Buchanan, Tullock, Peacock on fiscal decentralization, and EU ex-communist countries

While in J. Buchanan's clubs theory, the decentralized governments should supply only public goods suited to their spatial dimension, for G. Tullock the decentralization should prevail over spatial dimension of the public goods to broaden individuals’ control on government. For A. Peacock too, devolution responds to the demand of participation against the irrelevance of the individuals in centralization, but an extended “dispersive revolution” might increase rather than decrease the “government failures”. Under Coase theory of the firm, applied to the government as firm, contracting out is limited by the cost of the deterioration of the power control.

We here, therefore, investigate the impact of the quantitative dimension of fiscal decentralization on the political robustness of the considered states in term of fragility, for 10 European Union (EU) ex-communist countries, over the period 1995-2012, by a panel-model approach. The main results show that between state fragility and fiscal decentralization there is a relationship with inverted-U and U shapes, analogous to the BARS (Barro, Armey, Rahn, and Scully) curve relating the government size to GDP growth. Clearly, the policy implication is that fiscal decentralization in EU ex-communist countries reduces the state fragility up to a point. After this point, the effect is inverted. At the same time, the governments in these countries may reinforce the state stability by smoothing the revenues inequalities and the inflation rate and by stimulating urbanization. Democratization and political rights deserve special attention.

Fragility is low under the reduced revenues inequality and inflation rate, and rises when the urbanization and democratization decrease, under given level of political rights. The relation between the fragility curve and the BARS curve may need further research.