Decentralization of Governance and Economic Development

P27∼49 P5∼20

Decentralization of Governance and Economic Development ∗

Tikiri Nimal Herath*

Abstract Decentralization of governance has become popular among many developing, developed and transition economies. A lot of writers have shown the many economic advantages of decentralization. Also included in the list of advantages is the role of the state in economic development. In 1980s and 1990s, decentralization became a hot and popular topic among economists and politicians. Even though the empirical studies on decentralization are still in their infancy, some countries have embraced decentralization without proper analysis. However, the literature on the history of decentralization is not complete and there are no adequate theories of decentralization. This paper makes an attempt to fill this gap by: (a) inquiring into the history of federalism; (b) examining the reasons for decentralization in recently decentralized countries; (c) and analyzing the relationship between decentralization and GDP per capita in terms of logit and probit models. The paper finds that decentralization originated from federalism and that economic growth is a significant reason for decentralization of governance, according to estimated models. Keywords: Decentralization, Ethnic Diversity, Federalism, The Role of the State

I. Introduction Decentralization of governance is, at present, a hot topic among economist, politicians, and policy makers. Several recent developments have given strength to the processes of decentralization. These include: (a) trends worldwide towards a realization that developments should not be a top down process but rather that it requires community involvement and motivation; (b) developments in the European Union; (c) suspicion of powerful central government; (d) growing disenchantment with the role of the public sector; (e) ethnic and cultural diversity (e.g. Ethiopia, Sri Lanka) (Tanzi 1996: 296; Bahl 1999); (f) country size (e.g. India, China, Russia, Brazil); (g) degree of devel* Ph.D, Senior Lecturer, Department of Economics, University of Sri Jayawardenepura, Nugegoda, Sri Lanka, E-mail: [email protected].

28 • Korea Review of International Studies

opment (Bahl and Linn 1992); (h) growth of local institutions with greater ability to deliver services and collect taxes (Bahl 1999); and (j) accepting and implementing decentralization as a way of reducing (restructuring) the role of the state in the economy (Bardhan 1997: 45; Faustor 1995). In developing countries as well as in economies in transition there is a big demand for decentralization of governance from the citizenry. Also, economists and political scientists have shown that a number of advantages could be derived from the adoption of decentralized governance. Furthermore, literature on the origin of decentralization of governance is scanty and there is no formal theory on the origin of decentralization. This study is to trace the major reasons for the origin of decentralization and lay the foundation for a theory on the origin of decentralization of governance. The paper firstly reviews the major changing pattern of the role of the state. It secondly defines basic terminology that includes decentralization and unitary form of government with a view of differentiation between terms and, after that, reviews federalism as a form of decentralization. Finally, the paper uncovers the origins of decentralized systems and how patterns of decentralization have changed.

II. Introduction of decentralization to the role of the state Almost all classical economists adhere to the idea that social welfare can be achieved through the market. In addition to the market, government is required to play other roles in the economy. Adam Smith (1776), even though he relied on a system of free competition and argued for a laissez-faire economy, emphasized the role of the state or government in economic development. After that, this same idea was emphasized through Pigou (1920), Rawls (1971), the neo-classical paradigm (see Wade 1990: 11), Buchanan and Flowers (1987) and the World Bank (1997). The World Bank has a two-pronged strategy to fulfill the role of the state, which includes decentralization of governance as a mechanism to improve the capacity of the public sector institutions.

III. Decentralization: present definitions and categorization 1. Definitions The concept of decentralization is very broad. The term is used to cover several ideas; its component parts are many, and it often means different things to different people. Therefore, definitions and classifications are necessary. Rondinelli (1981) presents a very clear definition. According to him decentralisation can, in general, be defined as the distribution of responsibility for planning, management and resource raising and allocation from the central government and its agencies to (a) field units of central government ministries or agencies, (b) subordinate units or levels of government, (c) semiautonomous public authorities or corporations, (d) area-wide, regional or functional authorities, or (e) non-governmental private or voluntary organisations. This definition includes both areas and regions as well as subordinate levels of government and covers

Decentralization of Governance and Economic Development • 29

both horizontal and pyramidal decentralisation. Also, it is based on power and resources sharing. However, even though the definition includes privatization, that does not directly form a part of decentralization of governance. In addition, the term decentralization is reserved in France for transfer of power from a central government to an area-wise or functionally specified authority with legal personality. That usage increases the degree of the autonomy of a local government unit or of a public-enterprise corporation (International Encyclopedia 1968). This definition does not include transferring responsibilities to the private sector. Further, it covers transferring legal authority only. In contrast, Rondinelli includes transferring both financial and legal authority. Thus, the French definition is narrower than that of Rondinelli (1981).

2. Classification Decentralization can be categorized into three types: deconcentration, delegation, and devolution (Rondinelli 1981). Some governments have used all types simultaneously or at different times. Other governments have used various combinations of the three. Deconcentration is the handing over of some amount of administrative authority and responsibility to units at lower levels within central government ministries and agencies. It is the shifting of the workload from centrally located offices to offices outside the national capital (Rondinelli et al., 1984: 10). Oates (1972) also presents a similar definition for deconcentration (p. 16). Delegation transfers managerial responsibility for specifically defined functions to organizations that are outside the regular bureaucratic structure and that are only indirectly controlled by the central government. Delegation has long been used in administrative law. It implies that a sovereign authority creates or transfers to an agent specified functions and duties, which the agent has broad discretion to carry out (Rondinelli 1981). Devolution is the creation or strengthening-financially or legally-of sub-national units of government, the activities of which are substantially outside the direct control of the central government. Under devolution, local units of government are autonomous and independent of the central government, and their legal status makes them separate and distinct from the central government. Central government may exercise only indirect supervisory control over such units. Sub-national governments have corporate or statutory authority to raise revenues and make expenditures (Sherwood 1969). In some countries, the intention of devolution was to place the mechanism of governance much closer to, or in direct contact with the citizens. The idea was to reduce the levels of administration through which activities had to pass, and to enhance productivity with increased participation by citizens in the development process (Rondinelli et al., 1984: 19-22). Tanzi (1996) divides decentralization into three: fiscal, administrative and political. Fiscal decentralization exists when sub-national governments have the power, given to them by the constitution or by particular laws, to raise some tax revenue and carry out spending activities within clearly established legal criteria as in Argentina, Australia, Brazil, Canada, India, Germany, Nigeria, Switzerland and the US. Since 1989, extensive


fiscal decentralization has been under way in almost all countries in central Eastern Europe and the Baltic countries, Russia and the other countries of the former Soviet Union (Bird et al., 1995: 31). Fiscal decentralization is definitionally fairly close to devolution, as defined earlier. Administrative decentralization is defined as a situation where most tax revenue is raised centrally, but funds are allocated to decentralized entities. A good example of administrative decentralization is in Italy. Political arguments for decentralization appear if a country’s population is non-homogenous and is divided by ethnic, racial, cultural, linguistic or other characteristics and they are regionally distributed as in Russia and Ethiopia. In some countries the economic and political arguments for decentralization tend to converge, since decentralization generally strengthens democracy (Tanzi 1996). Some governments have used several types simultaneously or at different times. Other governments have used various combinations. Some began with one approach and then shifted to another after assessing initial results. When we go back along the history of decentralization, federalism is the concept that most come across as a scion of decentralization.

IV. Federalism and fiscal federalism According to some writers there is no agreement as to the exact definition of federalism (Duchacek 1987; Inaman and Rubinfeld 1997). However, ‘federalism’ has been defined based on two different viewpoints; one in economics and the other in political science. From the political scientists’ view, federalism is not easy to define (Elazar 1987). For Proudhon (1863), a federal system is “the contrary of hierarchy or administrative and governmental centralization which is characteristic of, to an equal extent, democratic empires, constitutional monarchies, and unitary republics. Its basic and essential law is this: in a federation, the powers of the central authority are specialized and limited and diminish in number, in directness, and in what I may call intensity as the confederation grows by the adhesion of new states. In centralized governments, on the contrary, the powers of the supreme authority multiply, extend, and become more direct, bringing the business of provinces, towns, corporations, and individuals under the jurisdiction of the prince, as a direct function of territorial scale and the size of the population. Hence, arises the “suppression of all liberties, communal and provincial, and even individual and national” (p. 40). According to Dicey (1915: 139) a federal state is a political contrivance intended to reconcile national unity and power with the maintenance of “state rights.” Another definition, offered by Wheare (1953) defines it as follows: “if a system of government, with a written constitution, embody predominantly a division of powers between general and regional authorities, each of which, in its own sphere, is co-ordinate with the others and independent of them, it is a federal government (p. 3233). Many authors agree with this definition (see Dikshit 1975; Elazer 1987). Unitarism, in short, means the concentration of the strength of the state in the hands of one visible sovereign power, be that power Parliament or Czar (Dicey 1915: 153). However, the antithesis of federalism is not unitarism (Dikshit 1975: 11). The unitary form of government is a completely centralized situation of government for Oates (1972). In a unitary polity states exist at the mercy of central government. And in a fed-


eral government each level of government is theoretically autonomous within its allocated sphere of competence. Thus, what distinguishes federalism from a unitary government is constitutional autonomy not the formal division of powers. (Dikshit 1975: 34). Thus, most people who use the word ‘federalism’ or ‘federal government’ have in mind an association of states, which has been formed with certain common purposes, in which the member states retain a large measure of their original independence. There are differences among forms and types of association of states. Wheare set forth a number of characteristics that a political system must possesses in order to qualify as federal. He gives three conditions for a government to be a complete federal state. Firstly, a system of government does embody predominantly a division of powers between general and regional authorities, each of which, in its own sphere, is co-ordinate with the others and independent of them. Secondly, there should be a written constitution. And finally, the system should work. Wheare even if he advocates the division of powers between general and regional authorities, does not say what powers should be assigned to each level of government. However, he maintains that in a federal government, the regional government should be independent of the general government for some matters and power division is constitutional and hence legal. Thus, the political scientists’ view on federation is that it contains three major characteristics. Firstly, it is an association of states. Secondly, power division between the federal and state governments is constitutional. Thirdly, there is no clear division of powers between the centre and the regions. The overall picture shows that political scientists’ view on federation is concentrated on the concept of ‘powers’ of the government. For economists, the central concern of federalism is the allocation of resources and the distribution of income within an economy. Musgrave (1959) observed that "the heart of fiscal federalism thus lies in the proposition that the policies of the allocation branch should be permitted to differ between states, depending on the preferences of their citizens. “The objectives of the distribution and stabilization branches, however, require primary responsibility at the central level” (p. 181-182). Musgrave’s explanation does not give a clear definition on fiscal federalism. However, it shows that fiscal federalism is an intermediate situation between centralization and decentralization. Oates (1972) is more clear with the concept of fiscal federalism. For Oates (1972) “federalism represents a compromise between unitary government and extreme decentralization. In a federal system there exist both central government and sub-central government units, each making decisions concerning the provision of certain public services in its respective geographical jurisdiction” (p. 14). He defines federal government as “a public sector with both centralized and decentralized levels of decision-making in which choices made at each level concerning the provision of public services are determined largely by the demands for these services by the residents of (and perhaps others who carry on activities in) the respective jurisdiction” (p. 17). According to the views of both Musgrave and Oates, from an economic perspective, federalism is concerned with the allocation function of the government (allocation branch) and thus, for economists, federalism is that it combines the strength of the unitary form of government with those of decentralization. In this sense, federalism is the best form of government (federal structure) and has compelling advantages from an economic standpoint, over alternative


forms (Oates 1972: 15). However, these definitions do not say whether legal arrangements or constitutional provisions are essential for a federation. The constitutional provisions are a ‘must’ or necessary condition of federalism from the perspective of political scientists. But it is not so from the economic perspective as Oates (1972: 17) states. Devolution, as Sherwood (1969) defines, is financially or legally strengthening of sub-national governments. The term ‘legally’ includes constitutional arrangements also. However, according to Wheare (1953), under devolution regional governments are subordinate to general government (p. 32). As per the dividing of powers between federal and sub-national governments, political scientists have no clear idea, contrary to economists. From the economic perspective, government intervention consists of three branches: allocation; distribution and stabilization. The allocation function can clearly be decentralized. However, in that branch, there are some activities that cannot be decentralized at all. National defence is the best example. In sum, the political scientists’ view on federalism is different from that of economists mainly on the feature that economists’ clarify division of functions between federal and subnational governments. In addition, the constitutional characteristic may be in one economic category of decentralization-devolution. Thus, devolution is theoretically closer to political federalism than other alternative forms of decentralization. And furthermore, if lower layers of government are empowered with legal provisions, theoretically there will not be a difference between economic federalism and political federalism.

V. Origin of federalism and decentralization The idea of federation appears to be as ancient as the ideas of monarchy and democracy, as old as authority and liberty themselves (Proudhon 1863: 50). Federation, in Latin foedus, genitive foederis, that means pact, contact, treaty, agreement, alliance, etc is an agreement with one or more groups to perform one or more specific tasks, the responsibility for which rests exclusively with the officers of the federation (Proudhon 1863: 38). Elazar (1987) states that the federal idea originated from the Bible. He argues that the Latin foedus, which, same as the Hebrew term brit, means covenant and that shalom, the Hebrew term for peace, is a cognate of brit (p. 5). “The Israelite tribal federation described in the Bible was the first. More than three thousand years ago, it formulated the founding principle of federalism by transforming the vassal treaty among unequals into a covenant among equal partners (equal at least for the purpose of the covenant) that led to the establishment of a polity tribes maintaining their liberties within the framework of a common constitution law” (Elazar 1987: xii). Proudhon (1863) also reveals that more than 12 centuries before Christ, it appeared among Hebrew tribes, separate from one another in their valleys, but, like the tribes of Ishmael, united by a sort of contract of kinship (p. 50). According to Elazar, even though external pressures brought the demise of the tribal federation during the later periods, the Jewish people were the first to live under federal rule. As the second federation, Elazar states the Swiss Confederation which was born more than seven hundred years ago. And a third gave birth two hundred years ago as the federation of the United States of America. However, Wheare (1953) who accepts the modern idea of the federal government as


determined by the USA (p. 1), is not ready to accept both the US Constitution of 1777 nor the Swiss Constitution before 1848 as examples where the federal principle is perTable 1: Major characteristics of selected decentralized countries Country

Year of Decentralization

Layers of government

Reasons for decentralization

Ethiopia

1992 and onwards

National, state, Jurisdictions

Constitution 1994, ethnically and linguistically diverse

India

Federal structure has its origins in the Government of India Act of 1935.

Not a federation, but a union

Ethnically, socially diverse. Economic disparities among regions.

Korea

1994

National government, regional government and local government

Inefficiency of the centralized fiscal system, with development economy became diverse.

Nigeria

Quasi-federal in 1954, 1991

Federal, state and local governments

Large in terms of both land area and population, diverse in terms of ethnicity, religion, and climate.

China

1980s onwards

-

Rapid growth due to transition from planned to market

Hungary

1990 onwards

Two tiers

Idea that provision of services are more responsive for local demand

Italy

1970s onwards with constitutional provisions.

Central, regional, provincial and municipal

Wide regional differences in per capita income. Strong political forces.

Japan

Late 1990s

Central, and local.

Pressures for decentralization

Switzerland

1848 with constitutional provisions

Federal and cantons (states)

Greater variety of cultural background, languages, religions, settlements characteristics, and economic activities, large regional disparities.

USA

1787

Many, federal, state, townships, counties, school districts, special service districts

1787 constitution

Poland

1980s

In 1980s adopted market-based system after communism

Russian Federation

1990s

Multi-ethnic, multi-cultural

Sources: Ter-Minassian (1997); Poland and Russia - Bird et al. (1995).


fect. He maintains that to be a perfect federal principle, in practice as well as in theory, there should be the federal characteristics. In these two countries, at the time their reTable 2: Decentralization in Latin American economies Country

Year of Decentralization

Chile

1980s

Paraguay

1992

Layers of government

Mexico

Mid 1980s

Federal districts, states, municipal governments. Each sub government has its constitution subordinate to federal constitution

Argentina

Mid 1970s and onwards

Federal, provincial and municipal

Bolivia

1994

Central, municipalities, departments

Brazil

After 1988

Union, states plus federal districts, and municipalities.

Colombia

1991 (major process)

National government, departments and Municipalities

Reasons for decentralization Liberal policies which lead to institution innovations including decentralization and privatization Recommendations by international organizations since 1992, to implement decentralization. Privatization to solve the problem of diminishing budgetary resources Aimed at improving efficiency of the public services. Solving the problem of diminishing budgetary resources by reducing various burdens on the national budget. Regionally concentrated population, strong regional disparities. -Democratization after dictatorship from 1960 to mid 1980s, constitution in 1988. Problem of solving diminishing budgetary resources. Constitution 1991, objective is mainly political.

Source: FAO – www.ciesin.colombia.edu/decentralization.

Degree of decentralization on expenditure (%)

(1993) 21.7

(1992) 44.9

(1986) 14.0

(1993) 34.3

(1994) 32.6


spective constitutions were produced, he says, there was no practical working sample of a federal government. Proudhon’s (1863) idea on the origination of the federation is different from the above: it is the constitution. In this regard he wrote: “Among the many constitutions proposed by philosophy and put to the test by history, one alone reconciles the demands of justice, order, liberty, and stability, without which neither society nor the individual can live. Truth, like nature, is one. It would be strange if it were otherwise for the mind and for its grandest work, society. All writers have recognized the unity of human legislation; and without denying the diversity in application dictated by time and place and special character of each nation, or neglecting the scope of discretion in every political system, all have been obliged to accommodate their doctrines to it. I shall undertake to show that this one constitution, which it will be greatest triumph of human reason to have grasped, is nothing other than the federal system” (p. 5). Dikshit (1975: 1) also expresses a similar idea as Proudhon. He believes that federalism is a particularly complicated form of Western democracy. When we examine the views of key writers and study the experiences of countries that introduced federalism originally, two ideas surface: First, the USA, Switzerland and Israel can be considered countries from which a federation or close to federal state originated. Secondly, however, from the ideas of some authors namely, Proudhon, Elazar and Wheare, it is clear that the origination of federalism came about as a gradual change and incorporated in the constitution or through agreement with the people in these countries. Constitutional development is clear as a reason for decentralization, when we look into the situations in recently developed countries such as Ethiopia, Brazil and Colombia as presented in Table 1 and Table 2. New constitutions were adopted in Brazil in 1988, Colombia in 1991, and Ethiopia in 1994. In the originally decentralized countries such as the US and Switzerland also, constitutional development with decentralized governance took place. In addition, when we examine the reasons why countries introduced decentralized governance after 1970s, reasons range from ethnically and linguistically diverseness, regional disparities and increase in income are significant forces behind decentralized governance (Table 1 and Table 2). Moreover, it is clear that decentralization was popular in many countries in the 1980s and 1990s.

VI. Federalism in the USA, Switzerland and Australia: the original states The origins of decentralization namely ‘federalism’ was originally a concept of political science. As explained earlier, ‘federalism’ is an association of states (subnational governments) and hence is recognized as the original concept of decentralization. Modern federalism was basically developed in several countries, first in the USA, second in Switzerland and third in Australia. Reviewing the reasons for the introduction of federalism in these countries is very useful in determining the reasons for the origination and popularity of decentralization, and to postulate a theory on the origin of decentralization. Since the USA, Switzerland and Australia are the first three countries with a history of federalism, we need to review and analyze them.


1. United States of America The USA invented modern federalism through its constitution of 1787 (Dikshit 1975: 41; Wheare 1953). The foundation of the United States was laid out in 1607 when the first British colony was established in Jamestown, Virginia. By 1733 there were thirteen British colonies on the eastern seaboard. These colonies were hedged by Spanish territory to the south and French territory to the north and the Appalachians to the west. The 1641-1653 civil war and other troubles in England left all of the English colonies to grow in their own ways. Using their resources, colonies sought to develop their own markets, undertook the responsibility for their own defense, and by 1660 had begun to develop local institutions (Dikshit 1975). By that time, New England, Virginia and Maryland states were each full-fledged commonwealths possessing civilized life, conscious of their peculiar interests and capable of defending themselves against foreign enemies (Morison and Commager 1962). In 1643, the New England Confederacy was developed largely for defense against the Dutch, the French and the Amerindians. In the charter of the very first English American Colony (Virginia), it was clearly stated that the colonies were to enjoy all the liberties, franchises and immunities, just like they had enjoyed within the realm of England. As a result, each colony began to rear its own fabric of constitutional government, contending for a stronger representative system, control of finance and fuller guarantees of personal liberty. Each of the colonies had an assembly elected by citizens possessing the prescribed property qualifications. From their small beginnings the assemblies soon grew in dignity and took circumstance long associated with the House of Commons in England. Exercising the right to levy taxes, raising troops, issuing currency, fixing salaries of royal officers and appointing judges to the colonial courts, the assemblies became actual little parliaments in the course of time. However, afterwards a lot of things happened from the side of the British government. Efforts were made to strengthen the power of the Crown by reducing the dependence of the Governors on the Assemblies. The seven years war increased the expenditure on the colonial administration in America by almost four times. The imperial government decided to raise additional revenue for defense and administration from colonies themselves. With this objective, new and supplementary acts of trade and navigation were passed. The Sugar Act of 1764 prohibited colonial imports of molasses from French and Spanish colonies. This greatly hurt the New England colonies. The Mutiny Act of 1765 provided for dispatch of troops to America for maintaining order. While the different taxes had affected each of the colonies differently, the Stamp Act hurt them together. A violent united protest was made by the Stamp Act Congress (June 1765). This succeeded in getting the Act repealed in 1766. Early in 1774 ‘coercive’ or ‘intolerable’ Acts were passed. The port of Boston was closed and meetings in the town were banned; capital offenders were to be sent to England for trial. This was the end of the colonial period of America. George III wrote in a letter to Lord North ‘the colonies must submit or triumph’. In the protracted struggle the colonies ultimately triumphed and the thirteen colonies were transformed into the United States of America. A confederation was created in 1777 by the Articles of Confederation (Dikshit 1975). The success of the new experiment began to look doubtful. Britain was treating the colonies with contempt (Dikshit 1975: 45). The future of the country appeared bleak.


Alarmed by these grim prospects, national leaders rose to the occasion and, at last, in February 1787 the states were informed by the congress to elect delegates to a convention to meet at Philadelphia in May to revise the Articles of Confederation. After three months, the document was completed. The novel form is a compromise between the unitary form and confederal form of government. The constitution created two Houses of the central legislature-a lower house and the upper house. The first consists of representatives elected by voters and the second has equal representation of each state unit. In addition, the supreme court was created in the federal government. Why American colonies created a federation and why did they not think of a unitary state or any other kind of governance? There are some decisive reasons which include both geographical and cultural factors of the thirteen British American colonies whom got together to form the federal governance. These separate colonies were established on the eastern coastal area south of Quebec and each grew independently from one another. Each was separately governed from London and each colony had different obligations to the Crown. Great distances along the rivers, and a dangerous and unlit coast discouraged inter-colonial trade. Whatever trade between colonies was limited only to that with the mother country. Before the establishment of the Board of Plantations and Trade in 1696, there was no common coordinating agency for the colonies. When they gained independence each possessed its own homeland. Each colony enjoyed self-governance for long time so that they did not want to give this up under a unified central government. This influenced the making of a federation (Dikshit 1975). What are the factors that influenced the coming together? There are several factors in this aspect too. Firstly, British American colonies formed a distinct group surrounded at the north by the French, south by the Spanish and west by the insurmountable Appalachians. Moreover, a common language and common metropolis urged the colonies for a federation. Tocqueville (1835) demonstrated that the thirteen colonies shared the same religion, the same language, the same customs, almost the same laws, and the shared struggle against a common enemy were reasons to unite all of them (p. 112).

2. Switzerland The study of Swiss federalism must begin with the history of the country (Bieri 1979: 2). It is the oldest multi-ethnic federation and second to USA. In 1032, Switzerland became a part of the Holy Roman Empire. However, by the 13th century, German kings completely declined their power over Switzerland. As a consequence of the weakness of the imperial power to guarantee security for all of the areas of the empire, many of the units began to organize themselves into groups for the purpose of defense. The Swiss Confederation was one of these organizations. In August 1291, leaders of three communities entered into an agreement for mutual defense in the communities. This alliance was the true beginning of the federation. The victory of this alliance over Hapsburg forces in 1315 grew the confidence of the communal groups, and hence, by 1353 five other allies had joined the alliance. Military victories of the alliance gradually made it attractive for other allies that consequently joined the alliance. By 1513 there were


thirteen allies (Dikshit 1975). However, in the sixteenth century religious disharmony, which continued for two centuries, aroused and divided the alliance into two parts. After the French revolution the old Confederation disappeared, mainly due to political inability to generate action (Bieri 1979: 2). All of these problems and confusions came to an end, after the proclamation of ‘One and Indivisible Helvetic Republic’ was introduced, in April 1798. The country was hence divided into 23 cantons. After that, a representative democracy with universal male suffrage, rigidly centralized on the French model was established. This was a negligence of regional autonomy, and therefore, with maladministration created some problems (Dikshit 1975). After 1803, the establishment of a representative federal democracy, the 19 Cantons practically regained all of their original rights and privileges (Dikshit 1975). In August 1815, a federal agreement was reached between 22 Cantons, and Switzerland again became a federation (Bieri 1979). During the 1830s the old rivalry between Catholic and Protestant cantons raised its ugly head, and by the mid 1840s it threatened to break the solidarity of the Confederation. In 1848 a new constitution with compromise between the two extreme views of complete unitarism and extremely loose confederal polity was adopted. The central government was assigned with the administration of the army, customs, currency, postal services, foreign policy and the fixing of weights and measures. Cantons were empowered to manage the administration of law, justice and education, and freedom for religion was given to all cantons. Even though the constitution was amended a number of times, the concept federalism was kept undamaged (Dikshit 1975). In the 1860s, there were two democratic movements. On the one hand, there was pressure for an increase in federal responsibilities and on the other, there were claims for increased participation by the people in the federal government and the Cantons by means of referenda. The outcome of these discussions was the Federal Constitution of 1874, which is still in force (Bieri 1979: 3). Switzerland is a geographical area of great diversity. Its land area is about 41,000 square km. In the 18th century, the economy was well-developed and financially sound. However, there were considerable disparities between the weak agricultural areas and the cities (Bieri 1979: 2). Sixty-five percent of Switzerland land area is with rugged topography which made it difficult for inter-settlement transport. Each settlement was small in area and had distinct cultural communities. Cultural diversity was mainly in terms of languages (German and French) and religions (Catholic and Protestant). However, geography, distinct cultural communities and independent subsistence economies are reasons for a country’s settlements’ regional identities (Siegfried 1950). Diversity and religious factors were also significant in determination of the regional distinction (Dikshit 1975: 33). From the late 1700s to mid 1800s there were demands for democratic movement which was met with the amendment of the constitution. (Bieri 1979: 4). Difficulties in transport and communication tended to localize human activity in the Swiss valleys. However, the barriers did not completely isolate the cantons from their neighbours. Throughout the Swiss Alps, there are narrow corridors connecting the different valleys. Throughout history, traffic through the corridors made valley communities independent but interrelated. The location of Switzerland on the cross-roads between France, Italy, Austria, and Germany was also an important factor in the rise of a sense of unity among the valley communities.


3. Australia The federal Constitution of the Commonwealth of Australia came into effect on the first of January, 1901. At the beginning, the Australian federation consisted of six former British colonies-New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia. However, there were constitutional provisions to create new states, i.e. two territories, namely Northern Territory and Australian Capital Territory (the seat of federal government), which were added later. Unlike the USA and Switzerland, Australia’s population at the time of the establishment of the federation was extremely homogenous, divided neither by religion nor language and sharing a common culture. With such a homogenous background, the differences which favored a federation rather than unification were essentially geographical (vast distances separating colonies when transport by sea was, in most instances, the most rapid means of communication), institutional (loyalties and inertia built around established governmental structures and policies), and economic (vested interests related to the established basis of each colony’s production, commerce and trade). The Commonwealth powers under section 51 include matters such as trade and commerce with other countries, military defense, coinage, weights and measures, naturalization and treatment of aliens, marriage and divorce, immigration and emigration, external affairs and relations with the islands of the Pacific (Castles and Uhr 2005: 53-61).

VII. Origin of federalism: theory Federalism whether political or economic, is the root form of decentralization. What are the resulting circumstances for adoption of a federal government? Dikshit (1975) presents an extensive review on this question. Dicey presents a dictum in this regard: federalism is born as a result of political communities’ preference to a union over to complete unity. However, the democratic form of government is to provide collective consumption of goods by the society (i.e defense). This collective consumption or provision of a good can be analyzed by the theory of clubs postulated by Buchanan (1965). The same theory is also used to analyze decentralized provision of public goods. Wheare points out some six necessary factors which operated in the US, Switzerland, Canada, and Australia, as the origins of federalism. These are: (a) need for common defense; (b) desire for being independent from a foreign power and the feeling that it can be achieved only through union; (c) expected economic advantages of union; (d) political amity among some units prior to their federal union; (d) geographical neighborhood; and (e) similarity of political institutions. Wheare states that it is unlikely that a federation can be formed in the absence of all or most of these factors. However, he excludes ethnic characteristics such as language, race, religion from his list of prerequisites of federal government. Elazar (1987) states that the evolution of federalism is a result of the reassertion of ethnic and regional identities that is now worldwide in scope. He says there are about 3,000 ethnic and tribal groups in the world conscious of their respective identities. During the period of study (1980s), out of more than 160 politically sovereign states, 140 are multiethnic in composition (p. 8).


For regional separation or desire to have a regional autonomy among states, Wheare lists three factors in states: previous existence of a governance, economic disparity, and the sense of isolation through geographical factors. Wheare presents the above two (two or three?) types of factors that cause the formation the federation. However, he does not formulate a theory of origin of federalism. Some time later, Riker (1964) also after examining all federalist states postulated a theory of federalism. This theory consists of two conditions, namely, expansion and military. The first condition says that politicians seek federalism as a response to an external military threat or to prepare for military and diplomatic aggression and aggrandizement. But, they are not able to do so by conquest. Hence they must offer concessions to the rulers of the constituent units, which is the essence of the federal bargain. The second condition says that politicians who accept the bargain, giving up some independence for the sake of union, are willing to do so because of some external military threat. Commenting on this theory Dikshit (1975) says that, in the case of West Germany and Austrian federations both conditions were absent. Dikshit further states that the military factor is not a sufficient condition for the rise of a federation.

1. Ethnic diversity As stated earlier, Eethnic diversity has also been found to be a strong reason for the introduction of decentralization. Tanzi (1996) included ‘decentralization based on political argument’ in his categorization of decentralization. Showing a consistent idea, Stephen Castles (2000) maintains that migration made many countries multi-ethnic. When we analyze detailed data on ethnic diversity, in the world, at present, ninety individual countries exist with the ethnic majority of the population representing 80 percent or less of the total respective population. If this proportion were 75 percent or less, then there would be 75 countries (http://www.ed-u.com/ethnic-groups-by-country.htm). In Appendix 2, out of 33 countries, only thirteen have respective majorities that represent 80 percent or more in total population. Thus, it is clear that ethnic diversity is not such a strong factor for the introduction of decentralization of governance.

2. Increase in level of income Davoodi and Zou (1998) who analyzed the experiences of 46 decentralized countries showed that developed countries are, on average, more decentralized than developing countries (33% versus 20%). Bahl and Linn (1992) observed that “indeed, the review of the merits of decentralization above suggests significantly less decentralization in developing countries than in industrial countries. Decentralization more likely comes with the achievement of a higher state of economic development. This is because per capita income growth is usually accompanied by an increase both in urbanization and in the local government by a greater degree of local administrative capacity improvements in the implementation skills of local governments⋯⋯” (p. 392). After analyzing the evolution of the public sector, Oates (1993) agreed with this idea to some extent. All of these writings advocate for the fact that decentralization is an outcome of growth and


development. To test the hypothesis that decentralization is an outcome of development, a regression analysis was conducted. For this purpose, a general linear model was selected. Yi = β 0 + β1 X i + U i

Where Yi = dependent variable, Xi = independent variable, β i = parameters to be estimated, Ui = error term. The regression was binary (if the country was decentralized the value of the variable was unity and zero if not decentralized) and the independent variable was per capita income of the country at the closest previous year of decentralization. The model was estimated utilizing the data in Appendix 1. Sometimes, for a given country two data sets for both variables were utilized. For example Romania was decentralized in 1991. Then, the country’s per capita income for that year was taken as the independent variable and value of the dependent variable was unity. However, the country was not decentralized in 1987, but we have the per capita income of $ 3,000 for Romania for that year. Then the pair of data points for the dependent and independent variables can be taken respectively as, 0 against $ 3,000 and $ 3,500 against 1. Firstly, a linear probability model respectively with the least squares method and the weighted least squares were estimated. Later, logit and probit models were also estimated. The data set used for the estimations of the logit and probit models are given in the Appendix 3 and the results are given in Appendix 4. A priori parameters of the estimated models were expected to be positive. OLS estimates of LPM model are positive. Even though the intercept is not significant, the gradient is highly significant. The intercepts give the probability that a country is decentralized as a result of reasons other than namely ethnic diversity, country size and so on. The value of the intercept is positive, implying that 23 percent of countries are decentralized based on reasons other than per capita income. In that sense, however, it means whether the country is decentralized or not is decided wholly on the income level of the country. The slope value of 0.0001, which is significant in terms of t-statistic, means that for a unit change in income on average the probability of decentralized governance in an economy. Of course, given a particular level of per capita income, we can estimate the actual probability of introduction of decentralized governance in a country. Thus, for X = ppp $ 2740, the estimated probability of having decentralized governance is: ( Yˆ │X = 2740) = 0.23 + 0.0001(2740) = 0.50. This means countries with per capita GDP greater than ppp $ 2740 have a greater tendency to introduce decentralized governance into their economies. Except for the 16th observation, the estimated Y under LPM were all positive and less than one (Appendix 3). Reducing the sample size up to 32 countries, the LPM was estimated with weighted least squares method. Results show (Appendix 4) that the value of the t-statistic of the intercept has decreased but it has increased in terms of gradient. As a result, the significance of the slope also has improved. Also, the value of the Rsquared also has increased by 17 percent. Now a country with per capita income of PPP $ 2740 has a probability of 0.66 of getting decentralized governance: the probability of


adopting a decentralized governance has increased. Results of both logit and probit models show that their respective intercepts are of less significance. However, their slopes are individually positive and significant and on an overall basis both types of models are significant, according to the value of the respective LR statistic (Appendix 4). The slope coefficient of logit equation measures the change in the estimated logit for a unit change in the regressor. Thus, under the ceteris paribus assumption, if GDP per capita of a country increases by PPP $ 1000, on average the estimated logit increases by 0.5 suggesting a positive relationship between the two. If we take the anti-log of the slope coefficient, we will get 1.0005. This means countries that increase their GDP per capita, are more likely to adopt decentralized governance than countries that do not. The probit model also produces the same results just like the logit model.

VIII. Conclusion When we look into the history of federalism, we can observe that it was always introduced to unite fragmented countries or economies in terms of land by forming federal countries or economies. The USA, Switzerland and Australia are examples. Similar evidence was reported in Europe where in 1999 a union was formed with 11 countries. However, when time passes unified countries have also introduced federalism or decentralized governance. Argentina, Mexico and Nigeria are such examples. This is the adoption of the reverse order in acceptance of federalism. However, there is a similarity. To form a federation or decentralized governance, in a country, there needs to be a homogeneity in terms of some characteristics. For instance, among the fragmented colonies with which later federal economies were formed in both Switzerland and US, there was a similarity in terms of language. Therefore, in a country, before formation of a decentralized governance, identification of common strands among the expected subnational governments is essential. Only then can the government impress its citizenry. In countries like Sri Lanka, where peace was sought was this proposed tactic adopted. At the very beginning, nine reasons were stated as reasons for decentralization of governance. Some of them have not been critically analyzed and are not quantifiable. Suspicion of powerful central government, growing disenchantment with the role of the public sector, and growth of local institutions with greater ability to deliver services and collect taxes can be stated as examples. Reasons for decentralization include growth and development also. Results of estimated regression models show that the higher the GDP per capita of country the higher the probability for adopting decentralized governance. This finding is consistent with the extension of club theory by Adams and Royer (1977) and Adams (1980), who found that there is a positive relationship between the increase in consumer income and club size. Thus, economic growth is a strongly significant determinant for adoption of decentralized governance in a country. There is another side to this conclusion. Higher growth is mostly due to higher educational development (i.e. higher literacy, higher level of tertiary education and so on). Therefore, when growth is higher, it can be assumed that people in that country are well familiar with the polity, administration, and role of the state in economic development. Then there may be pres-


sures from the citizenry for adoption of decentralized governance.

References Adams, Roy D. “Income Effects and Club Size: Some Comments,” Public Finance 35, 1980: 450-454. Adams, Roy D. and J.S. Royer. “Income and Price Effects in the Economic Theory of Clubs,” Public Finance 32(2), 1977: 141-58. Bahl, Roy W. “Fiscal Decentralization,” http://www-wbweby.worldbank.org/courses/ ebel/ryl.html, 1999. Bahl, Roy W. and J.F. Linn. Urban Public Finance in Developing Countries, Oxford: Oxford University Press, 1992. Bardhan, Pranab. The Role of Governance in Economic Development: A Political Economy Approach, The Organisation for Economic Co-operation and Development, Paris: OECD Publications, 1997. Barro, Robert J. and Xavier Sala-i-Martin. Economic Growth, Cambridge: The MIT Press, 1995. Bieri, S. Fiscal Federalism in Switzerland, Research Monograph No. 26, Centre for Research on Federal Financial Relations, The Australian National University, Canberra, 1979. Bird, Richard M., C.L. Freund and Christine I. Wallich. “Decentralising Fiscal Systems in Transition Economics,” Finance and Development 32(3), 1995: 31-34. Buchanan, James. “An Economic Theory of Clubs,” Economica 32(75), 1965: 1-14 Buchanan, James and M.R. Flowers. The Public Finances: an Introductory Text Book, Sixth Edition, Illinois: Homewood, 1987. Castles, Stephen. Ethnicity and Globalization, London: Sage publications, 2000. Castles, Francis G. and John Uhr. Australia: Federal Constraints and Institutional Innovations, in Herbert Obinger, Stephan Leibfried and Francis G.Castles (eds), Federalism and Welfare State: New World and European Experiences, 2005. Davoodi, Hamid and Heng-fu Zou. “Fiscal Decentralization and Economic Growth: A Cross Country Study,” Journal of Urban Economics 43(1), 1998: 244-257. Dicey, A.V. Introduction to the Study of the Law of the Constitution, Eighth Edition, London: Macmillan and Company Ltd, 1915. Dikshit, Ramesh Dutta. The Political Geography of Federalism: An Inquiry into Origins and Stability, Delhi: The Macmillan Company of India Ltd, 1975. Duchacek, Ivo D. Comparative Federalism: The Territorial Dimension of Politics, Lanham, MD: University Press of America, 1987. Elazar, Daniel J. Exploring Federalism, Alabama: University of Alabama Press, 1987. Faustor, C.M. Decentralisation and Planning of Education: Recent Experiences in Five Latin American Countries, International Institute for Educational Planning, IIEP Research Report 102, 1995. Inman, Robert P. and Daniel P. Rubinfeld. “Rethinking Federalism,” Journal of Economic Perspectives 3(4), 1997: 43-64.


International Encyclopedia of the Social Sciences. Vol. 1-2, New York: The Macmillan Company and The Free Press, 1968. Morison, S.E. and H.S. Commager. The Growth of the American Republic, two volumes, Fifth Edition, New York: Oxford University Press, 1962. Musgrave, R.A. The Theory of Public Finance, New York: McGraw Hill, 1959. Oates, Wallace E. Fiscal Federalism, New York: Harcourt, Brace, Jovanovich, 1972. Oates, Wallace E. “Fiscal Decentralization and Economic Development,” National Tax Journal 46(2), 1993: 237-243. Pigou, Arthur C. The Economies of Welfare, London: Macmillan, 1920. Praudhon, P.-J. The Principle of Federation, translated and introduced by Richard Vernon, 1979, Toronto: University of Toronto Press, 1863. Rawls, John. A Theory of Justice, London: Oxford University Press, 1971. Riker, W.H. Federalism: Origin, Operation, Significance, Boston: Little Brown and Company, 1964. Rondinelli, Dennis. “Government Decentralisation in Comparative Perspective: Theory and Practice in Developing Countries,” International Review of Administrative Science 47(2), 1981: 133-145. Rondinelli, Dennis A., John R. Nellis and G. Shabbir Cheema. Decentralisation in Developing Countries: A Review of Recent Experience, World Bank Staff Working Papers, no. 581, World Bank, Washington D.C., 1984. Sherwood, F. “Devolution as a Problem of Organisation Strategy,” in R.T.Daland, ed., Comparative Urban Research, Sage: Beverly Hills, 1969. Siegfried, Andre. Switzerland: A Democratic way of Life, translated by Fitzgerald, London: Jonathan Cape, 1950.

Smith, Adam. An Inquiry into the Nature and Causes of Wealth of Nations, New York: The Modern Library, 1776. Tanzi, Vito. “Fiscal Federalism and Decentralisation: A Review of Some Efficiency and Macroeconomic Aspects,” in Annual World Bank Conference on Development Economics 1995, World Bank, Washington D.C., 1996: 295-316. Ter-Minassian, Teresa. “Intergovernmental Fiscal relations in a Macroeconomic Perspective: An Overview,” In Teresa Ter-Minassian, ed. Fiscal Federalism in Theory and Practice, International Monetary Fund, Washington, 1997: 3-24. Tocqueville, Alexis De. Democracy in America, republished in 1945 by New York: Alfred A. Knopf, I, 1835. UNDP. Human Development Report, various issues, New York: Oxford University Press. Wade, Robert. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialisation, Princeton: Princeton University Press, 1990. Wheare, K.C. Federal Government, Third Edition, London: Oxford University Press, 1953. World Bank. World Development Report 1997: The State in a Changing World, New York: Oxford University Press, 1997. World Bank. World Development Indicators 2004, Washington, D.C., 2004.


Appendix 1: Degree of decentralization in selected countries

Country

Expenditure as a

Tax revenue as a

Percentage of the total

percentage of the total

Year

Central

State and local

Central

State and local

Australia

1995

59.0

41.0

76.6

23.4

Canada

1993

41.7

58.3

53.5

46.5

Germany

1995

59.2

40.8

73.0

27.0

Spain

1993

70.4

29.5

86.6

13.4

United States

1994

53.4

46.6

65.7

34.3

Switzerland

1984

47.5

52.5

n.a

n.a

Sweden

1987

59.8

40.2

n.a

n.a

France

1995

82.3

17.7

89.8

10.2

Netherlands

1995

76.4

23.6

96.3

3.7

Norway

1994

68.4

31.6

78.6

21.4

United Kingdom

1995

77.3

22.7

96.4

3.6

India

1993

54.7

45.3

61.8

28.1

Argentina

1992

55.1

44.9

57.2

42.8

Brazil

1993

65.7

34.3

71.4

28.6

Mexico

1993

78.3

21.7

84.6

15.4

Russian Federation

1995

62.4

37.6

60.0

40.0

Poland

1995

83.8

16.2

92.1

7.9

South Africa

1994

66.3

33.7

91.4

7.6

Colombia

1984

67.4

32.6

n.a

n.a

Pakistan

1985

68.2

31.8

n.a

n.a

Romania

1985

77.0

23.0

n.a

n.a

Note: n.a means ‘not available.’ Sources: IMF, 1996, Government Finance Statistics Yearbook; and IMF, 1997, International Financial Statistics (June), Washington DC.


Appendix 2: Introduction of decentralization and development Gross tertiary

Whether majority

Year of

Real GDP per capita

Adult liter-

of population is

decentrali-

(ppp $)

acy rate (%)

80% or less

zation

1960

1987

1991

Albania

N

1992

-

2,000

3,500

85

85

7

15

Argentina

N

1970s

3,294

4,647

5,120

96

95

39

57

Belgium

N

Bolivia

Y

Country

1

Late 1960s 5,554 13,140 17,510 1994

1,103

1,380

2,170

1985 1992

education enrolment ratio2 (%) 1990/91

2001/2

99

99

40

58

75

79

21

39

Brazil

Y

1988

1,745

4,307

5,240

78

82

11

18

Bulgaria

N

1991

-

4,750

4,813

93

94

31

40

Cambodia

N

Early 1990s

-

-

1,250

-

38

1

3 37

Chile

N

1980s

2,898

4,862

7,060

98

94

21

China

N

1980s

-

2,124

2,946

69

80

3

13

Colombia

Y

1991

1,657

3,524

5,460

88

87

13

24

Ethiopia

Y

1992

249

454

370

66

50

1

2

99

99

34

-

Germany Federal Rep

N

After 1970s 6,660 14,730 19,770

Hungary

N

India

Y

1990s

-

4,500

6,080

98

99

14

40

665

1,053

1,150

43

50

6

Indonesia

Y

After 1998

11

621

1,660

2,730

74

84

9

15

Italy

N

Japan

N

1970s

4,660 10,682 17,040

97

97

32

50

1990s

2,976 13,135 19,390

99

99

30

Korea

N

1994

883

4,832

8,320

48

95

97

39

82

Mexico

Y

1980s

2,798

4,624

7,170

Nigeria

Y

1991

557

668

1,360

90

89

15

20

43

52

4

Paraguay

N

1992

1,208

2,603

3,420

88

-

91

8

18

Philippines

N

1991

1,112

1,878

2,440

86

90

28

30

Poland

N

1980s

-

4,000

4,500

98

99

22

55

Romania

N

1991

-

3,000

3,500

96

97

10

27

N

1990s

-

-

6,930

-

99

52

68

1996

2,107

4,981

3,885

70

80

13

15

After 1978 3,165

8,989

12,670

95

98

37

57

2,053

2,650

87

89

5

-

15,405 21,780

99

99

26

42

Russian Federation South Africa

Y

Spain

N

Sri Lanka

Y

Switzerland

Y

1987

1,267 -

Thailand

Y

1997

923

2,576

5,270

91

94

17

37

Ukraine

Y

1990s

-

-

5,180

-

95

47

57

USA

N

99

99

75

71

2

10

9,774 17,615 22,130

Vietnam N 1990s 1,000 1,250 80 89 Sources: 1. Barro and Sala-i-Martin (1995); Human Development Report, various issues, 2. World Development Indicators 2004.


Appendix 3: Observations used and calculation of values of observations for weighted squares model Obs 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

(Regressor) X 2000 1380 4307 4750 1250 2898 4862 2124 3524 5460 4500 6080 3730 1660 4832 8320 2798 4624 1360 1208 2603 3420 1112 1878 2440 4000 3500 6930 2107 2053 5270 5180 1250

(Regressand) Y 0 0 1 0 1 0 1 1 0 1 0 1 1 0 0 1 0 1 1 0 0 1 0 0 1 1 1 1 0 1 1 1 1

Estimated Y 0.43041 0.36717 0.665724 0.71091 0.35391 0.522006 0.722334 0.443058 0.585858 0.78333 0.68541 0.84657 0.60687 0.39573 0.719274 1.07505 0.511806 0.698058 0.36513 0.349626 0.491916 0.57525 0.339834 0.417966 0.47529 0.63441 0.58341 0.93327 0.441324 0.435816 0.76395 0.75477 0.35391

(Weight) W 0.495134 0.482033 0.471737 0.45334 0.478182 0.499516 0.447848 0.496747 0.492573 0.411976 0.464352 0.360401 0.488445 0.489007 0.449354 0.499861 0.4591 0.481467 0.476852 0.499935 0.494305 0.473653 0.493225 0.499389 0.481595 0.492994 0.249554 0.496545 0.495863 0.424653 0.430223 0.478182

Notes: X – Per capita income; Y – Whether the country is decentralized or not;

W = Y (1 − Y ) .

Y/W 0 0 2.119826 0 2.091255 0 2.232902 2.013097 0 2.427327 0 2.774683 2.047312 0 0 0 2.178174 2.076987 0 0 2.023042 0 0 2.002447 2.076433 2.028424 4.007152 0 2.016685 2.354862 2.324373 2.091255

X/W 4039.314 2862.872 9130.092 10477.79 2614.069 5801.622 10856.37 4275.818 7154.266 13253.2 9690.916 16870.07 7636.474 3394.635 10753.22 5597.561 10071.87 2824.703 2533.282 5206.681 6918.805 2347.712 3807.597 4885.97 8305.73 7099.482 27769.56 4243.32 4140.254 12410.12 12040.25 2614.069


Appendix 4: Results of the regression estimated models Dependent variable: Y (1 if the country is decentralized, 0, if not) Coefficient

Least squares

Weighted least square

Binary logit

Binary probit

No. of observations

33

32

33

33

Constant

0.2264 (1.27)

0.316 (1.006)

-1.33 (-1.54)

-0.824 (-1.58)

GDP per capita

0.0001 (2.22)

0.00013 (3.69)

0.0005 (2.01)

0.00031 (2.09)

R-squared

0.137

0.312

F statistic

4.92

13.59

D.W stat

2.32

2.25

LR -statistic (1 df)

4.97

5.06

Prob (LR stat)

0.026

0.024

McFadden R-squared

0.111

0.113

Note: In least squares models t-statistic within parenthesis, in binary models it is z-statistic.


Appendix 5: Logit model Obs

Actual Y

Fitted Y

Residual

1

0.00000

0.41822

-0.41822

|

·*

|

·

|

2

0.00000

0.34552

-0.34552

|

·*

|

·

|

3

1.00000

0.69392

0.30608

|

·

|

*·

| |

4

0.00000

0.73867

-0.73867

|*

·

|

·

5

1.00000

0.33104

0.66896

|

·

|

· *|

|

6

0.00000

0.52922

-0.52922

|

*·

·

|

7

1.00000

0.74929

0.25071

|

·

| * ·

|

8

1.00000

0.43331

0.56669

|

·

|

·* |

9

0.00000

0.60556

-0.60556

| *·

|

·

|

10

1.00000

0.80100

0.19900

|

·

| *

·

|

11

0.00000

0.71394

-0.71394

|*

·

|

·

|

12

1.00000

0.84570

0.15430

|

·

|*

·

|

13

1.00000

0.62977

0.37023

|

·

|

*·

|

14

0.00000

0.37769

-0.37769

|

·*

|

·

|

15

0.00000

0.74648

-0.74648

|*

·

|

·

|

16

1.00000

0.94356

0.05644

|

·

|*

·

|

17

0.00000

0.51680

-0.51680

|

*·

|

·

|

18

1.00000

0.72638

0.27362

|

·

| * ·

|

19

1.00000

0.34328

0.65672

|

·

|

· *|

20

0.00000

0.32642

-0.32642

|

·*

|

·

|

21

0.00000

0.49253

-0.49253

|

*·

|

·

|

22

1.00000

0.59313

0.40687

|

·

|

*·

|

23

0.00000

0.31600

-0.31600

|

·*

|

·

|

24

0.00000

0.40352

-0.40352

|

·*

|

·

|

25

1.00000

0.47227

0.52773

|

·

|

·*

|

26

1.00000

0.66053

0.33947

|

·

|

*·

27

1.00000

0.60270

0.39730

|

·

|

*·

|

28

1.00000

0.89326

0.10674

|

·

|*

·

|

29

0.00000

0.43124

-0.43124

|

*

|

·

|

30

1.00000

0.42465

0.57535

|

·

|

·* |

31

1.00000

0.78549

0.21451

|

·

| * ·

|

32

1.00000

0.77785

0.22215

|

·

| * ·

|

33

1.00000

0.33104

0.66896

|

·

|

|

· *|