Decentralisation and Resilience: A Multidimensional Approach

Abstract

Multidimensional wellbeing is gaining momentum as a measure of socio-economic performance. Departing from common practice using income and employment, we investigate the resilience of 22 European countries on the occasion of the 2007 economic crisis in terms of multidimensional wellbeing. The potential effects of fiscal federalism-as measured by decentralised expenditure- on the ability to recover from the economic shock at the sectoral level are taken into account using data from the IMF’s Fiscal Decentralisation dataset. Methodologically, using panel data from 2009 to 2017 the empirical analysis adopts a pooled regression (POLS) approach with Driscoll–Kraay standard errors to consider very general forms of cross-sectional/spatial and temporal dependence. The analysis shows that (i) the results in terms of multidimensional resilience along the so-called 4R (i.e., Resilience, Recovery, Reorientation, and Renewal) are rather sector-specific and (ii) generally speaking, the level of fiscal decentralisation mitigates the shocks. Although based on the 2007 financial crisis, we argue that the lessons learned from the current analysis could provide a stimulus for research and interesting general insights applicable to other shocks, including the current COVID-19 pandemic. Indeed, our novel approach based on multidimensional wellbeing provides a piece of robust evidence making the spatial unevenness of economic shocks more apparent. As a consequence, from a scholarship perspective, it questions the mainstream approach based on mainstream measures, such as GDP and employment, calling for a more granular approach to economic resilience; furthermore, from a policymaking perspective, it prompts policymakers and practitioners to pay higher attention to sector-specific effects of decentralised policies.