Decentralization, fiscal transfers and income inequality in Central and Eastern European countries

Makreshanska, Suzana and Petrevski, Goran (2016): Decentralization, fiscal transfers and income inequality in Central and Eastern European countries.

Abstract

Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and implemented. This paper provides empirical evidence on the association between fiscal decentralization and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1995-2011. In these regards, we focus on three research topics: the effect of decentralization on income inequality; the effects of the structure of local government finance on income inequality; and the validity of the Kuznets-hypothesis. The main findings from the empirical exercise are as follows: first, we cannot provide firm evidence on the presumes favourable effects of fiscal decentralization on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralization on income inequality depend on the source of finance of sub-national governments, i.e. intergovernmental transfers might have a role in income equalization; third, we provide empirical support for the validity of the Kuznets-hypothesis in the CEE countries in which there is a nonlinear relationship between the level of economic development and income inequality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal decentralization; Fiscal transfers; GINI; Central and Eastern Europe; Panel Data Models
• Subjects: D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H70 - General; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H73 - Interjurisdictional Differentials and Their Effects

References

Baltagi, Badi H. (2008), Econometric Analysis of Panel Data (fourth edition). Chichester, UK: John Wiley & Sons.

Baskaran, T., Feld, L. P., and Schnellenbach, J. (2016). “Fiscal federalism, decentralization and economic growth: a meta-analysis”, Economic Inquiry, 54(3), pp. 1445-1463.

Dabla-Norris, E. (2006). “The challenge of fiscal decentralisation in transition countries”, Comparative Economic Studies, 48(1), pp. 100-131.

Greene, W. H. (2003). Econometric Analysis. 5th ed, Upper Saddle River: Prentice Hall.

Hausman, J., A. (1978), “Specification Tests in Econometrics”, Econometrica, 46(6), pp. 1251-1271.

Kuznets, S. (1955), “Economic growth and income inequality”, American Economic Review, 45(1), pp. 1-28.

Lessmann, C. (2012), „Regional inequality and decentralization: an empirical analysis“, Environment and Planning A, 44(6), pp. 1363-1388.

Musgrave, R. A., (1959), Theory of public finance. New York: McGraw Hill.

Neyapti, B. (2006), „Revenue decentralization and income distribution“, Economics Letters, 92(3), pp. 409-416.

Oates, W. E., (1972), Fiscal Federalism. New York: Harcourt Brace Jovanovich.

Oates, W. E. (1999), „An essay on fiscal federalism“, Journal of Economic Literature, 37(3), pp. 1120-1149.

Pauly, M. V. (1973), „Income redistribution as a local public good“, Journal of Public Economics, 2(1), pp. 35-58.

Péteri, G. (2002). Mastering Decentralisation and Public Administration Reforms in CEE. Budapest: LGI-Open Society Institute.

Prud'Homme, R. (1995). The dangers of decentralization“, The World Bank Research Observer, 10(2), pp. 201-220.

Qiao, B., Martinez-Vazquez, J., and Xu, Y. (2008), „The tradeoff between growth and equity in decentralization policy: China's experience“, Journal of Development Economics, 86(1), pp. 112-128.

Rodriguez-Pose, A., and Ezcurra, R. (2009), „Does decentralization matter for regional disparities? A cross-country analysis“, Journal of Economic Geography, 10(5), pp. 619-644.

Sacchi, A. and Salotti, S. (2014a), “The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence”, Spatial Economic Analysis, 9(2), pp. 202-222.

Sacchi, A. and Salotti, S. (2014b), „How regional inequality affects fiscal decentralisation: accounting for the autonomy of subcentral governments“, Environment and Planning C: Government and Policy, 32(1), pp. 144-162.

Sepulveda, C. F. and Martinez-Vazquez, J. (2011), „The consequences of fiscal decentralization on poverty and income equality“, Environment and Planning C: Government and Policy, 29(2), pp. 321-343.

Šević, Ż. (2008). Local public finance in Central and Eastern Europe. Cheltenham: Edward Elgar, 2008.

Slukhai, Sergii, (2003). Dilemmas and compromises: fiscal equalization in transition countries. Budapest: LGI-Open Society Institute.

Swianiewicz, P., ed., (2004). Local government borrowing: risks and rewards. Budapest: LGI-Open Society Institute.

Tselios, V., Rodríguez-Pose, A., Pike, A., Tomaney, J., and Torrisi, G. (2012), „Income inequality, decentralisation, and regional development in Western Europe“, Environment and Planning A, 44(6), pp. 1278-1301.

Wooldridge, J. (2002). Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.