Intergovernmental Fiscal Transfers and Geographical Disparities in Local Government Income in the Philippines

Abstract

Whether intergovernmental transfers can remedy geographic disparities in development without an explicit horizontal equalization feature has been a matter of dispute. To address the issue, I explore spatial inequalities in per capita local government income in the Philippines across alternative notions of geography and examine the intersecting effect of vertical revenue transfers on observed inequalities. The Gini and Theil indices and their corresponding subgroup decompositions are utilized as analytic tools. First, overall inequality in local government income generation is moderate across national space. Second, the severity of income inequality varies across different geographic groupings. Third, it is shown that the current Philippine transfer system has a substantial equalizing effect in terms of national inequality, but a negligible impact on specific spatial inequalities. Notably, spatial income inequalities between local governments have remained steady over the last decade. Additionally, local governments are not sharply stratified over national space. Rather, the space economy is composed of several overlapping regional economic systems. The implications for intergovernmental fiscal transfer policy reform is discussed.