through pro-poor sectoral outcomes such as basic education, basic healthcare and agricultural productivity. We first develop a theoretical model to explain the interaction between decentralization and poverty reduction outcomes. In particular, we show that the marginal effect of fiscal decentralization on pro-poor sectors depends largely on the outcome of the trade-off between potential benefits derived from better matching of local preference due to local proximity, and the lack of technical capacity at the local level. This finding provides, in a way, a theoretical explanation of the different outcomes observed in fiscal decentralization programs around the world. This inconclusive theoretical result motivates an empirical analysis to assess whether there is any statistical significant relationship between fiscal decentralization and poverty. We implement this estimation using the Generalized Method of Moment Instrumental Variable (GMM-IV) methodology on 97 countries spanned over the period 1975-2000. Our estimation results reveal a statistically significant, but non-linear relationship between fiscal decentralization and poverty. In addition, we empirically explore potential transmission mechanism of the effect of fiscal decentralization on poverty through three sectors (basic education, basic healthcare and agricultural extension) that have been shown in the literature on basic needs and also by development practitioners to have significant bearing on the well-being of the poor. Finally, given the relatively high level of poverty in addition to the fact that most African countries are far behind in attaining their Millennium Development Goals (MDGs) targets, we investigate whether the effect of fiscal decentralization on poverty will be greater in Sub-Saharan Africa (SSA) relative to other regions.

This dissertation comprises two essays. While the topics of both essays are different both are interrelated on the base of economic development. The first essay examines ethnic wage gaps on segmented labor markets with evidence from Latin American countries. The second essay revisits the determinants of fiscal decentralization with an emphasis on the role that geography plays in determining fiscal decentralization. The first essay contributes to limited literature on ethnic wage gaps in Latin America. It examines ethnic wage gaps for workers in formal and informal labor markets. Using data from Latin American countries we estimate and examine across-ethnic wage gaps for informal and formal markets, their changes over time, factors that explain their differences, and the wage gap distribution. More specifically, we verify that different ethnic wage gaps do exist across formal and informal markets; they behave differently not only at their means but also along the wage distribution. The results indicate that higher ethnic wage gaps in informal sectors exist not only on average but also throughout the distribution. In addition, we find that wage gaps have declined significantly over the last 10 years. we explain this by examining changes in the prices of institutional factors and changes in human capital endowments. The distributional analysis shows a decrease in the unexplained component, especially in the top part of the distribution. The second essay contributes to the existing literature on the determinants of fiscal decentralization by motivating theoretically and exploiting in depth the empirical relevance that geography has as a determinant of fiscal decentralization. The relationship between decentralization and geography is based on the logic that more geographically diverse countries show greater heterogeneity among their citizens, including their preferences and needs for public goods and services provisions. Communications and physical distance are also a very important issue and play a key role on the effect of geography over time. (Lora et. al., 2003) argue geography plays a key role in economic and social development, as well as in the institutional design of the countries; yet, this effect could be enhanced (or diminished) in the presence of better physical infrastructure or communications. The theoretical model in this paper builds on the work by Arzaghi and Henderson (2002) and Panizza (1999). For the empirical estimation, we use a panel data set for approximately 91 countries for the period 1960-2005. Physical geography is measured along several dimensions, including elevation, land area and climate. We construct a geographical fragmentation index and test its effect on fiscal decentralization. In addition, we interact the geographical fragmentation index with time-variant infrastructure variables in order to test the effect that infrastructure and communications have on the relationship between geography and fiscal decentralization. For robustness, we construct Gini coefficients for in-country elevation and climate. We find a positive and strong correlation between geographical factors and fiscal decentralization. We also find that while the development of infrastructure (in transportation, communications, etc.) tends to reduce the effect of geography on decentralization, this effect is rather small and mostly statistically insignificant, meaning that the impact of geography survives over time. The strategy has additional value because geography may be used as an instrument for decentralization in future econometric estimations where decentralization is used as an explanatory variable, but may be suspected to be endogenous to the economic process being studied (economic growth, political instability, macroeconomic stability, income distribution, etc.).