The political economy of fiscal transfers: The case of Ethiopia
| Published date | 01 August 2024 |
| Author | Bizuneh Yimenu |
| Date | 01 August 2024 |
| DOI | http://doi.org/10.1002/pad.2053 |
Received: 17 July 2023
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Revised: 4 April 2024
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Accepted: 12 April 2024
DOI: 10.1002/pad.2053
RESEARCH ARTICLE
The political economy of fiscal transfers: The case of Ethiopia
Bizuneh Yimenu
International Development Department,
University of Birmingham, Birmingham, UK
Correspondence
Bizuneh Yimenu.
Email: b.g.yimenu@bham.ac.uk
Funding information
Open Society Foundations
Abstract
This article examines the political economy of fiscal transfers in Ethiopia. Utilising an
original data set spanning 1995–2020, as well as interviews and document analyses,
the article illustrates how different factors interact to shape the distribution of
grants. Statistical analysis indicates that population size is critical in determining
regional grant shares. However, the analyses reveal a pattern of ethno‐regional
favouritism in grant distributions during the early stages of Ethiopian federalism.
During that period, opaque and centralised decision‐making processes, coupled with
the dominant influence of the Tigray People's Liberation Front in the federal gov-
ernment, resulted in grant distribution deviating from principles of fiscal equity.
Over time, this evolved into more fluid forms of negotiation influenced by intra‐
party competition, dynamics of bargaining between the central and regional au-
thorities, and regional assertiveness, collectively shaping the allocation of grants
alongside the grant formula. The analysis highlights how economically and politically
marginalised regions are disadvantaged, especially when their population is small.
The absence of an independent grant agency means that political considerations
continue to affect seemingly formula‐driven allocations. The Ethiopian case un-
derscores how intra‐party bargaining and alignment along ethnic and regional lines
undermine the effectiveness of formula‐based grant allocations in the absence of an
independent and empowered grant agency.
KEYWORDS
decentralisation, Ethiopia, federalism, grant, region, transfer
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INTRODUCTION
Decentralisation has emerged as a prevailing strategy for public sector
reform worldwide (Smoke, 2015). Among the various decentralisation
models, fiscal decentralisation stands out as a pervasive approach.
Integral to federal systems, fiscal decentralisation involves devolving
spending responsibilities and revenue‐raising powers to subnational
governments. However, while transferring revenue authority to these
sub‐national units, federations often encounter vertical fiscal
imbalances wherein constituent states face budget deficits as their
expenditure obligations exceed their revenue capacities (Boadway
et al., 2011; McLure, 1999; Oates, 1972,1999). Therefore, fiscal
transfers from the central government to subnational units are crucial
for addressing these vertical fiscal gaps. These transfers also play a
critical role in addressing horizontal imbalances, the differences in
revenue capacity among subnational units (Bird & Smart, 2002, p. 900).
A growing body of research suggests that the allocation of such
intergovernmental grants is frequently shaped by institutional
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, pro-
vided the original work is properly cited.
© 2024 The Authors. Public Administration and Development published by John Wiley & Sons Ltd.
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Public Admin Dev. 2024;44:212–229. wileyonlinelibrary.com/journal/pad
dynamics and political considerations beyond just objective economic
criteria (Acosta & Tillin, 2019; Calvo & Murillo, 2004; Evans, 2005;
Gervasoni, 2010; Gordin, 2006; Oates, 2005; Weingast, 2009).
However, most existing studies focus on established, higher‐income
federations with sound fiscal frameworks. In contrast, this study in-
vestigates the political economy of federal grants in a multiethnic
African state. In this regional context, subnational fiscal capacities are
generally limited (Hobdari et al., 2018; Masaki, 2018), necessitating
heavy reliance on transfers from central governments to fulfil
expenditure responsibilities. This vertical fiscal imbalance creates
distinct political economy dynamics shaping grant allocation
processes.
This study contributes to the evolving discourse on the political
economy of fiscal transfers by examining the case of Ethiopia, a vital
nation from the Global South that embraced a multinational federal
system in 1995. The 1995 Constitution transformed Ethiopia into a
federation of nine regions primarily organised along ethnic lines. Per
the Constitution, the federal government is mandated to provide
fiscal grants to the regions to address both vertical imbalances and
horizontal socioeconomic inequalities across regions. Until 2019, this
Ethiopian federal system operated such that each region was gov-
erned by its own ethnic‐based regional party, while at the national
level, the federal government consisted of a coalition of four regional
parties known as the Ethiopian Peoples' Revolutionary Democratic
Front (EPRDF). This tight ethno‐regional alignment of ruling elites in
the federal ruling coalition suggests that the distribution of fiscal
transfers may have been influenced by political considerations tied to
ethno‐regional favouritism and power dynamics.
Crucially, Ethiopian regions rely heavily on federal grants, which
account for over 75% of their expenditure funding (Yimenu, 2023b).
Given this high fiscal dependence, the interplay between politics and
the grant allocation system was virtually inevitable. This article posits
that regions likely competed for larger shares of the transfer pool,
while the central government could strategically disburse grants to
pursue specific political interests aligned with its ethnic power base
across regions. Ethiopia's complex case of institutionalised multina-
tional federalism, coupled with an intricate dominant party system
built on identity‐based regional parties, amplifies the possibility of
politics influencing fiscal transfers. This makes it a critical case study
for understanding how fiscal transfers unfold in younger, multiethnic
federations across the Global South.
While existing studies on Ethiopia have delved into various as-
pects of fiscal transfer arrangements (e.g., Chanie, 2007a; Ish-
iyama, 2012; Keller, 2002; Moges, 2003), this article addresses a
literature gap by assessing the evolution of Ethiopia's grant systems
since the country became a federation in 1995. The analysis is
enabled by an original dataset computed from official federal and
regional government sources and other reliable sources like the
World Bank. This novel dataset encompasses detailed information on
grant allocation formulas, formula variables and their respective
weightings, annual regional grant disbursements, the proportion of
conditional grants, and regional own‐source revenue trends spanning
1995–2020. Qualitative evidence generated through document
analyses and key informant interviews supplements and reinforces
the quantitative data.
Utilising this longitudinal dataset and the qualitative evidence,
the analyses reveal that demographic and political factors and dy-
namics have shaped Ethiopia's federal grant system evolution, often
superseding objective economic criteria. The study fills a vital gap in
the literature by providing a comprehensive assessment across
25 years. It sheds light on the complex power dynamics and
ethnically‐driven political re/alignments inherent in centre‐regional
fiscal relations in Ethiopia. The detailed empirical investigation un-
ravels how the economic, institutional, and political forces interacted
to shape federal grant flows over time. The findings demonstrate that
the formal allocation principles have frequently been subverted by
political incentives and interests, yielding varying implications across
the regions.
The article unfolds in a structured manner. Section two conducts
a literature review. Section three outlines the data and methods.
Section four provides background on Ethiopia's federal model, party
system, and legal framework for fiscal transfers. Section five analyses
the political economy dynamics shaping federal grant allocation
across regions. Section six analyses conditional grants in Ethiopia.
Section seven discusses insights from the Ethiopian case within the
broader literature. The final section provides conclusions.
2
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THEORETICAL FRAMEWORK
Countries have pursued decentralisation reforms over recent de-
cades. This trend has been driven by initiatives aimed at better
responding to diverse local needs by bringing government closer to
citizens (Rodden & Wibbels, 2010). In regions with historically cen-
tralised governance models, such as Africa and the post‐communist
states, decentralisation was further advocated by donor agencies
(Dickovick, 2014). Among the array of decentralisation policies
adopted globally, fiscal decentralisation reforms are widespread
(Hanif et al., 2020). In the final quarter of the 20th century alone,
more than 75 countries decentralised fiscal responsibilities (Ahmad &
Devarajan, 2005, p. 1). This embrace of fiscal decentralisation across
the global North and South states reflects its recognised potential
benefits (Boex & Simatupang, 2008, p. 436). Fiscal decentralisation
encompasses the devolution of revenue‐raising powers, expenditure
responsibilities, and borrowing authority to subnational governments
(Rodden & Wibbels, 2010; Yimenu, 2023b). Crucially, it also neces-
sitates fiscal transfers from higher to lower government tiers, as the
revenue capacities of constituent units in federations are typically
insufficient to fully cover their expenditure obligations (Boadway
et al., 2011; Rodden, 2004).
Fundamentally, realising the potential benefits of fiscal decen-
tralisation hinges on well‐designed and coordinated intergovern-
mental fiscal relations frameworks. These mechanisms govern the
process of grant distributions and regulatory oversight of its usages
(Boex & Martinez‐Vazquez, 2005). In federations, in particular,
establishing sustainable and equitable fiscal transfer arrangements is
YIMENU
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