Government quality and spatial inequality: A cross-country analysis

Andrés Rodríguez-Pose, Roberto Ezcurra, 29 November 2013

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Spatial inequality has received considerable attention from both scholars and politicians in the last two decades, coinciding with advances in globalisation. The growing interest has to do with the fact that spatial inequality – income inequality across geographical or administrative units within country or region – is a primary component of overall inequality across individuals (Milanovic 2005). When spatial inequality increases within a given country (all else equal), so does national inequality. Spatial inequality is also important because a high degree of regional disparities may lead to internal conflicts over the territorial distribution of resources, which undermines economic, social and/or political stability (Østby et al. 2009).

A country’s level of economic development, trade openness, and fiscal and political decentralisation have been considered as major factors behind spatial inequality, but the influence of government quality on regional disparities has attracted little attention.1 This scant interest is particularly disconcerting, as the way in which authority is exercised by governments plays a key role in shaping the spatial distribution of economic activity and in fostering regional development (Acemoglu and Robinson 2012; Rodríguez-Pose 2013). In order to fill this gap, our research examines the effect of government quality on spatial inequality, using data for 46 countries with different levels of economic development over the years 1996-2006 (Ezcurra and Rodríguez-Pose 2013).

Does government quality affect spatial inequality?

Figure 1 shows that countries with better quality of government– measured according to the World Bank’s Worldwide Governance Indicators – register lower levels of spatial inequality. This relationship is confirmed by the econometric analysis, which indicates that the connection between government quality and regional inequality is robust to the inclusion of additional explanatory variables that may be correlated with regional disparities and government quality, such as GDP per capita, the degree of trade openness, country and government size, or ethnolinguistic diversity. Furthermore, an instrumental variable approach shows a causal effect running from quality of government to territorial inequality . In particular, our results provide strong support for the hypothesis that government quality contributes to the reduction of spatial disparities, which underlines the importance of institutional factors in the processes of regional growth.

The results survive several robustness checks. First, our findings are not driven by a specific group of countries or a reduced number of influential observations. Second, the negative link observed between governance and regional disparities holds when alternative measures of spatial inequality and government quality are used.

Figure 1. Spatial inequality and government quality, 1996-2006.

Policy implications

Spatial inequality poses significant economic and political challenges for the governments of many countries, mainly in the developing world where regional disparities are considerably higher than in the developed world. In relation to this, the results of our analysis raise potentially important policy implications. In particular, our findings suggest that improving the quality of government may contribute to reduce regional disparities. This means that government quality is not only important per se or as a determinant of growth and economic development, but also as a way to guarantee greater territorial cohesion. Consequently, policy makers concerned with regional disparities should pay attention to the way in which authority is exercised, without overlooking the importance of institutional quality and government performance. Nevertheless, when considering the possibility of public intervention, it is important to recall that government quality also depends on geography and historical and cultural factors, which cannot be easily modified in the short run.

References

Acemoglu, D and J A Robinson (2012), Why Nations Fail: The Origins of Power, Prosperity, and Poverty, New York: Crown Business.

Ezcurra, R and A Rodríguez-Pose (2013), "Government quality and spatial inequality: A cross-country analysis", CEPR Discussion Paper 9719, November.

Kyriacou, A and O Roca-Sagalés (2012), "The impact of Structural Funds on regional disparities within Member States", Environment and Planning C: Government and Policy 30, 267-281.

Kyriacou A, L Muinelo and O Roca-Sagalés (2013), "Fiscal decentralization and regional disparities: The importance of good governance", Papers in Regional Science, forthcoming. DOI:10.1111/pirs.12061.

Milanovic, B (2005), Worlds Apart: Measuring International and Global Inequality, Princeton (NJ): Princeton University Press.

Østby G, R Nordrås and J K Rød (2009), "Regional inequalities and civil conflict in Sub-Saharan Africa", International Studies Quarterly 53, 301-324.

Rodríguez-Pose, A (2013), "Do institutions matter for regional development?" Regional Studies 47, 1034-1047.


1 Exceptions include Kyriacou and Roca-Sagalés, (2012); Kyriacou et al. (2013).

Topics: Poverty and income inequality
Tags: development, government institutions, spatial inequality

Associate Professor of Economics, Public University of Navarre
Andrés Rodríguez-Pose
Professor of Economic Geography, London School of Economics

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