Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I say who wrote them.
Treisman. 1999. Political decentralization and economic reform. American Journal of Political Science 43 (April): 488-517.
"How does the degree of political decentralization in a state affect the outcomes of economic reform programs?" Despite some research (e.g. Weingast 1995) that suggests that federalism helps economic reform, "recent experience ... suggests that decentralization may at times interact with economic liberalization to exacerbate fiscal, macroeconomic, or even territorial instability. This paper suggests a [game-theoretic] logic that can account for such cases." The game is between "central and local officials in a two-level state with significant cultural divisions." "It finds that decentralization or local democratization increases the level of central redistribution required to prevent spirals of regional revolt." Thus, decentralizing reforms can bring "virtuous cycles of growth and increased revenues" in homogeneous states, but "vicious cycles of higher redistribution, economic inefficiency, and political instability" in deeply divided states.
Thus, these are the variables:
Briefly, the logic looks something like this. In deeply divided states, regions vary in their opposition to the central government's rule. Economic reforms can cause short-term pains. When the state is decentralized (i.e. federal), the most anti-center regions might use the pains of these reforms to threaten secession or revolt. As such, the central government must either give anti-center regions additional redistribution (to persuade them to stay in the state) or it must occupy them militarily (e.g. Chechnya). It might occupy them militarily if buying them off gets too expensive, or if it wishes to send a message to other anti-center regions that revolt won't be tolerated.
Thus, in deeply divded societies, economic reforms are unlikely to succeed if the state is decentralized. But in less divided societies economic reforms may work well regardless of federalism. In fact, federalism might be quite conducive to economic reform (as in Weingast's 1995 logic) in homogeneous states.
Research by the same authors
Research on similar subjects