Federalism, Decentralization, and Macro-Economic Performance in OECD Countries

Abstract

Federalism research has recently seen a downright renaissance by putting the question “Does federalism matter?” on centre stage (Kaiser 2004). Findings in this respect are, however, ambiguous so far. Some authors observe a positive influence of federalism on lower inflation rates (Lijphart 1999; Lancaster/Hicks 2000), lower unemployment (Crepaz 1996), or a higher economic growth (Lancaster/Hicks 2000), whereas other researchers do not find any effects of federalism with regard to the macroeconomic performance of political systems (Lane/Ersson 1997; Castles 2000).p1 In addition to disputed findings and a preference for case studies instead of comparative research, there is next to no theoretical argument in these contributions as to why federalism should or should not have consequences for policy output. Against this background, the history of federalism research has a surprise in store. The question of performance effects of federalism refers back to Ostrom (1973) who turns against Riker’s (1969) claim that federalism (apart from more complicated decision-making) makes no real difference. Ostrom’s argument rests explicitly on findings of the public finance literature (in particular Oates 1972) and the assumption that federal countries can fully exploit the advantages of a decentralized provision of public goods and services. It is therefore rather startling that federalism literature has, for the most part, neglected the dimension of economic decentralization, the more so as there appears to be no alternative basis for the purported performance effects of federalism.p2