Regional Equity and Fiscal Decentralization: Which States Stay Robust During the Economic Downturn?

Authors

  • HyungGun Park Ph.D, Assistant Professor, Myongji University, 34 Geobukgol-ro Seodaemoon-gu, Seoul, South Korea
  • Ji Min Park Ph.D, National Assembly Budget Office, Budget Analyst, 1 Uisadang-daero Yeongdeungpo-gu, Seoul, South Korea
  • Hyung Jun Park Ph.D, Professor, Sungkyunkwan University, 25-1 Seonggyungwan-ro, Jongno-gu, Seoul, South Korea

DOI:

https://doi.org/10.52152/23.1.140-161(2025)

Keywords:

regional inequity, concentration, fiscal decentralization, economic development, economic crisis

Abstract

Location and level of government are critical factors that promise statewide economic growth. While existing research is prone to focus on the role that the factors consistently contribute to growth, there is limited understanding of how the structural varieties of geographical concentrations and decentralization could be effective during economic crises. Based on data from 29 OECD countries between 2000 and 2019, this study finds mixed empirical findings. First, the result shows the degree of concentration standing for regional inequity per se has adverse effects on the growth, while allowing states to withstand economic crises, having a modest decline. Second, oppositely, the fiscal decentralization rapidly enhances nationwide economic growth but is prone to experience far more losses than its less decentralized counterparts. The patterns point out some limited application of both regional equity and fiscal decentralization for economic development, leaving an implication that local governance may be differently managed in consideration of economic shocks.

References

Abdellatif, L., Atlam, B., & Aly, H. (2015). Revisiting the relation between decentralization and growth in the context of marketization. Eastern European Economics, 53(4), 255-276. doi:10.1080/00128775.2015.1065152

Abramovitz, M. (1989). Thinking about growth: And other essays on economic growth and welfare. Cambridge, UK: Cambridge University Press. doi:10.1017/CBO9780511664656

Akai, N., Hosoi, M., & Nishimura, Y. (2009). Fiscal decentralization and economic volatility: Evidence from state-level cross-section data of the USA. The Japanese Economic Review, 60, 223-235. doi:10.1111/j.1468-5876.2008.00450.x

Armingeon, K. (2012). The politics of fiscal responses to the crisis of 2008–2009. Governance, 25(4), 543-565. doi:10.1111/j.1468-0491.2012.01594.x

Baranski, E., Sweeny, K., Gardiner, G., International Situations Project, & Funder, D. C. (2021). International optimism: Correlates and consequences of dispositional optimism across 61 countries. Journal of Personality, 89(2), 288-304. doi:10.1111/jopy.12582

Barrios, S., & Strobl, E. (2009). The dynamics of regional inequalities. Regional Science and Urban Economics, 39(5), 575-591. doi:10.1016/j.regsciurbeco.2009.03.008

Barsky, R. B., House, C. L., & Kimball, M. S. (2007). Sticky-price models and durable goods. American Economic Review, 97(3), 984-998. doi:10.1257/aer.97.3.984

Baskaran, T., & Feld, L. P. (2013). Fiscal decentralization and economic growth in OECD countries: Is there a relationship?. Public Finance Review, 41(4), 421-445. doi:10.1177/1091142112463726

Baskaran, T., Feld, L. P., & Schnellenbach, J. (2016). Fiscal federalism, decentralization, and economic growth: A meta‐analysis. Economic Inquiry, 54(3), 1445-1463. doi:10.1111/ecin.12331

Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time-series cross-section data. American Political Science Review, 89(3), 634-647. doi:10.2307/2082979

Benson, C., & Clay, E. (2004). Understanding the economic and financial impacts of natural disasters. Washington, DC: The World Bank. doi:10.1596/0-8213-5685-2

Bilbao‐Osorio, B., & Rodríguez‐Pose, A. (2004). From R&D to innovation and economic growth in the EU. Growth and Change, 35(4), 434-455. doi:10.1111/j.1468-2257.2004.00256.x

Bjørnskov, C., Drehe, A., & Fischer, J. A. (2008). On decentralization and life satisfaction. Economics Letters, 99(1), 147-151. doi:10.1016/j.econlet.2007.06.016

Bodman, P. (2011). Fiscal decentralization and economic growth in the OECD. Applied Economics, 43(23), 3021-3035. doi:10.1080/00036840903427208

Boronenko, V., & Zeibote, Z. (2011). The potential of cluster development and the role of cluster support policies in Latvia. Economic Annals, 56(191), 35-67. doi:10.2298/EKA1191035B

Brennan, G., & Buchanan, J. M. (1980). The power to tax: Analytic foundations of a fiscal constitution. Cambridge, UK: Cambridge University Press.

Canaleta, C. G., Pascual Arzoz, P., & Rapun Garate, M. (2004). Regional economic disparities and decentralisation. Urban Studies, 41(1), 71-94. doi:10.1080/0042098032000155696

Canavire-Bacarreza, G., Martinez-Vazquez, J., & Yedgenov, B. (2020). Identifying and disentangling the impact of fiscal decentralization on economic growth. World Development,127, 104742.

Canova, F. (2004). Testing for convergence clubs in income per capita: A predictive density approach. International Economic Review, 45(1), 49-77. doi:10.1111/j.1468-2354.2004.00117.x

Cantarero, D., & Gonzalez, P. P. (2009). Fiscal decentralization and economic growth: Evidence from Spanish regions. Public Budgeting & Finance, 29(4), 24-44. doi:10.1111/j.1540-5850.2009.00941.x

Chu, J., & Zheng, X. P. (2013). China’s fiscal decentralization and regional economic growth. The Japanese Economic Review, 64(4), 537-549. doi:10.1111/jere.12013

Colagrossi, M., Rossignoli, D., & Maggioni, M. A. (2020). Does democracy cause growth? A meta-analysis (of 2000 regressions). European Journal of Political Economy, 61. doi:10.1016/j.ejpoleco.2019.101824

Courbis, R. (1979). The REGINA model: A regional-national model for French planning. Regional Science and Urban Economics, 9(2-3), 117-139. doi:10.1016/0166-0462(79)90009-7

Crescenzi, R. (2021). Changes in economic geography theory and the dynamics of technological change. In M. Fischer & P. Nijkamp (Eds.), Handbook of regional science (pp. 1307-1324). Berlin, Germany: Springer. doi:10.1007/978-3-662-60723-7_35

Davoodi, H., & Zou, H. F., (1998). Fiscal decentralization and economic growth: A cross-country study. Journal of Urban Economics, 43(2), 244-257. doi:10.1006/juec.1997.2042

de Mello Jr, L. R. (2000). Fiscal decentralization and intergovernmental fiscal relations: a cross-country analysis. World development, 28(2), 365-380.

de Paula, L. F. (2021). The COVID-19 crisis and counter-cyclical policies in Brazil. European Journal of Economics and Economic Policies: Intervention, 18(2), 177-197. doi:10.4337/ejeep.2021.02.06

Didier, T., Hevia, C., & Schmukler, S. L. (2012). How resilient and countercyclical were emerging economies during the global financial crisis?. Journal of International Money and Finance, 31(8), 2052-2077. doi:10.1016/j.jimonfin.2012.05.007

Dietrich, A. (2012). Does growth cause structural change, or is it the other way around? A dynamic panel data analysis for seven OECD countries. Empirical Economics, 43, 915-944. doi:10.1007/s00181-011-0510-z

Escaleras, M., & Register, C. A. (2012). Fiscal decentralization and natural hazard risks. Public Choice, 151, 165-183. doi:10.1007/s11127-010-9740-4

Ezcurra, R., & Pascual, P. (2007). Regional polarisation and national development in the European Union. Urban Studies, 44(1), 99-122. doi:10.1080/00420980601023877

Ezcurra, R., & Pascual, P. (2008). Fiscal decentralization and regional disparities: Evidence from several European Union countries. Environment and Planning A, 40(5), 1185-1201. doi:10.1068/a39195

Ezcurra, R., & Rapún, M. (2006). Regional disparities and national development revisited: The case of Western Europe. European Urban and Regional Studies, 13(4), 355-369. doi:10.1177/0969776406068590

Ezcurra, R., Pascual, P., & Rapún, M. (2007). Spatial inequality in productivity in the European Union: Sectoral and regional factors. International Regional Science Review, 30(4), 384-407. doi:10.1177/0160017606286424

Faggio, G. (2019). Relocation of public sector workers: Evaluating a place-based policy. Journal of Urban Economics, 111, 53-75. doi:10.1016/j.jue.2019.03.001

Fedelino, M. A. (2010). Making fiscal decentralization work: Cross-country experiences. Washington, DC: International Monetary Fund. doi:10.5089/9781589069855.084

Fernald, J., & Li, H. (2019). Is slow still the new normal for GDP growth?. FRBSF Economic Letter, 17, 1-5.

Gallup, J. L., Sachs, J. D., & Mellinger, A. D. (1999). Geography and economic development. International Regional Science Review, 22(2), 179-232.

Gemmell, N., Kneller, R., & Sanz, I. (2013). Fiscal decentralization and economic growth: Spending versus revenue decentralization. Economic Inquiry, 51(4), 1915-1931.

Hall, R. E. (2009). By how much does GDP rise if the government buys more output? (No. w15496). Cambridge, MA: National Bureau of Economic Research. doi:10.3386/w15496

Hammond, G. W., & Tosun, M. S. (2011). The impact of local decentralization on economic growth: Evidence from US counties. Journal of Regional Science, 51(1), 47-64. doi:10.1111/j.1467-9787.2010.00683.x

Helliwell, J. F. (1994). Empirical linkages between democracy and economic growth. British Journal of Political Science, 24(2), 225-248. doi:10.1017/S0007123400009790

Jalil, A., Feridun, M., & Sawhney, B. L. (2014). Growth effects of fiscal decentralization: Empirical evidence from China's provinces. Emerging Markets Finance and Trade, 50(4), 176-195. doi:10.2753/REE1540-496X500411

Jha, S., Mallick, S. K., Park, D., & Quising, P. F. (2014). Effectiveness of countercyclical fiscal policy: Evidence from developing Asia. Journal of Macroeconomics, 40, 82-98. doi:10.1016/j.jmacro.2014.02.006

Jilek, M. (2018). Determinants of fiscal decentralization-the recent evidence in European countries. In Conference on Theoretical and Practical Aspects of Public Finance (pp. 58-67). Retrieved from https://www.researchgate.net/publication/330508453

Jimenez, B. S. (2014). Smart cuts? Strategic planning, performance management and budget cutting in US cities during the Great Recession. Journal of Public Budgeting, Accounting & Financial Management, 26(3), 494-526. doi:10.1108/JPBAFM-26-03-2014-B005

Jin, J., & Zou, H. F. (2002). How does fiscal decentralization affect aggregate, national, and subnational government size?. Journal of Urban Economics, 52(2), 270-293. doi:10.1016/S0094-1190(02)00004-9

Kim, M. G., Park, J. H., & Park, H. (2022). Does revenue-sharing improve government service quality? Evidence from Seoul metropolitan districts. Journal of Asian Public Policy, 15(3), 517-540. doi:10.1080/17516234.2020.1858706

Korotayev, A.V. & Tsirel, S.V. (2010). A spectral analysis of world GDP dynamics: Kondratieff waves, Kuznets swings, Juglar and Kitchin cycles in global economic development, and the 2008–2009 economic crisis. Structure and Dynamics, 4(1). doi:10.5070/SD941003306

Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.

Kyriacou, A. P., Muinelo‐Gallo, L., & Roca‐Sagalés, O. (2015). Fiscal decentralization and regional disparities: The importance of good governance. Papers in Regional Science, 94(1), 89-108. doi:10.1111/pirs.12061

Lagravinese, R. (2015). Economic crisis and rising gaps North-South: Evidence from the Italian regions. Cambridge Journal of Regions, Economy and Society, 8(2), 331-342. doi:10.1093/cjres/rsv006

Li, W., Schmidt, S., & Siedentop, S. (2024). Can polycentric urban development simultaneously achieve both economic growth and regional equity? A multi-scale analysis of German regions. Environment and Planning A: Economy and Space, 56(2), 525-545. doi:10.1177/0308518X231191943

Lucas Jr, R. E. (2000). Some macroeconomics for the 21st century. Journal of Economic Perspectives, 14(1), 159-168. doi:10.1257/jep.14.1.159

Mainali, R., Tosun, M. S., & Yang, J. (2022). Fiscal decentralization, intergovernmental transfer reform and conflict in Colombian municipalities. Socio-Economic Planning Sciences, 83, 101108.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2), 407-437.

Marshall, J. N., Bradley, D., Hodgson, C., Alderman, N., & Richardson, R. (2005). Relocation, relocation, relocation: Assessing the case for public sector dispersal. Regional Studies, 39(6), 767-787. doi:10.1080/00343400500213663

Martinez-Vazquez, J., & McNab, R. M. (2003). Fiscal decentralization and economic growth. World Development, 31(9), 1597-1616. doi:10.1016/S0305-750X(03)00109-8

McKinnon, R. I. (1997). Market-preserving fiscal federalism in the American monetary union. Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi, 5-73. doi:10.4324/9780203024980.pt2

Montero, A. P. (2001). After decentralization: Patterns of intergovernmental conflict in Argentina, Brazil, Spain, and Mexico. Publius: The Journal of Federalism, 31(4), 43-64. doi:10.1093/oxfordjournals.pubjof.a004920

Ndambwa, B. J., & Siwale, A. W. (2022). Reinterpreting domestic sources of Zambia’s foreign policy: The party and the president. Journal of Contemporary Governance and Public Policy, 3(1), 1-20.

Neyapti, B. (2010). Fiscal decentralization and deficits: International evidence. European Journal of Political Economy, 26(2), 155-166.

Oates, W. E. (1972). Fiscal federalism. New York, NY: Harcourt Brace Janovich.

Oates, W. E. (1993). Fiscal decentralization and economic development. National Tax Journal, 46(2), 237-243. doi:10.1086/NTJ41789013

Ottaviano, G., & Thisse, J. F. (2004). Agglomeration and economic geography. In J. V. Henderson & J. F. Thisse (Eds.), Handbook of regional and urban economics (Vol. 4, pp. 2563-2608). (Netherlands: Elsevier). doi:10.1016/S1574-0080(04)80015-4

Park, H., & Park, J. H. (2022). Citizen participation and budget variance: How does local government make better fiscal accountability?. Lex Localis-Journal of Local Self-Government, 20(2), 369-392.

Park, H., & Park, J. H. (2024). Is fiscal decentralization a seasonal illusion? Evidence from Korean local governments. Journal of Asian Public Policy, 17(3), 704-724.

Parkinson, M. (2016). UK city regions: Policies, performance and prospects. Town Planning Review, 87(6), 629-653. doi:10.3828/tpr.2016.42a

Pavlov, P. N., & Drobyshevsky, S. M. (2022). Structure of GDP growth rates in Russia up to 2024. Voprosy Ekonomiki, (3). doi:10.32609/0042-8736-2022-3-29-51

Qian, Y., & Weingast, B. R. (1997). Federalism as a commitment to preserving market incentives. Journal of Economic Perspectives, 11(4), 83-92. doi:10.1257/jep.11.4.83

Rodden, J., & Eskeland, G. (2003). Fiscal decentralization and the challenge of hard budget constraints. Cambridge, MA: The MIT Press.

Rodríguez-Pose, A., & Ezcurra, R. (2011). Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries. Journal of Economic Geography, 11(4), 619-643. doi:10.1093/jeg/lbq025

Rodríguez‐Pose, A., & Krøijer, A. (2009). Fiscal decentralization and economic growth in Central and Eastern Europe. Growth and Change, 40(3), 387-417.

Rodrik, D. (Ed.). (2003). In search of prosperity: Analytic narratives on economic growth. Princeton, NJ: Princeton University Press. doi:10.1515/9781400845897

Sacchi, A., & Salotti, S. (2014). How regional inequality affects fiscal decentralisation: Accounting for the autonomy of subcentral governments. Environment and Planning C: Government and Policy, 32(1), 144-162. doi:10.1068/c1241r

Scorsone, E. A., & Plerhoples, C. (2010). Fiscal stress and cutback management amongst state and local governments: What have we learned and what remains to be learned?. State and Local Government Review, 42(2), 176-187. doi:10.1177/0160323X10378826

Shi, Y., Hendrick, R., & Park, H. (2018). Fiscal decentralization and capacity to service debt: Are they tightly linked?. Public Finance and Management, 18(2), 192-223. doi:10.1177/152397211801800203

Skidmore, M., & Toya, H. (2002). Do natural disasters promote long‐run growth?. Economic Inquiry, 40(4), 664-687. doi:10.1093/ei/40.4.664

Skoufias, E. (2003). Economic crises and natural disasters: Coping strategies and policy implications. World Development, 31(7), 1087-1102. doi:10.1016/S0305-750X(03)00069-X

Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94. doi:10.2307/1884513

Stansel, D. (2005). Local decentralization and local economic growth: A cross-sectional examination of US metropolitan areas. Journal of Urban Economics, 57(1), 55-72. doi:10.1016/j.jue.2004.08.002

Szarowská, I. (2014). Fiscal decentralisation and economic development in selected unitary European countries. European Financial and Accounting Journal, 9(1), 22-40. doi:10.18267/j.efaj.113

Tanzi, V. (2002). Pitfalls on the road to fiscal decentralization. In E. Ahmad & V. Tanzi (Eds.), Managing fiscal decentralization (pp. 33-46). Abingdon, UK: Routledge.

Taş, N., Hepsen, A., & Önder, E. (2013). Analyzing macroeconomic indicators of economic growth using panel data. Journal of Finance and Investment Analysis, 2(3), 41-53. doi:10.2139/ssrn.2264388

Ter-Minassian, M. T. (1997). Decentralization and macroeconomic management. Washington, DC: International Monetary Fund. doi:10.5089/9781451857276.001

Thiessen, U. (2003). Fiscal decentralisation and economic growth in high‐income OECD Countries. Fiscal Studies, 24(3), 237-274. doi:10.1111/j.1475-5890.2003.tb00084.x

Thornton, J. (2007). Fiscal decentralization and economic growth reconsidered. Journal of Urban Economics, 61(1), 64-70. doi:10.1016/j.jue.2006.06.001

Ulku, H. (2004). R&D, innovation, and economic growth: An empirical analysis (IMF Working Paper No. 04/185). doi:10.5089/9781451859447.001

Weede, E. (1983). The impact of democracy on economic growth: Some evidence from cross‐national analysis. Kyklos, 36(1), 21-39. doi:10.1111/j.1467-6435.1983.tb02659.x

Weingast, B. R. (1995). The economic role of political institutions: Market-preserving federalism and economic development. The Journal of Law, Economics, and Organization, 11(1), 1-31.

Wheaton, W. C., & Shishido, H. (1981). Urban concentration, agglomeration economies, and the level of economic development. Economic Development and Cultural Change, 30(1), 17-30. doi:10.1086/452537

Williamson, J. G. (1965). Regional inequality and the process of national development: A description of the patterns. Economic Development and Cultural Change, 13(4, Part 2), 1-84. doi:10.1086/450136

Woller, G. M., & Phillips, K. (1998). Fiscal decentralisation and IDC economic growth: An empirical investigation. The Journal of Development Studies, 34(4), 139-148. doi:10.1080/00220389808422532

Xie, D., Zou, H. F., & Davoodi, H. (1999). Fiscal decentralization and economic growth in the United States. Journal of Urban Economics, 45(2), 228-239. doi:10.1006/juec.1998.2095

Yang, Z. (2016). Tax reform, fiscal decentralization, and regional economic growth: New evidence from China. Economic Modelling, 59, 520-528. doi:10.1016/j.econmod.2016.07.020

Zhang, T., & Zou, H. F. (1998). Fiscal decentralization, public spending, and economic growth in China. Journal of Public Economics, 67(2), 221-240.

Published

2025-01-29

Issue

Section

Article