fiscal relations across levels of government and regional disparities
TRANSCRIPT
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FISCAL RELATIONS ACROSS LEVELS OF
GOVERNMENT AND REGIONAL
DISPARITIES
David Bartolini, OECD Fiscal Network
ZEW Public Finance Conference, Mannheim 25-26 April 2016
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Motivation 1: Regional disparities
• Why is it important?– Impact on economic growth: overall growth depends
on the contribution of each region (dynamic and size)
– Impact on income inequality: geographical inequality adds to overall inequality (national GINI)
• How to measure regional disparities?– Unit of analysis: OECD TL2 regions (NUTS2 regions)
– Coefficient of variation: ��� ���.�
� �
– Using regional per capita GDP in constant PPP 2005 US$
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Inequality between countries is reducing …
… BUT inequality WITHIN countries is on the rise
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On the right-hand side of the Kuznets curve (?)
• Low income countries seems to display larger regional disparities
• Inequality is picking up again for high levels of development – signal the importance of high-tech activities and services that tend to be concentrated in cities
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• Fiscal decentralisation might increase the efficient provision of local public goods, but there is fear that it would also increase regional disparity
• Main goal: investigate the impact of several indicators of fiscal decentralisation on regional disparities
Motivation 2: fiscal decentralisation
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Fiscal decentralisation indicators (from OECD Fiscal Decentralisation database):• Revenue• Tax• Expenditure• Tax autonomy• Tax Authority (RAI)
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Increases disparities
Less endowed regions will suffer – no level playing
field for competition
“race to the bottom” (Prud’homme, 1995) and “self selection”(Tiebout,
1956)
Corruption at the local level (Tanzi, 1996)
Decreases disparities
Efficiency (Oates, 1972) , Public choice (Brennan &
Buchanan, 1980), transparency/political
economy (Salmon, 1987)
Incentive for growth-enhancing policies (Qian &
Weingast, 1997)
Larger potential of endogenous growth in
poor regions (Baldwin & Krugman, 2004; Barankay
& Lookwood, 2007; Rodriguez-Posé & Ezcurra,
2010)
Fiscal decentralisation framework:existing literature
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Fiscal autonomy, balanced fiscal
structure
Incentive to increase tax base
Competition
More inequality
Less inequality
Better use of existing
resources
Less inequality
• Key channel: better use of existing resources – there is more scope for improvement in lagging regions than in top performers, which are closer to the productivity frontier
Importance of tax decentralisation and vertical fiscal “balance”
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Tax decentralisation may change the spending decision of SNG
• Period 1995-2011• Countries with large SNG tax share experience larger SNG spending
on economic affairs
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���� � � � ������ � ����� � �� � �� � ���
Empirical strategy
Dependent variable (cv) • Coefficient of variation = ��.�
� �
Fiscal decentralisation (FD) • SNG Revenue share• SNG Tax share• SNG Expenditure share• Vertical fiscal imbalance (1-Rev/Exp)
Control variables (X) • GDP per capita of country i at time t• Human capital, gross capital formation• Trade openness• Population concentration, pop, urbanisation• Public expenditures, public debt
Fixed effects • Country ��• Year ��
Unbalanced panel of 20 OECD countries over the period 1995-2011
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Empirical results: fiscal decentralisation
(1) (2)
COV of per capita GDP robust SEIV (2/3year
lag)
Tax decentralisation -0.278* -1.904***(0.145) (0.707)
Revenue decentralisation -0.364* -0.433***(0.189) (0.144)
Expenditure decentralisation 0.179*** 0.206***(0.055) (0.069)
Vertical imbalance 0.127** 0.284***(0.059) (0.085)
Fiscal autonomy -0.012*** -0.022***(0.004) (0.005)
Observations 274 252
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
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Empirical results: control variables
(2)
COV of per capita GDP
GDP pc 0.00163***(0.000432)
Square GDP pc -1.55e-08**(5.84e-09)
Capital formation -0.457***(0.130)
Trade openness 5.204(4.666)
Pop concentration -2.343**(1.063)
Government expenditure size 0.157***(0.0387)
Observations 274
Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 11
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Robustness
• Reverse causality – instrumental variable estimation
• Different time periods: (1995-2007) (2008-2011)
• Exclusion of one country at a time from estimation
• Different measure of regional disparities:• Weighted CV• GINI index• percentile ratios (75/25 and 90/10)
• GDP per worker (labour productivity)
All these robustness checks provided results similar to the baseline model
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• Cross section analysis
– Shankar and Shah (2003) decentralisation may increase disparities in “unitary” countries
– Rodriguez-Posé & Gill (2004) cross section analysis of OECD countries –decentralisation increases regional disparities because it favours economies of agglomeration
• Panel data models:
– Lessman (2006, 2009): panel OECD countries (1980-2001) = all indicators of fiscal decentralisation reduce regional disparity
• Differences in the level of development
– Rodriguez-Posé and Ezcurra (2010): impact of decentralisation depends on the level of development of a country = political and expenditure decentralisation reduces disparity only in developed countries
– Lessman (2012): panel of 54 countries (1980-2009) interaction decentralisation and GDP pc has a negative impact on disparity
• Differences in the quality of government
– Kyriacou et al (2013): the quality of government rather than the level of development may affect the impact of decentralisation on regional disparity
Selected literature review
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Highest impact on “low income” regions (catching up)
• Take regional income corresponding to the top (bottom) 25th percentile• Use it a s dependent variable in the regression:
∆ ��� !"#$% � &'(# �)�*'+ � &',-�)�*'+ � &./�� � 0� � 1� � 2��
(1) (2) (3) (5) (6) (7)
VARIABLES bottom bottom bottom top top top
SNG tax share 0.137* 0.0769
(0.0751) (0.0778)
SNG exp share 0.00188 0.0274 0.0692 0.0857*
(0.0578) (0.0595) (0.0526) (0.0508)
SNG rev share -0.00926 -0.0196
(0.0978) (0.108)
Fiscal authority 0.0112*** 0.0058
(0.00392) (0.00430)
• SNG tax share and Fiscal authority significant impact only on the bottom 25th percentile
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1. FD reduces regional disparities, if it does not increase vertical fiscal imbalance
2. Tax decentralisation stimulates SCG to implement pro-growth policies
3. Tax decentralisation favours catching-up of lagging regions
4. FD stimulate regional mobility in the distribution
Main conclusions
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Most of TL2 regional disparity depends on labour productivity
3-4
5"5�3-4
675∙675
9:4∙9:4
5"5
Productivity Employment rate
Activity rate
Note: coefficient of variation for the year 2010 17