Abstract
Since the 1970s, the process of decentralization has spread throughout the world, and today more than 95% of democratic countries are decentralized. Decentralization should lead to a well-organized and more efficient local government. Nevertheless, the empirical results are rather vague. The motivation for this paper is to examine the impact of political and fiscal decentralization on the quality of government in seventeen countries in Central and Eastern Europe for the period 1998 - 2012. The main objective of the paper is to explore whether fiscal decentralization positively influences the quality of government and whether political decentralization reduces its positive influence. An additional contribution of the paper comes from the introduction of a decentralization interaction variable. Our results have shown that fiscal decentralization has a positive impact on governance, while political decentralization was found to be statistically insignificant. Our results also showed that richer countries have higher government quality, that government size increases the level of corruption and decreases government quality, and that in more democratic countries politicians behave more responsibly and accountably, which decreases the level of corruption and increases government quality. We conclude that political decentralization cancels out the positive effects of fiscal decentralization on the quality of government, which can be explained by less developed institutions at the local level in Central and Eastern European countries.
Highlights
Decentralization refers to the transfer of authority and responsibilities for the delivery of public services from the central to the local level
Our results have shown that fiscal decentralization has a positive impact on governance, while political decentralization was found to be statistically insignificant
Our results showed that richer countries have higher government quality, that government size increases the level of corruption and decreases government quality, and that in more democratic countries politicians behave more responsibly and accountably, which decreases the level of corruption and increases government quality
Summary
Decentralization refers to the transfer of authority and responsibilities for the delivery of public services from the central to the local level. Lower levels of government play an increasingly important role in the development of the country (Krtalic and Gasparini, 2007). According to Schneider (2003), devolution of powers and resources to lower levels of government increases economic efficiency. Decentralization includes fiscal, administrative and political dimensions (Schneider, 2003). Administrative decentralization refers to the degree of autonomy that decentralized units of government have relative to central control, i.e., it involves the redistribution of responsibility, authority, and sources of funding across different levels of government. Political decentralization refers to the degree of governance carried out by decentralized government units, i.e. it denotes the power that citizens and elected representatives have in the decisionmaking process (Schneider, 2003; Krtalic and Gasparini, 2007). Views on the impact of fiscal and political decentralization on the quality of government are unclear and there are arguments both for and against decentralization
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