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Fiscal relations across levels of government and regional disparities

Presentation on Fiscal Relations Across Levels of Government and Regional Disparities made at the 2016 ZEW Public Finance Conference - Fiscal Equalisation in Europe held in Mannheim, Germany on 25-26 April 2016, made by David Bartolini, Economist, Regional Development Policy, OECD.
www.oecd.org/gov/regional-policy/

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Fiscal relations across levels of government and regional disparities

  1. 1. FISCAL RELATIONS ACROSS LEVELS OF GOVERNMENT AND REGIONAL DISPARITIES David Bartolini, OECD Fiscal Network ZEW Public Finance Conference, Mannheim 25-26 April 2016
  2. 2. 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$ 2
  3. 3. Inequality between countries is reducing … … BUT inequality WITHIN countries is on the rise 3
  4. 4. 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 4
  5. 5. • 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 5 Fiscal decentralisation indicators (from OECD Fiscal Decentralisation database): • Revenue • Tax • Expenditure • Tax autonomy • Tax Authority (RAI)
  6. 6. 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 6
  7. 7. 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” 7
  8. 8. 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 8
  9. 9. 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 9
  10. 10. Empirical results: fiscal decentralisation (1) (2) COV of per capita GDP robust SE IV (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 10
  11. 11. 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
  12. 12. 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 12
  13. 13. • 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 13
  14. 14. 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 14
  15. 15. 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 15
  16. 16. THANK YOU 16 david.bartolini@oecd.org http://www.oecd.org/tax/federalism
  17. 17. 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

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