Corruption, Entrepreneurship, and Social Welfare by Farzana Chowdhury Sameeksha Desai & David B. Audretsch

Author:Farzana Chowdhury, Sameeksha Desai & David B. Audretsch
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

4.5 Fiscal Decentralization and Corruption

Fiscal decentralization has been a trend in both developed and developing countries (Akai and Sakata 2002; Davoodi and Zou 1998). Fiscal decentralization pertains to transfer of power from national to local governments (Bahl and Linn 1992; Bird and Wallich 1993). Dillinger’s (1994) study found that 12 of the 75 developing countries have adopted some form of power transfer to local governments. The theoretical argument has been successful in arguing that decentralization is better for growth, community, and citizens. These arguments have been made based on the industrialized countries that pose the institutional quality necessary to carry out the decentralized activity (Melo 2002; Davoodi and Zou 1998). The theoretical argument stemmed from the Oates’ decentralization argument that local level government has access to local information, and therefore they are better able to provide services to the local community and efficiently; as pointed out by Peter de Valk (1990) “resurgence of interest in decentralization” has focused on “effectiveness and efficiency” (p. 5). Decentralization also gives power to the local citizens; if residents are not satisfied with the services then they can move from jurisdictions, which Tiebout calls “voting with feet” (Tiebout 1956). This expressed preferences for the services will lead to changes in the services and improved services to the local level promote economic development. However, many of the developing countries have a frail democratic system and the voting with feet model may not hold (Melo 2002). Critics also argue that mobility in the countries is also rather limited and influenced by the infrastructure stability, availability of resources such as capital, land, labor market, and legal frameworks (Melo 2002; Litvack et al. 1999; Prud’Homme 1995).

While the decentralization process was adopted by the developing countries based on the theoretical argument, the empirical evidence regarding the relationship remains unclear (Melo 2002). Davoodi and Zou (1998) in their empirical investigation of the relationship between fiscal decentralization and economic development found a significant negative relationship in developing countries and no relationship in developed countries. The study included cross-country data from 1970 to 1989. The similar negative relationship is also visible in the regional studies. Xie et al.’s (1999) study included data for the United States from 1948 to 1994 and found a negative relationship. Zhang and Zou (1998) studied 28 provinces of China from 1986 to 1992 and found a negative relationship between regional growth and fiscal decentralization. On the other side, Iimi’s (2004) study found a positive relationship between economic development and fiscal decentralization; the study included both developed and developing countries over the years of 1997–2001. Akai and Sakata’s (2002) study included state-level data in the United States and found a positive relationship between economic development and decentralization. These differences in the outcome of the decentralization could be explained by the flypaper effect. The literature related to flypaper effect (Gramlich 1977; Fisher 1982; Gamkhar and Oates 1996; Melo 2002) indicates that money sticks where it hits: “money in the private sector from private income tends to remain in the private

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