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The Contribution of Fiscal Decentralization to Regional Inequality: Empirical Results for South African Municipalities

Over the past two decades, many African countries have carried out reforms aimed at decentralizing the political, administrative and fiscal structures of the public sector. The need to transform the structure of governance is informed by the view that decentralization increases the overall efficiency and responsiveness of the public sector in providing services, an outcome that enhances economic development and contributes to a reduction in regional disparities. Using panel data for South Africa’s 234 municipalities over the period 2003–2012, we test whether the decentralization of some fiscal powers to municipalities acts as a commitment tool that motivates local authorities to implement policies that reduce inter–regional inequality. The results of the empirical analysis provide evidence of a statistically significant relationship between fiscal decentralization and inequality in the context of South Africa’s local government sphere, with the specific nature of the relationship contingent on how fiscal decentralization is measured. In the case of revenue based measures of fiscal decentralization, the results support the hypothesis that the commitment device of fiscal decentralization provides incentives that decrease inter–municipal inequality. On the other hand, expenditure based fiscal decentralization contribute to increased inter–municipal disparities.

Working paper 597
1 April 2016
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