Decentralization or Fiscal Autonomy? What Does Really Matter? Effects on Growth and Public Sector Size in European Transition Countries

Abstract

This paper examines the importance of fiscal autonomy in the analysis of decentralization. Using new data published by the OECD (2001 and 2002), it reproduces several indicators and proposes new measures of decentralization that take into consideration subnational governments' autonomy over their revenues. Two models are reproduced: Davoodi and Zou (1998) on decentralization and economic growth, and Oates (1985), on decentralization and public sector size. Some evidence suggests that fiscal autonomy positively affects economic growth. Also, it seems to affect the size of the state, but evidence on this relation is limited. Despite some statistical weaknesses, there are sufficient indications to argue that subnational governments' fiscal autonomy should be a major concern when measuring decentralization.

This paper - a product of the Poverty Reduction and Economic Management Division, World Bank Institute - is part of a larger effort in the institute to take a critical look at the nature and implications of measuring the fiscal dimension of decentralization.