Political Economy of Intergovernmental Fiscal Transfers: The Rural‐Urban Dynamics in Ghana

Abstract

This study examined the political economy dimension of fiscal transfers from the national government to district assemblies based on the formula distribution policy created under Ghana's 1992 Constitutional democracy. The two‐step system GMM for dynamic linear panel analysis was estimated from locational perspectives of rural and urban in relation to political swing and aligned districts. Data on annual District Assemblies Common Fund transfers and election results were used for the analyses from 1994 to 2014 covering 167 assemblies. From the results, average transfers to each district was Ghafdr12310-gra-0001 6.28 million but it increased by 3.5 per cent in politically aligned rural districts and by 6.4 per cent in urban swing districts. During election years, the increases were even higher, precisely 5 per cent and 10 per cent for rural aligned and urban swing districts, respectively. These suggested that the government generally targets more urban swing voters than rural aligned voters. The allocation formula was influenced by political factors, as election years tended to be associated with higher transfers. The swing effects dominated the sharing mechanism. Therefore, to reduce political influence on the allocation formula, an independent body should be established to make recommendations directly to parliament. This should dampen the political influence of incumbent governments on the allocations.