Is Federalization a Corruption-Abatement Strategy in Developing Countries?

Raul Fabella; Sarah Lynne Daway-Ducanes; Karl Robert Jandoc; Irene Jo Arzadon

doi:10.1515/ajle-2022-0026

Abstract

Would a shift to a Federal system raise or lower corruption in low-income countries? Local ownership, which is a strong argument for control of corruption under a Federal system, may not always be effective in jurisdictions with weak institutions. Our theoretical model shows that the net effect of these conflicting pressures cannot be determined a priori. Thus, we test empirically whether de jure federalism and/or de facto federalism are each a good predictor of control of corruption. We find that in countries with sufficiently high quality of governance or levels of development, neither de jure federalism nor de facto federalism matters as much as other dimensions of governance. However, in countries with poor governance, de jure federalism may have an adverse effect on control of corruption. A developing economy, which ranks poorly in terms of governance, cannot expect a reduction in corruption to follow a shift to a Federal system.

Keywords: federalism; de jure decentralization; fiscal decentralization; control of corruption; low-income countries

JEL Classification: H10; H40; H70; O10

Corresponding author: Irene Jo Arzadon, University of the Philippines Diliman School of Economics, 1101, Quezon City, Philippines, E-mail: iearzadon@up.edu.ph

Data availability: The data on Federal experience, Common law and French law are available to the public under the CIA World Factbook for Legal Systems: https://www.cia.gov/the-world-factbook/; the data on the percentage of Protestants can be retrieved from the Religious Characteristics of States Dataset Project of the Association of Religion Data Archives: https://doi.org/10.17605/OSF.IO/7SR4M; the rest of the other variables publicly available under the World Development Indicators and Worldwide Governance Indicators of the Word Bank: https://databank.worldbank.org/source/world-development-indicators and https://info.worldbank.org/governance/wgi/.
Competing interests: The authors have no relevant financial or non-financial interests to disclose.

Appendix

Proof of Proposition 1: The equilibrium pair (f ^∗, P ^∗) that simultaneously solves Equations (3) and (4) produces the functions f ^∗ and P ^∗ as an expression of the parameters M, H, λand L:

(A1) f ∗ ( M , λ , L , H ) = ( 1 − M + λ L ) ⋅ M λ M λ − H

and

(A2) P ∗ ( M , λ , L , H ) = ( 1 − M + λ L ) λ L M − H L

With the assumptions from the text and Footnote 3, the following derivatives are obtained along with their signs:

d f ∗ d M = − λ ( M 2 λ − 2 M H + λ L H + H ) ( H − M λ ) 2 < 0

d P ∗ d M = − λ 2 L − λ + H L ( H − M λ ) 2 < 0

d f ∗ d λ = M [ M ( λ 2 L + H ) − H ( 2 λ L + 1 ) ] ( H − M λ ) 2 > 0

d P ∗ d λ = M 2 − M − H L L ( H − M λ ) 2 < 0

d f ∗ d L = M λ 2 Mλ − H > 0

d P ∗ d L = M − 1 L 2 ( M λ − H ) > 0

d f ∗ d H = M λ ( λ L + 1 − M ) ( H − M λ ) 2 > 0

d P ∗ d H = − m + λ L + 1 L ( H − M λ ) 2 > 0

QED

Table A1:

Correlation matrix of WGIs and log of real GNI per capita.

World Governance Indicator (WGI)	Control of corruption	Government effectiveness	Political stability and absence of violence	Regulatory quality	Rule of law	Voice and accountability	Log of real GNI per capita
Control of corruption	1.00
Government effectiveness	0.92	1.00
Political stability & absence of violence	0.80	0.73	1.00
Regulatory quality	0.86	0.93	0.68	1.00
Rule of law	0.93	0.93	0.82	0.89	1.00
Voice and accountability	0.80	0.79	0.75	0.80	0.84	1.00
Log of real GNI per capita	0.77	0.83	0.70	0.80	0.80	0.69	1.00

Table A2:

Control of corruption and federalism measures.

	(1) Control of Corruption
Control of corruption (−1)	0.151^c
	(0.036)
Federal dummy	−80.862^c
	(18.750)
Federal dummy ∗ Real GNI per capita	7.686^c
	(1.849)
Fiscal federalism	−0.817^a
	(0.415)
Fiscal federalism ∗ Real GNI per capita	0.085^a
	(0.044)
Government effectiveness	0.331^c
	(0.039)
Political stability and absence of violence	0.051^a
	(0.030)
Regulatory quality	0.076
	(0.049)
Rule of law	0.378^c
	(0.072)
Voice and accountability	−0.147^a
	(0.075)
Log of real GNI per capita	0.785
	(0.993)
Log of GDP deflator	0.488
	(0.731)
Common law	1.914^c
	(0.725)
French law	−0.741
	(0.898)
Percentage of protestants	0.013
	(0.035)
CA	−15.636^c
	(2.438)
EAP	−1.303
	(1.218)
LAC	3.678^b
	(1.415)
MENA	−2.812^a
	(1.562)
SA	1.216
	(6.768)
SSA	0.277
	(1.989)
1997–2001	2.065
	(9.512)
2002–2006	0.645
	(9.647)
2007–2011	−0.252
	(9.667)
2012–2016	−1.604
	(9.778)
Number of observations	223
Number of countries	79
Number of instruments	76

Standard errors in parentheses. ^a p < 0.10, ^b p < 0.05, ^c p < 0.01.

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Is Federalization a Corruption-Abatement Strategy in Developing Countries?

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