Different forms of decentralization and their impact on government performance: Micro-level evidence from 113 countries

Abstract

This study of the effect of decentralization on government performance differs from the vast literature on the topic in three major ways. First, we compare the effects of four different forms of decentralization, namely, fiscal decentralization, administrative decentralization, federalism, and aggregate decentralization. Second, we study the effect on three dimensions of government performance, namely, tax administration, business licensing and permits, and corruption. Third, the effects are judged in terms of the perceptions of nearly 100,000 business leaders located in 113 countries. Seven statements summarize our findings. First, fiscal and administrative decentralization improve perceptions of government performance. Second, federalism is associated with worse perceptions. Third, the effect of aggregate decentralization is ambiguous. Fourth, service industries tend to perceive decentralization more favorably than others. Fifth, large firms perceive decentralization less favorably than other firms. Sixth, the effect of the same form of decentralization varies in magnitude across the three government activities. Seventh, therefore, decentralization may not be oversold as a policy prescription to improve government performance; the form of decentralization and its contextualization in terms of the targeted area of government activity need careful consideration.