Local Government Proliferation and Fiscal Efficiency: Evidence From Ghana

Abstract

In many active decentralized nations in the developing world, the number of sub-national administrative units has continued to increase over the past few decades. In most cases, this churning of more decentralized units does not go without contestation, with critics arguing that they are not done in the true spirit of decentralization but rather a political gesture to palliate constituents and increase popularity among seemingly under-represented groups. Even though studies have attempted to study the impacts of proliferation, we observe a huge swing toward the newly created administrative units, with few studies dedicated to the impacts of proliferation on the parent unit from which the split occurred. In this study, we look at the impact of splitting of districts on the Internal Revenue Generation performance of the parent district (split from) in Ghana. Using year-on-year inflation-adjusted Internally Generated Fund (IGF) for the period 2014–2022, we employed a Difference-in-Differences (DiD) research design, which was operationalized as an Ordinary Least Squares model with robust standard errors. The results show that holding other factors constant, the splitting of the districts in 2018 resulted in an increase in internal revenue generation performance (p < 0.05). We argue that the desire to meet pre-split revenue targets is among the key driving factors. Our results challenge existing notions that administrative unit proliferation is an entirely political activity with no positive recourse to the fiscal potential of the parent unit. Given that this study is only the first in the Ghanaian context, we believe deeply contextual studies are further needed to enhance understanding of the factors that could underline revenue improvements.