Decentralization and Income Inequality in a Panel and Cross-Section of Countries

Abstract

Decentralization had been a common public finance reform among developing countries in the past few decades. Some advocates pushed for decentralization reform as an answer to the growing problem of income inequality. The primary argument for decentralization was that sub-national governments had better information on the needs and preferences of local citizens; while the primary argument against it was that the central government had better economies of scale in delivering public services, and usually had better access to important resources. This study tested for the relationship between decentralization and income inequality using both panel data and an annual averaged cross-section data of countries with varying income levels. The results showed that revenue decentralization and fiscal independence were weakly associated with lower income inequality, while expenditure decentralization had no significant relationship with inequality. In addition, the relationship appeared only in the panel data analysis, i.e. when short-term yearly fluctuations in data was not controlled for.