Developing Composite Indicators for Fiscal Decentralization: Which Is The Best Measure For Whom?

The right way to measure the degree and extent of the different aspects of fiscal decentralization has been a long-debated, yet underdeveloped issue. There has been little consensus on the right approach to developing a single indicator which is sometimes needed to show a general trend in fiscal decentralization and reveal relationship to other variables in empirical studies. In particular, several composite indicators of fiscal decentralization have been proposed, but there are very few attempts to evaluate and compare these measures in terms of implicit biases and different weights between revenue and expenditure decentralization. Critically reviewing and comparing various types of fiscal-relation indicators in a systematic way, this paper proposes two criteria to classify similar-looking composite indicators for fiscal decentralization while it also presents two new composite measures. The new fiscal decentralization indicators are symmetric in terms of the relative effects of revenue and expenditure decentralization on the value of the composite indicators at the same time that they are weighted for/against fiscal gaps and imbalances. It is argued that different composite indicators reflect different perspectives on which aspect of fiscal decentralization is more important and whether a growing fiscal gap means less fiscal decentralization or not.