Central Government Control over Local Authority Expenditure: The Overseas Experience

This article compares the macroeconomic performance of centralized countries and decentralized countries in the OECD between 1984 and 1995. It considers three views of decentralization: the level of state and local taxes, the degree of decentralized power over tax rates, and the freedom of access for states or local authorities to capital markets. The evidence does not support the commonly held fear that decentralized countries may perform worse. In terms of growth, the two types of country seem evenly matched, and in terms of inflation and unemployment, decentralized countries actually seem to perform consistently better. It is possible, because central governments in decentralized countries concentrate on fewer activities, such as macroeconomic policy, that they tend to perform these activities better.