Who Honor the Rules of Federalism? Party System Nationalization and Fiscal Performance

Abstract

This paper explores the impact of decentralization on countries’ fiscal outcomes paying attention to one aspect usually neglected in the literature: the relevance of self-interested local politics. Relevance that can be proxied by the nationalization of political party systems, namely the extent to which parties compete nationally oriented. Based on a sample of developed and developing countries over the period 1970-2011, our findings are twofold. First, fiscal decentralization has a positive effect on general governments' primary balance. Second, primary balance is negatively affected by the nationalization of party systems only when the latter is extremely weak.