Reexamining the determinants of fiscal decentralization: what is the role of geography?

This paper contributes to the existing literature on the determinants of fiscal decentralization by exploring in depth the empirical relevance of physical geography as a determinant of fiscal decentralization; more geographically diverse countries show greater heterogeneity among their citizens. The theoretical framework imbeds geography into the concept of spatial decay in the provision of public services and our empirical estimation employs a panel data set for 94 countries for the period 1970-2010. Following the 'first nature' geography literature we construct a geographical fragmentation index based on elevation data and find that geographical fragmentation and area are significantly and positively related to fiscal decentralization. Following the 'second nature' geography literature we interact the geographical fragmentation index with time variant infrastructure variables, in order to test the effect that infrastructure and communications have on physical geography and fiscal decentralization. While the development of infrastructure tends to reduce the effect of physical geography on decentralization, this effect is rather small and mostly statistically insignificant.