Combining Federalism and Decentralization

Abstract

Studies evaluating the effects of territorial state organization on the performance of democratic political systems produce ambiguous results. The authors argue that research so far has suffered from insufficiently conceptualizing federalism and decentralization as two distinct dimensions. This article makes use of the advantages of a nested design and detects micro-level causal mechanisms underlying statistically confirmed effects. The authors conduct in-depth case studies comparing policy processes in four countries (Austria, Switzerland, Ireland, and Denmark) in the area of regional development policy, an area that exhibits typical effects in a macro-quantitative analysis, to back their hypothesized and corroborated macro-level relationships by micro level causal evidence. The case studies show that federalism induces subnational actors to adopt divergent positions and push through individual interests in processes of decision making, thus increasing transaction costs and preventing substantial policy shifts. Decentralization and subnational discretion induces actors to vary service delivery in an efficiency-enhancing way.

Keywords

federalism decentralization performance case studies regional development policy

Studies evaluating the effects of territorial state organization on the performance of democratic political systems are rare and,¹ moreover, produce ambiguous results.² Thus, political scientists are unable to answer the simple question, “Does federalism matter?” (Kaiser, 2004) in a coherent way. We argue that research so far has suffered from an insufficient conceptualization of federalism and its economic counterpart, fiscal federalism, that is, decentralization, as two distinct dimensions.³

Our approach to study output effects of territorial state organization follows an argument first made by Braun (2000) and Keman (2000), who distinguish between a subnational entity’s “right to decide” and its “right to act.” The latter describes the competence to independently implement policies as disposed by some superordinated institution. It is this autonomy of subnational levels to allocate resources within their jurisdiction (Musgrave, 1959; Oates, 1972) that we define as decentralization. The “right to decide,” on the other hand, refers to the competence to design and pass policies on its own or in cooperation with a superordinated institution. Federalism thus refers to a constitutionally guaranteed division of competences between territorially defined governmental levels (Lijphart, 1999; Sawer, 1969). In previous quantitative work (Biela & Hennl, 2010; Biela, Hennl, & Kaiser, 2010; Ehlert, Hennl, & Kaiser, 2007) we have shown that empirical patterns corroborate the notion of two conceptually distinct dimensions.⁴ Moreover, both dimensions exhibit independent and divergent effects on indicators of macroeconomic performance. Although, by and large, decentralization exhibits positive effects, federalism leads to no or negative effects.⁵ In addition, our analysis yields findings that point at policy-area-specific effects of both dimensions,⁶ hence corroborating an assumption stated in previous literature (Benz, 1998, 2001).

Though these analyses corroborate the expected macro relationships, the limits of a purely quantitative approach are evident: It cannot yield findings in the sense of causal explanations since intervening steps at the micro level remain unstudied. We therefore take the quantitative findings as a starting point to analyze causal mechanisms in in-depth case studies of processes of decision making and policy implementation in four countries (Austria, Switzerland, Ireland, and Denmark) in the area of regional economic policy. In so doing, we apply a mixed-methods design and combine the advantages of both quantitative and qualitative approaches (Gerring, 2004; Lieberman, 2005; Rohlfing, 2008).

The article proceeds as follows: The next section briefly restates the main components of our theoretical argument that leads to two macro hypotheses regarding performance effects of federalism and decentralization. This paves the way for theoretically derived expectations regarding actors’ behavior at the micro level, more precisely national as well as subnational actors’ behavior in decision-making and implementation processes under divergent arrangements of territorial state organization. The third section depicts the central features of our case study design and provides for a quantitatively guided selection of country cases and the policy area of regional economic policy. In the fourth and fifth sections we conduct comparative case studies on decision-making and implementation processes. The sixth section concludes.

Theory and Hypotheses

Reflecting on previous theoretical work it is possible to establish a consistent framework that distinguishes between the effects of federalism and decentralization and bases its reasoning on proper micro-level foundations. Regarding decentralization, the most basic argument has been put forward by Oates (1972). His decentralization theorem postulates that a decentralized provision of resources is generally more efficient than a centralized supply—subject to specific conditions such as scale effects. His rationale is twofold. Policy makers at the subnational level are better informed about local resource needs than policy makers at the central level, and, in addition, an uneven supply of resources is not always enforceable by the central level because it may violate political perceptions of equal treatment (cf. Oates, 2005). Accordingly, our first macro hypothesis is as follows: Decentralization is a more efficient mode of governance than centralization, and therefore leads to better policy performance (Hypothesis 1).

At the micro level, we thus expect decentralized systems to induce subnational actors to gather detailed knowledge of resource needs, political preferences, and the local costs of providing public services to adapt their provision of public goods. Facing mobile citizens who may exit in case of inefficiencies, subnational actors will, moreover, feel an incentive to invest in policy innovation as well as adopt best practices (Oates, 1977; Tiebout, 1956). As a consequence, decentralized countries will thus, in the aggregate, exhibit efficient variations in patterns of policy implementation. The central precondition for such variance is subnational discretion that accrues from sufficient own revenue sources (or unconditional block grants) that establish a vertical fiscal balance (Weingast, 2006), personnel to engage in knowledge accumulation, and policy discretion.⁷ However, patterns of vertical as well as horizontal interaction may influence discretionary leeway and thus the efficiency of implementation processes. In case subnational entities possess insufficient own resources, the central level might severely encroach on their policy discretion by giving away specific purpose grants. Vertical influence may thus lead to a spatial harmonization of policy implementation. On the other hand, subnational entities may face externalities that might increase the need to horizontally coordinate policy implementation to internalize spillover effects. Although their capacity to engage in horizontal coordination may vary depending on their administrative resources, the type as well as extent of coordination needed may differ between policy areas. At the decision-making stage of the political process, the federal or unitary character of a state’s organization becomes relevant. Subnational entities in federal states (holding per definitionem original decision-making competences) that negotiate on the allotment of resources find themselves within the logic of a prisoners’ dilemma (Inman, 2003): Cooperation of all subnational governments with the central government yields the most efficient allocation of resources, but any single subnational government has an incentive to deviate and demand a bigger slice of the pie. At the micro level we thus expect subnational entities to act in a weakly coordinated way and develop individual policy proposals that reflect their preference for resource maximization.⁸ As the integration of subnational actors into negotiations at the national level is stronger in federal than in unitary countries, welfare-maximizing policy reforms that reallocate between subnational entities are then ceteris paribus harder to achieve. This perspective is supported by veto player theory, which postulates a greater policy stability of federal countries in comparison to unitary states (Tsebelis, 2002). Moreover, game-theoretical considerations also imply that it is rather difficult to reach a welfare-optimizing equilibrium in prisoners’ dilemma situations with n > 2 players (E. Ostrom, 1990; Scharpf, 1997). Given comparatively high transaction costs, reform processes are then either protracted or yield only minor policy changes.

Though slower decision-making processes and higher decision-making costs are not necessarily equal to lower efficiency of a political system,⁹ a transaction cost economics approach indicates inefficiencies resulting from a reduced capacity for reacting to socioeconomic changes. In this respect, Williamson (1991) argues that hierarchical structures are clearly superior when it comes to adapting to such changes, which are particularly salient with regard to the redistribution of resources according to Scharpf (1992). In an environment of changing socioeconomic conditions, federalism thus tends to result in lower policy performance (Hypothesis 2).¹⁰

Given these two distinct macro hypotheses that are, by and large, corroborated by our quantitative analyses and are based on theoretical arguments that yield expectations regarding the underlying causal mechanisms at the micro level, we end up with four country types as characterized by territorial state organization, federal decentralized, federal centralized, unitary decentralized, and unitary centralized countries, each with a specific profile of prospects regarding the performance of decision making as well as implementation processes. Following our hypotheses, we expect the unitary decentralized type to perform best, whereas federal centralized structures ought to be most problematic with regard to performance. Our theory allows no clear prediction regarding the overall performance of in-between cases, that is, federal decentralized and unitary centralized countries, as it is an empirical matter whether independent performance effects of decision making or implementation processes predominate. In addition, our theoretical model does not yet incorporate interaction effects between the two dimensions, and these might also affect performance.

The following section outlines basic features of our comparative case studies, designed to elucidate micro mechanisms at work.

Research Design: Case Studies

We select our cases, that is, countries and policy areas to be studied in more detail, on the basis of quantitative indicators and our results from macro-quantitative analyses (Biela & Hennl, 2010; Ehlert et al., 2007).

Our case studies yield in-depth analyses of decision making and implementation processes in an area that is typical regarding the effects of both dimensions. We thus scrutinize regional economic policies because the statistical analyses corroborate significant positive effects of decentralization but no definite ones of federalism in this area. In doing so, regional economic policy is understood as the sum of spatially relevant policies (Glassmann 2007) that aim at actively influencing economic processes in distinctive areas of a state (Maier, Tödtling, & Trippl, 2006). Regional economic policy is thus a broad area including several policy areas such as labor, social, educational, environmental, and transport policies. Within our case studies, however, we dedicate ourselves to a narrower focus and analyze strategies to promote investments, growth, and competitiveness to reduce regional disparities.¹¹ It is the sum of these strategies for which we apply the term regional development policy. Given the statistical findings, processes of decision making and implementation in this area provide a fertile testing ground for the micro logic sketched above such that the analyses to follow are mainly “model-testing” (Lieberman, 2005, p. 436).

Regarding the selection of countries to be studied, our database allows for a clear-cut classification of countries with regard to the two dimensions of multilevel politics by plotting each of the federalism indicators against each of the decentralization indicators.¹² Using the mean of the Organisation for Economic Co-operation and Development (OECD) countries as a separating device, a country’s position in one of the four quadrants serves to classify it and yields a classification of all OECD countries alongside the two dimensions (see Biela & Hennl, 2010). Out of those countries that quite unambiguously belong to one of the four possible country classes, we then select one country per class that is average with regard to factors that also influence area-specific policy performance, namely a country’s surface area, its population, and the legal tradition as measured by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999).

It turns out that a comparison of regional economic policy in Switzerland (federal decentralized), Austria (federal centralized), Denmark (unitary decentralized), and Ireland (unitary centralized) proves adequate: The countries quite unambiguously represent the broader class of countries exhibiting the respective types of multilevel politics and are average cases with regard to influential control factors in the area of regional economic policy.¹³

Operationalization

In an effort to operationalize our dependent variable—political performance—in the course of a qualitative analysis, we select several indicators of decision making and implementation processes that emanate from the theoretical arguments presented above. As for the performance of decision-making processes, we analyze (a) whether subnational actors are involved in the respective decision-making process and what access points they use (precondition for federalism’s negative effect), (b) whether the transaction costs are high or low (duration of negotiations and level of conflict), (c) to what extent a change of status quo is achieved, (d) whether the new policy is judged as an adequate reaction toward the main challenges, and, finally, (e) to what extent it provides the structures and guidelines necessary for successful implementation of the policy. The performance of implementation processes is assessed on the basis of (a) the extent to which subnational units possess financial and personnel resources (Precondition 1 for decentralization’s positive effect), (b) the vertical fiscal imbalance of the respective implementation process (Precondition 2 for decentralization’s positive effect), (c) the policy discretion given during implementation processes (Precondition 3 for decentralization’s positive effect), (d) the degree of subnational variance emanating from implementation processes, (e) the degree and adequacy of horizontal cooperation, and (f) an overall assessment of its efficiency in economic terms.

The data required for qualitative inference alongside these indicators were generated by document analysis, interviews conducted with policy and country experts, and secondary literature. The case studies as presented in the next two sections are organized as follows. First, we ask whether characteristics of national decision making (and implementation, respectively) as ascribed in secondary literature in general match the theoretical expectations. Second, we offer detailed studies of specific decision-making and implementation processes, which have been selected on the basis of expert interviews. At this stage, it is furthermore of particular relevance to expound on the extent to which policy-area-specific parameter values match the country type, that is, whether, for example, Swiss regional development policy exhibits significant features of decentralized resource allocation. Third, we draw conclusions on whether our findings match the micro-level logic we hypothesize.

National Decision-Making in Federal and Unitary States

Our conjecture that regional actors’ positions in federal states diverge quite frequently and systematically influence negotiations on grounds of either formal arrangements as in Switzerland (see, inter alia, Bolleyer, 2006; Fischer, 2006; Linder & Vatter, 2001; Sager & Steffen, 2006; Vatter, 2005; Wälti, 1996) or informal ones as in Austria (see Erk, 2004; Fallend, 2005; Weber, 1992) is corroborated by country-specific research. In Ireland national policies are largely determined by national government and ministerial bureaucracy (Nannestad, 2008; Saalfeld, 2008). Given a lack of relevant regional institutions in Ireland (McDonagh, 2001), subnational interests are mainly defined on a local basis and often informally promoted by members of the national parliament being responsive toward their constituencies (Gallagher & Komito, 2005). Denmark’s national policy making shows similar patterns, but corporatist and local actors have a larger say (Blom-Hansen, 1999; Christensen & Pallesen, 2001; Lidström, 2001).¹⁴

Before turning to an analysis of distinct reform processes, let us briefly consider the extent to which the organization of decision making in the area of regional development policy matches the overall country classification. In Switzerland, the constitutional basis of a regional development policy carried out by the federal government is Article 103 BV, which enables federal authorities to support economically disadvantaged regions as well as branches of the economy.¹⁵ Next to cantonal strategies for economic development (Bochsler, Koller, Sciarini, Traimond, & Trippolini, 2004, pp. 143-144; Veraguth, 2003), we thus find explicitly national processes of decision making regarding regional development. It is here that we expect to detect the incentives of federal decision making at work most clearly. In Austria, we find a more ambiguous and labyrinthine picture as the constitution remains silent on regional development policies, encouraging both federal and provincial governments to take action.¹⁶ We approach this situation by concentrating on two different processes: In the case of EU structural funding, decision-making competencies lie mainly at national level, but subnational governments are strongly involved. We thus assume that processes of decision making match our theoretical model in this case. We then contrast the respective findings with a more general analysis of regional development initiatives that were undertaken mainly by the Austrian Länder during the 1990s. In Ireland and Denmark, decision-making competencies regarding regional development are—just like those in most other areas—assigned to the national arena.

In the realm of regional development policy, the national governments of all four countries have felt a strong need to redesign their strategies throughout the 1990s (Amin & Thomas, 1996; Boyle, McCarthy, & Walsh, 1999; O’Leary, 2003; Schremmer & Tödtling, 1996; Steiner & Jud, 1998; Wälti & Bullinger, 2000).

Notwithstanding, and in line with our expectations, the processes of decision making that were initiated to tackle the perceived challenges display diverse characteristics. Table 1 summarizes the findings of our case studies in the field of regional development policy, and a first look at the penultimate row indicates two major findings.

Table 1.

Patterns of Decision Making in Regional Development Policy

	Switzerland	Austria	Denmark	Ireland
Policy approach	New Regional Policy (NRP)	(a) Regional policy instruments in the 1990s, (b) 2000–2006 and 2007–2013 programming documents	Various regional development strategies in the 1990s	National Spatial Strategy
Main actors (subnational actors in bold)	Federal government, expert commission, cantonal governments	Federal government, Länder governments, Conference of State Heads of Governments, Austrian Conference on Spatial Planning (ÖROK)	Ministry of Industry and Business, subordinated agencies and councils	Department of Finance, Department of Environment, Heritage and Local Government, external experts, local lobbyists
Transaction costs	High: medium duration of negotiations (almost 6 years) with high level of conflict between levels	Low: (a) Länder foster own policy initiatives, (b) fast agreement because of negative coordination	Low: short duration of negotiations with medium level of conflict	Low: short duration of negotiations with low level of conflict
Access points for subnational actors	Given: (expert commission), consultation procedure, working group NRP (Council of the States)	Given: (a) own initiatives, (b) ÖROK	None: an entirely national competence	None: consultation process “largely a cosmetic exercise” (interview with O’Broin)
Change of status quo	Limited: change of objectives, but partly prevalence with regard to strategies	Considerable: (a) correction of policy goals and establishment of many new instruments	Considerable: fundamental changes regarding regional policy’s paradigm, its strategies, and even the distribution of competences	Limited: change of policy but lack of institutional reform
Adequacy of new policy	Controversial: insufficient consideration of greater functional areas	(a) Given, (b) controversial because of nonbinding agreement	Controversial: roll back in 2003 (from cluster policies to equalizing strategies) indicates program failure	Controversial: lack of institutional reform, clientelistic features
Provision for implementation	Given: cantons as experienced actors, funding ensured	Limited: (a) high number of implementing agencies, partially poor coordination, resources vary between state governments	Highly limited: not given by law, capability of existing structures varies, resources only through EU structural funding	Highly limited: no regional actors capable of implementation, no extra funding
Typical for country?	Yes	No	Yes	Yes
Theoretical expectation met?	Yes	(a) —^a, (b) No: negative coordination and decentralized implementation provide for fast decision making despite federal structure	Yes	Yes
Sources	(Interview with Boesch, May 14, 2008; Biela, Hennl, & Kaiser, 2010; Bundesversammlung der Schweizerischen Eidgenossenschaft, 2006; Sekretariat für Wirtschaft. Seco, 2009)	(Interview with Mayerhofer, September 2, 2008; interview with Seidl, September 1, 2008; Heintel, 2004; Steiner & Jud, 1998)	(Interview with Halkier, June 20, 2007; Enemark & Jorgensen, 2001; Halkier, 2000, 2001)	(Interview with Breathnach, September 25, 2007; interview with O’Broin, September 9, 2008, interview with Bartley, September 25, 2007; Davoudi & Wishardt, 2005; Government of Ireland, 2002; O’Leary, 2003)

In our theoretical model, we do not develop a hypothesis on decision-making processes in policy areas with separate competences of the state levels.

First, processes of decision making regarding regional development strategies in Denmark and Ireland match our expectation. Unconstrained by influential subnational actors, the Irish and Danish national governments have considerable leeway for designing policies according to their preferences. Policy changes may thus be considerable like in Denmark, where paradigms as well as strategies were shifted repeatedly throughout the 1990s, but also limited, as was the case with the Irish National Spatial Strategy. Though experts had assessed a far-reaching institutional reform highly necessary, the Irish government resisted to establish a relevant regional tier, given strong interests of both resource-maximizing government departments and legislators whose career ambitions hinge on presenting themselves as unchallenged local brokers.

Second, the extent of confirming our theoretical expectations regarding patterns of decision making in federal countries varies. Comparing negotiations about regional development policies in Austria and Switzerland yields strong differences regarding transaction costs as well as the extent of policy shifts adopted. Although the Swiss New Regional Policy stays back behind the ex ante–inspired amount of policy change, Austrian politics reveal a higher flexibility and seem to yield an output that meets perceived challenges in a quite successful way. Let us investigate these findings in more detail.

After 6 years of highly conflictive negotiations, Switzerland adopted a comprehensive reform of its regional policy in October 2006, called Neue Regionalpolitik (NRP; Bundesversammlung der Schweizerischen Eidgenossenschaft, 2006). But even though the NRP successfully shifts the regional policy’s overarching objective from reducing disparities to increasing regional competitiveness and almost completely withdraws from financing basic infrastructure, it exhibits strong characteristics of policy stability. And these may be traced back to cantonal resistance as our analysis shows. After cantonal interests had been represented only marginally in the expert commission that designed a first draft of the law, written statements of many cantons indicated strongly varying positions during the consultation procedure.¹⁷ First, many cantons refused the idea of promoting urban agglomerations within the framework of regional policy. Second, almost half of the cantons vetoed the proposal to establish a foundation that would build on cantonal contributions for its capitalization and allocate the support for small-scale regions. Third, the proposed end of tax reductions for individual businesses was disapproved by those eight cantons that had so far mostly benefited from it. Seven cantons (including large parts of the Romandy) as well as the conference of cantonal directors of finance even opposed the draft in total (Eidgenössisches Volkswirtschaftsdepartement, 2004). Cantonal behavior thus confirms our theoretical expectation as Swiss cantons press ahead individual policy proposals that would at large favor their own territory. Confronted with such manifold criticisms, the federal government initiated a working group (AG NRP) that included cantonal representatives far stronger than the first expert commission. Its explicit assignment was to “optimize” the draft in a way acceptable to a majority (Arbeitsgruppe Neue Regionalpolitik AG NRP, 2005). As the resulting second draft was adopted in parliament quite quickly and not challenged by a popular referendum, it is safe to say that the AG NRP did succeed in fulfilling this job. However, cantonal involvement negatively affected the extent to which the aspired change of status quo was achieved. The NRP does not, for example, account for the strongly recommended promotion of urban agglomerations, and thus greater functional areas.¹⁸ In sum, strong cantonal influence led to a reform that stays back behind the ex ante–ispired amount of policy change.

A comparable deadlock in Austrian regional policy was circumvented by both constitutional silence on competences and incentives set by EU structural funding. The former enables governmental levels to act independently of each other such that both the federal level and individual Länder brought up new strategies to assist regional economies. These did not require multilevel coordination and have been assessed as quite successful despite their “flexible to chaotic” (Aigner, Fallend, Mühlböck, & Wolfgruber, 2001, p. 14) approach to regional development.¹⁹ A far stronger demand for intergovernmental coordination was given in case of EU Structural Funding. However, agreements on the 2000–2006 and 2007–2013 Programming Documents were hardly conflictive and reached quickly. Three aspects may explain this: First, all actors assigned a top priority of making full use of the funds available and thus aimed at a pareto-superior solution. Second, negotiations about additional resources from a supranational level resemble a positive-sum game alleviating coordination. Third, the operational programs leave plenty of room for prioritization during the stage of policy implementation. The policy output thus reveals negative coordination.²⁰

Taken together, comparing processes of decision making in Austria and Switzerland yields insights as to why federalism does not deterministically downsize policy performance. First, decision-making competencies are distributed differently across policy areas (and countries). As long as distribution induces only a marginal need for multilevel coordination, conflicting interests do not necessarily clash in a single arena. A “prisoners’ dilemma” is then prevented ex ante. Second, incentives set by an additional player like the EU may outweigh conflicting interests and foster coordination. This finding is in line with established research (Wachendorfer-Schmidt, 1999). The vague formulation of our second hypothesis as well as our macro-quantitative findings are thus backed by our investigation of micro-level politics. Federalism tends to induce subnational actors to deviate from cooperation and thus to restrict the latitude of national governments, but ultimately a state’s capability to adequately react toward changing socioeconomic conditions arises out of incentives set by complex institutional arrangements.

Implementation in Centralized and Decentralized Countries

Turning to the implementation phase of the political process, we analyze whether resource allocation occurs according to regional needs and public preferences. According to our theoretical argument, a sufficient amount of own resources on behalf of subnational administrations and a certain degree of discretionary leeway in using them are prerequisites for such variation. For our analyses of implementation programs, we choose policies that were established at a point in time that allow us to adequately judge the outcomes. Moreover, we draw on expert interviews to focus on policies considered as exemplary for a country’s strategy.

In Switzerland, Denmark, and Austria, implementation of national policies is mainly carried out by subnational administrations (Blom-Hansen & Pallesen, 2001; Fallend, 2005; Vatter, 2005), which employ thus a large share of public employees (BADAC, 2009; Bundeskanzleramt Österreich, 2009, p. 4; Christensen & Pallesen, 2001). In contrast, Irish national ministries and governmental agencies clearly dominate implementation in almost any policy area (Collins & Quinlivan, 2005).

Danish local governments and Swiss cantons and municipalities enjoy a high autonomy in terms of financing and policy discretion (Blom-Hansen & Pallesen, 2001; Dafflon, 1999; Lidström, 2001; Wälti, 1996). In contrast, Austrian Länder and municipalities are much more dependent on federal resources (Pelinka, 2008) and are much more restricted in policy implementation by detailed laws (Fallend, 2005). Irish subnational levels have no own tax competences at all and suffer from an overall lack of resources (O’Broin & Waters, 2007, p. 31).

In sum, the prerequisites for efficient resource allocation are doubtlessly given in Switzerland and Denmark, but not in Ireland. The only diverging fact is the strong subnational administrations in Austria in terms of personnel, which are nevertheless severely restricted in their implementation leeway because of extremely detailed federal regulation and dependence on shared taxes.

Does the organization of resource allocation in regional development policy correspond to this overall pattern? In Switzerland, Denmark, and Ireland, structures underlying the implementation of regional development policies are in line with the general characteristics described above (cf. Ahedo Santisteban, 2006; Walsh, 1998; Wälti & Bullinger 2000). Austria joins the decentralized countries insofar as the Länder have higher competences and discretion in implementing regional development strategies than in other policy areas. Within the Länder, in contrast, the organization of development policies is strongly centralized. A summary of our findings is displayed in Table 2.²¹

Table 2.

Patterns of Implementation in Regional Development Policy

	Switzerland	Austria	Denmark	Ireland
Policy approach	Investitionshilfegesetz (IHG)	STRAT.AT	EU Structural Funds	Local development initiatives (LDI)
Actors (regional actors in bold)	IHG regions, cantons, and local governments	Federal Ministries of Transport (BMVIT), Economics (BMWA), and Science (BMWF), chancellery, several national agencies (TIP, AWSG), nine Länder governments with numerous outsourced agencies, 31 regional managements, Austrian Conference on Spatial Planning as coordinating body	National Government, Danish Agency for the Development of Trade and Industry (DATI, now DEACA), since 2007: regional governments, regional development fora, local governments	Government departments, Area Development Management (ADM, now Pobal), parallel structures of LDIs, established by different departments, such as Area Based Partnerships (ABP) and County Enterprise Boards (CEB), LEADER groups, counties and cities
Financial and personnel resources	Varying: given for investments in small-scale infrastructure but constrained beyond it, resources provided by cantons vary	Personnel: adequate, financial conditions varying between Länder	Insufficient: EU funds only accessible for certain areas	Adequate in case of ABP, LEADER and CEBs, insufficient in case of counties and cities
Vertical fiscal imbalance	Medium: cantonal investments in regions trigger federal contributions (50%), leads to windfall gains	Medium: mainly joint funding by EU, federal, and Länder levels	High: exclusively grant financed	High in case of ABP, LEADER, CEBs, and counties and cities
Policy discretion	High: given for IHG regions (investments are based on regionally compiled development concepts), resource allocation by cantons	High: Länder have leeway for interpretation of Strategic Reference Framework, negative coordination, central level has no monitoring competences	High: within national framework, varying over time: stronger influence on policy goals by end of 1990s	Medium in case of ABP, LEADER, CEB, but decreasing because of cohesion process, low in case of counties and cities
Degree of subnational variance	High: with regard to provision and allocation of resources	High: selective distribution of EU funding, organizational variation; no selective approaches at the sub-Länder level	High: only specific areas (North Jutland, Baltic Islands) gain EU funding	High policy variance, but only marginal impact because of small scale and limited funding of LDIs
Horizontal cooperation	Limited: strong need for coordination has led to reform (Neue Regionalpolitik, NRP)	Insufficient: competition on funding between Länder and municipalities prevails, coordination only on broad terms	Insufficient: pre-2007 uncoordinated and ineffective, remedied through establishment of Regional Development Fora in 2007	Insufficient between national departments and agencies and between individual LDIs, no improvement through CEBs
Efficiency of Implementation	High with regard to regional disadvantages, small-scale infrastructure, limited with regard to innovation, large-scale problems and competitiveness	Low: Incentive problems through fiscal system, small scale and high administrative costs, intransparent structures let the system depend strongly on personal relationships	Medium: varying results, several positive examples, restricted resources	Medium: innovative approaches of individual LDIs, but insufficient cooperation and duplication of services, deficient integration of local initiatives
Typical for country?	Yes	Yes	Partly	Yes
Theoretical expectation met?	Partly: effects of fiscal imbalance visible	Yes	Yes	Partly
Sources	(Interview with Boesch, May 14, 2008; Bieger et al., 2004; Eidgenössisches Volkswirtschaftsdepartement, 2004)	(Interview with Mayerhofer, September 2, 2008; Downes, 2000; Fallend, 2007; Heintel, 2004)	(Interview with Halkier, June 20, 2007; Ahedo Santisteban, 2006; Villadsen, 2002)	(Interview with O’Broin, September 9, 2008; interview with Adshead and McInerney, September 26, 2007; O’Broin & Waters, 2007; Turok, 2000)

A first finding is that patterns of implementation in Switzerland and Denmark meet our theoretical expectation as regional development strategies vary strongly between regions and are mostly considered efficient. In Switzerland, variance emanates from a high degree of subnational policy discretion assigned to Swiss cantons and IHG regions and is also backed by a large variance in institutional and administrative set-up between cantons.²² Swiss cantons trigger federal contributions by their own cofinancing and as such decide on the amount and use of resources. However, patterns of implementation in Switzerland constantly reflect the trade-off between efficiency gains through decentralization and a limited capability of small cantons to effectively make use of their right to act, yielding it essential to achieve large-scale coordination as was aspired by the first draft of the NRP.

In the Danish case, the central state acts highly flexibly. It frequently changes regional development policies and redraws boundaries to increase efficiency. In the early 1990s, the Danish state left the funding of subnational development entirely to the EU, and eligible regions were only marginally restricted in the use of these resources. In this regard, the Danish strategy was highly selective, as only two regions (North Jutland and Bornholm) were eligible for EU funding. However, many municipalities developed small-scale strategies in the course of the decade. To coordinate these local policies, the 2007 Regional Government Reform established five Regional Development Fora with local and regional representatives. The Danish approach thus proves to be flexible and dynamic as upcoming needs for more coordination were tackled adequately.

Hence, comparing Switzerland and Denmark yields that decentralization induces actors to efficiently vary strategies of regional development. This finding holds even though fiscal imbalance in the policy area is above average in both countries and some experts mention coordination deficits. Policies are considered as successfully reducing regional disparities, despite the fact that some Swiss cantons (because of their small scale structure) and some Danish municipalities (because of highly selective funding schemes) hardly have a chance to establish their own economic development strategies.

Our second main finding regarding patterns of implementation arises out of a comparison of Austrian and Irish strategies of regional and local development. In both countries, a centralized provision of structural funding brings about a seemingly unmanageable number of regional or local development agencies, which exacerbates an effective coordination of efforts. Inefficiencies thus arise out of high administrative costs and from a partial duplication of services.

Regional development strategies in Austria were implemented by 60 federal and 130 state programs in the 1990s (Downes, 2000), a number that has decreased only marginally ever since.²³ Given particularly extensive rights of decision making (see above), the Länder derived an amount of discretion far above Austrian average. This resulted in a high variance of institutional structures between individual Länder and paved way for innovative approaches like the Regional Managements. However, there is much less variance with regard to the policy approaches, which is partly the result of similarities in Länder economic structures and their high degree of internal centralization but also arises out of indirect fiscal incentives set by the federal level. Because neighboring states frequently establish clusters in the same economic area, like wood or automotive industries, they hardly reach a “critical mass” and positive externalities. Furthermore, the widely applied cofunding induces competition for federal resources, as, for instance, the allocation of promotional agencies affects the fiscal equalization scheme between the states. And, finally, Länder are hardly capable of selectively allocating resources within their own territory such that there are “fifteen technological centres [in one state], just because there are fifteen districts” (P. Mayerhofer, personal communication, September 2, 2008, translation by authors).

A similar multitude of agencies and actors characterizes Ireland’s approach to subnational development given that the so-called local development initiatives (LDI) cover 39 area based partnerships, 35 LEADER groups, and 35 county enterprise boards (O’Broin & Waters, 2007, Appendix I). Though case studies show that LDIs provide direct assistance in many cases, their capability to pursue an innovative and integrated approach to local economic development is strongly constrained. They lack own resources, are severely underfunded, and have only limited discretion as they are supervised by national government departments (Loughlin, 2001; Moseley, Cherrett, & Cawley, 2001; Walsh, 1998). Moreover, the initiatives seldom overlap geographically, which results in an inefficient duplication of services. In 2002, the Irish government tried to reach a more cohesive approach by establishing 35 County Development Boards (CDB) that were required to draw up a three- to five-year strategy for local development. However, “CDBs are overly reliant on influence as opposed to statutory sanctions, . . . have been unable to commit their agencies to CDB strategies and . . . to influence the planning process of major public agencies” (O’Broin & Waters, 2007, p. 46). A more general criticism is that CDB just add another player to the already unmanagable network of actors rather than addressing the issue of decentralization. Administrative inefficiencies—LDIs have been under the control of three different ministries since 2002—thus continue to create uncertainty and tensions and strongly hamper efficiency.

Taken together, a comparative investigation of the implementation of regional development policies demonstrates, first, how decentralization brings about incentives for efficient variation in Switzerland and Denmark and, second, how opaque structures and high administrative costs impede a selective and coordinated approach to regional development in Ireland and to some degree in Austria. Although Austria developed some innovative and effective approaches, there is evidence for inefficient competition for federal resources, even in the area of regional development promotion, which is exceptionally decentralized. In addition, though all cases under investigation feature some problems of coordination caused by small-scale funding structures (in Denmark, Switzerland, and to a lesser extent Austria) or parallel structures (Ireland), only Denmark successfully established a new regional coordinative structure.

Conclusion

Theoretical as well as empirical research on federalism revolves around the central question, “Does federalism matter?” (Kaiser, 2004) but yields ambiguous findings so far. Our research aims to broaden but at the same time sharpen the perspective of interest by asking both “Does territorial state organization matter?” and “If so, how?” We thereby contribute to the field of research in at least three respects.

The first one is theoretical in nature. We clearly differentiate between two distinct dimensions of territorial state organization—federalism and decentralization—and develop a consistent theoretical model that yields hypotheses regarding macro effects of both dimensions.

The second one is foremost empirical: We test for both causal effects at the macro level (Biela & Hennl, 2010; Ehlert et al., 2007) and for intervening steps at the micro level through comparative case studies, which are the main focus of the article at hand. The case studies are thereby embedded in a mixed-methods design as both the countries as well as the policy area studied were selected on the basis of the quantitative findings. Austria, Switzerland, Denmark, and Ireland unambiguously belong to a specific class of territorial state organization (as they are federal decentralized, federal centralized, unitary decentralized, and unitary centralized, respectively) and are moreover average cases with regard to those factors that significantly alter performance in the area of regional development policies. This area is, furthermore, selected for in-depth case studies because it is here that the quantitative analyses detect the expected macro effects of both federalism and decentralization. The area is thus typical and appropriate for a test of our theory.

Given theoretically deduced expectations how actors’ behavior in decision-making (and implementation) processes varies between federal and unitary (decentralized and centralized) countries, the findings of our article bring about a third merit. On one hand, they corroborate expected mechanisms in decision making as well as implementation processes. From a theory-testing perspective our comparisons show, for example, how Swiss cantons pursue diverging interests and use their influential position to frame the new regional policy in a way that falls short of a reform proposed by the national government. Irish and Danish governments, on the other hand, have simply adopted what they perceived necessary. In a similar vein, processes of implementation exhibit a large variance in structures (Switzerland, Denmark, but also at the Länder level in Austria) as well as strategies for regional development (Switzerland, Denmark) under decentralized arrangements. Experts as well as the secondary literature evaluate such variance as mostly efficient and only ascribe minor restraints of efficiency to problems of regional coordination. Centralized countries, however, exhibit major difficulties in varying service delivery (Ireland, sub-Länder level in Austria) as well as an obstructive multitude of poorly coordinated agencies at the subnational level. High inefficiencies arise.

On the other hand, our findings deliver at least two new insights. Our analyses of processes of decision making in Austria illuminate, first, why federalism does not deterministically induce subnational actors to obstruct national policies: Constitutional silence regarding the distribution of competences may decrease the need for coordination and thus establish flexibility as well as the involvement of third actors like the EU may change the incentives at work during multilevel negotiations. In both cases, the overall institutional arrangement turns out to be decisive for overall performance. Second, the trade-off between efficiency gains through decentralization and a necessary degree of horizontal coordination may more easily be balanced by unitary governments. Although the Danish government proves capable of redrawing boundaries for regional development whenever it is perceived necessary, the Swiss government partially failed in its attempt to introduce coordinating instruments for greater functional areas in the course of negotiating the NRP. It is here that our analysis detects an interaction effect between both dimensions of territorial state organization: An adequate degree of decentralization (which may differ between policy areas, over time as well as because of country-specific challenges) may more easily be reached in unitary countries as national governments decide widely unconstrained. It remains the subject of further research to show how these interactions work in detail.

Footnotes

Acknowledgements

This article is based on research funded by the Deutsche Forschungsgemeinschaft (KA 1741/2-1 and KA 1741/2-2). We thank David Allmann, Thorsten Kemper, Sybille Seubert, and Gregor Zons for their valuable research support.

The author(s) declared no potential conflicts of interest with respect to the authorship and/or publication of this article.

The author(s) received financial support for the research and/or authorship of this article from the Deutsche Forschungsgemeinschaft (KA 1741/2-1 and KA 1741/2-2).

Notes

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