Measuring and explaining fiscal de/centralization: Empirical evidence from Ethiopia, 1995–2020

Abstract

AbstractThis article provides an in‐depth analysis of fiscal decentralization in Ethiopia from 1994/95 to 2019/20, focusing on five fiscal categories: regional own‐source revenues, regional tax autonomy, regional borrowing, federal grants, and conditional grants. To measure fiscal de/centralization, the study constructs original data sets based on reports from various organizations over multiple years. The analysis results demonstrate that fiscal de/centralization varies temporally and spatially. While improved capacity is associated with enhanced own‐source revenue, the desire to improve regional fiscal management often results in fiscal centralization. Further, although Ethiopian regions have constitutional powers to determine the bases and rates of regional taxes, the central government has significant influence in such matters, often manipulating regional affairs in disregard of the constitution. The article reveals substantial variations of own‐source revenues across regions attributed to regional differences in capacity, development, location, and investment distribution. The article highlights the importance of a systematic understanding of region‐specific challenges to accurately assess the effectiveness of decentralization policies in the global South. Insights from Ethiopia are of great importance to policymakers looking to embrace fiscal decentralization in developing countries.