Fiscal decentralization in Turkey: an empirical assessment of the transfer rule

Abstract

This thesis analyzes whether the fiscal relations between the central and local governments of Turkey can be solely explained by socio-economic and demographic factors or the regional and political positions of cities also affect it. We use a balanced panel dataset consisting of all of the 81 cities of Turkey over the years 2008-2012. Our main dependent variables are transfers and government compensation. We define government compensation as the total government spending made in a city excluding local own revenues. Other fiscal aggregates such as local own revenues and expenditures, or fiscal indicators such as fiscal decentralization and financial independence, defined as the share of local governments spending financed by its own revenues, are also analyzed. Regression analysis and robustness tests showed the following: (i) Socio-economic structure of cities are significantly associated with the amount of transfers and government compensation; which means that the transfer rule of Turkey, as an institutional mechanism, is quite successful addressing regional socio-economic differences. Besides, there is no robust effect of political parties on the amount of transfers and government compensation. (ii) Our analysis also shows that there is a significant association between political parties and local expenditures, revenues, and expenditure decentralization.