Who Honours the Rules of Federalism? Party System Nationalisation and Fiscal Performance
| DOI | 10.1177/0032321717714611 |
| Author | Agnese Sacchi,Pablo Simón,Santiago Lago-Peñas |
| Date | 01 May 2018 |
| Published date | 01 May 2018 |
| Subject Matter | Articles |
https://doi.org/10.1177/0032321717714611
Political Studies
2018, Vol. 66(2) 265 –286
© The Author(s) 2017
Reprints and permissions:
sagepub.co.uk/journalsPermissions.nav
DOI: 10.1177/0032321717714611
journals.sagepub.com/home/psx
Who Honours the Rules of
Federalism? Party System
Nationalisation and Fiscal
Performance
Pablo Simón1,2, Agnese Sacchi2,3 and
Santiago Lago-Peñas2
Abstract
This article explores the impact of decentralisation on countries’ fiscal outcomes paying
attention to one aspect usually neglected in the literature: the relevance of local politics,
proxied by party system nationalisation. Based on a wide sample of developed and developing
countries over the period 1970–2011, our findings are threefold. First, both fiscal and political
decentralisations have a virtuous effect on fiscal performance, improving general government
primary balances. Second, there is no strong evidence that nationalisation by itself enhances
national fiscal outcomes. Nevertheless, when fiscal decentralisation is coupled with a certain
level of nationalisation, the former improves government fiscal balances. However, when
nationalisation of party systems is extremely weak, all the disciplining effects of decentralisation
tend to disappear.
Keywords
primary balance, fiscal decentralisation, regional authority, party nationalisation
Accepted: 2 April 2017
The twentieth century has been labelled an ‘era of regionalisation’ (Hooghe et al., 2010),
and the spread of decentralisation around the world has been intense over the last 50 years
(Rodden, 2006). This trend has justified the interest of scholars in different dimensions of
decentralisation, such as the nature and effects of intergovernmental competition, govern-
ment accountability, political stability, public sector performance and multilevel fiscal
management (Faguet, 2014).
1Department of Social Sciences, Universidad Carlos III de Madrid, Madrid, Spain
2Governance and Economics Research Network, University of Vigo, Ourense, Spain
3Department of Economics and Law, Sapienza University of Rome, Rome, Italy
Corresponding author:
Pablo Simón, Department of Social Sciences, Universidad Carlos III de Madrid, c/ de Madrid 126, Getafe,
Madrid, Comunidad de Madrid 28903, Spain.
Email: pablo.simon@uc3m.es
714611PSX0010.1177/0032321717714611Political StudiesSimón et al.
research-article2017
Article
266 Political Studies 66(2)
One of the most debated issues deals with a country’s fiscal discipline. Conventional
wisdom has argued that decentralisation erodes national fiscal sustainability (Darby
et al., 2005; De Mello, 2000; Rodden, 2002). The mechanism that encourages the attri-
tion of fiscal performance is the lack of incentives among local elites to ‘honor the rules
of federalism’ (Weingast, 2009) through the prevalence of self-interested local politics.
When there are fissiparous forces that control regional governments, there are more
incentives to freeride, and common-pool problems are likely to appear. Strong local
leaders, who rule in a context of soft budget constraints, have a tendency to overspend
(Goodspeed, 2002) and give rise to inefficiencies with inter-jurisdictional coordination
problems (De Mello, 1999). However, recent empirical evidence has shown that the
effect of decentralisation can be exactly the opposite, that is, improving fiscal discipline
(Baskaran, 2010; Neyapti, 2010; Presbitero et al., 2014). Ultimately, empirical results
are mixed as best.
The goal of this article is to address the impact of decentralisation on a country’s fiscal
outcomes while also taking into consideration the role played by party politics. Arguments
dealing with the impact of decentralisation on a country’s fiscal performance have tended
to be disconnected from the literature on political parties, which are, in fact, the crucial
actors taking decisions on public spending and taxation. This article makes an effort to
reconcile both such fields of literature in order to stress that the political incentives under-
lying the relation between decentralisation and fiscal performance can be uncovered by
the extent to which the party system is roughly the same across the regions of a polity.
Accordingly, this article explores the political conditions under which decentralisation
fosters or erodes a country’s fiscal performance taking into consideration the conditional
role played by the nationalisation of party systems.
Nationalisation is a process through which ‘politicians seeking election to the national
legislature from different districts (…) run under a common party label’ (Cox, 1997: 186).
In a perfectly nationalised party system, national parties compete everywhere and with
similar electoral strength across the polity. Conversely, in an extreme denationalised party
system, each constituency presents its own set of local parties, and they do not merge into
statewide organisations beyond their constituencies.1 According to the mechanisms pre-
sented by the conventional literature (Darby et al., 2005; Rodden, 2002), it should be
expected that weakly nationalised party systems endanger fiscal performance. Where
local leaders dominate, veto players cannot be internalised, and they cannot be forced to
allow institutional changes that constrain their powers and avoid common-pool problems
and freerider behaviours in terms of fiscal discipline (De Mello, 1999). Thus, decentrali-
sation could only entail poor fiscal performance when local party systems are relevant in
the national political arena.
In order to test these hypotheses, we rely on a wide sample of both developed and
developing countries over the period 1970–2011, using different measures of decentrali-
sation, that is, capturing both the fiscal and political dimensions of the phenomenon. Our
results are threefold. First, both fiscal and political decentralisation have a direct and posi-
tive effect on fiscal performance, improving the general government primary balance-to-
gross domestic product (GDP) ratios. Second, despite what the literature suggests, there
is no strong evidence that nationalisation by itself enhances national fiscal outcomes.
Nevertheless, when both decentralisation and nationalisation are considered altogether,
our analysis suggests that fiscal decentralisation improves government fiscal balances
only when the party system is somehow nationalised. In confirmation of the previous
statement, our results also show that nationalisation of party systems erodes fiscal
To continue reading
Request your trial