Decentralization And Regional Convergence

The proponents of decentralization argue that it improves economic growth by increasing government efficiency and accountability. However, the critics argue that decentralization increases regional inequality by increasing the differences in institutional capacities and socio-economic endowments across regions. The empirical evidence is mixed and is based mostly on developed countries due to lack of income data at lower administrative regions. This paper fills that gap by analyzing the impact of decentralization on regional convergence using first and second administrative regions data from a global sample of developed and developing countries. We construct a panel dataset from 1992 to 2010 using intensity of night-time lights captured by U.S. Air Force satellites to proxy for local economic performance. We combine lights data with a new database of fiscal, political, and administrative decentralization derived from actual laws that are institutionalized and circumscribed. We find that decentralization hinders regional convergence between first as well as second subnational regions within a country. These impacts are larger for developing countries. The results are economically meaningful, statistically significant, and robust to alternative specifications.