More on decentralization and economic growth

Abstract

This article casts new evidence on the effects of decentralization on economic growth. Based on the literature on the effects of institutions on the economy, such effects are assumed to accrue through total factor productivity (TFP). Five variables to capture decentralization are proposed in order to overcome the recent criticisms of the empirical approaches regarding the proper measures of variables capturing decentralization. Panel data for the regions of Spain over the 1986–2010 period are used. In general, the results show that the financial autonomy and the share of regional investment in public infrastructure seem to positively affect the economic growth of Spanish regions. However, a negative effect is found for a proxy for the number of responsibilities transferred to the regions. Moreover, empirical evidence provided for three sub-sample periods could be suggesting that the Spanish state might be around the optimal level of decentralization. Results are fairly robust to different estimation methods and measures of TFP, regardless of the assumption of constant returns to scale.