In an illuminating new study exploring fiscal dynamics in Ghana’s Central Region, researchers unveil striking evidence regarding the interplay between central government transfers and local revenue generation. The investigation, published in Humanities and Social Sciences Communications, rigorously analyses what is known as the “flypaper effect” — a phenomenon where intergovernmental grants disproportionately influence local government expenditure compared to local own-source revenues. Employing sophisticated econometric techniques on panel data from 17 local government areas, the study profoundly challenges existing assumptions about decentralisation, accountability, and local financial autonomy in developing contexts.
At the heart of the analysis lie two advanced estimation methods: Generalised Least Squares (GLS) and the Blundell–Bond System Generalised Method of Moments (S-GMM) models. The researchers contend that traditional estimates are prone to bias when affected by heteroscedasticity, autocorrelation, or endogeneity. To circumvent these issues, the deployment of GLS tackles heteroscedasticity and serial correlation effectively, while the S-GMM model corrects for endogeneity by exploiting internal instruments derived from lagged variables. This robust methodological approach ensures that the results presented are both reliable and policy-relevant.
Examining the parameter estimates for total expenditure within local governments, the study validates longstanding theoretical predictions: central government transfers wield greater influence on expenditure decisions than revenues generated locally. Specifically, under the GLS model, a one-percent increase in central transfers prompts approximately a 0.47 percent rise in total local government spending with year controls, and 0.43 percent without. Contrastingly, local tax revenue increments yield more modest impacts, around 0.31 and 0.21 percent respectively. These findings strongly affirm the presence of the flypaper effect within Ghana’s fiscal architecture.
The S-GMM estimates reinforce this pattern but add nuanced insights. Notably, the lagged total expenditure variable is identified as a significant and positive driver of current expenditures, endorsing the empirical notion of expenditure multiplier effects. This means previous fiscal outlays stimulate subsequent cycles of spending, amplifying the economic impact within local jurisdictions. However, unlike GLS results, own revenue does not attain statistical significance in the S-GMM context, underscoring the prevailing dominance of central allocations in shaping financial behavior at the local government level.
Furthermore, the diagnostic tests reinforce the credibility of the instrument choices utilized in the S-GMM framework. Serial correlation checks, including the AR(2) test, confirm no second-order autocorrelation, while Hansen tests for over-identification validate the robustness of instruments. Critically, the ratio of instruments to groups remains below one, avoiding concerns related to excessive instrumentation that could bias results. Together, these tests bolster confidence in the rigor of the estimation strategy.
This disproportionate weight of central government transfers relative to local revenues has profound governance implications. It suggests local officials may preferentially align their budgetary priorities with directives from the central government, seeking to secure or maintain transfer inflows rather than cultivating independent fiscal bases. The study emphasizes that such dynamics erode the very essence of decentralisation, fostering a system where local governments are effectively re-centralised in practice despite nominal autonomy.
Rooted in fiscal interest theory, the research elucidates how the flypaper effect cultivates perverse incentives. When central grants overshadow local revenues, local authorities often demonstrate lowered motivation to mobilize taxable capacity within their communities. Instead, they lean heavily on intergovernmental transfers, which are typically less scrutinized by local citizens. This lack of accountability can breed inefficiencies, misallocation of resources, and diminished responsiveness to local needs—undermining democratic governance.
Moreover, the study highlights a critical tension in how conditional central transfers stifle fiscal federalism aspirations. Many transfers carry stipulations that prioritize national government agendas, limiting local officials’ discretion in expenditure decisions. Consequently, local governments become conduits for implementing central plans rather than autonomous entities responsive to the specific priorities and preferences of their constituents. This dynamic perpetuates a hierarchical financial system antithetical to genuine decentralisation.
Control variables related to geography and demographics provide additional context. Distance from the central government’s seat in Accra does not significantly affect expenditure, suggesting that resource allocation mechanisms are not evidently influenced by spatial factors. However, population size emerges as a robust predictor in the dynamic model with time controls: a one-percent increase in population results in a substantial 1.74 percent rise in local government spending. This association reiterates the logic that densely populated areas demand broader and more varied public services, intensifying fiscal pressures.
The implications of these findings extend beyond Ghana, resonating with broader debates on public finance in developing nations. Fiscal federalism aims to devolve power and resources to enhance local governance and citizen participation. Yet, as this research underscores, the structure and design of intergovernmental transfers can inadvertently consolidate control, marginalise local revenue effort, and commodify local governance in political negotiation processes.
In practical terms, the analysis calls for urgent reforms to Ghana’s intergovernmental fiscal structure. Policymakers must strike a careful balance between providing necessary fiscal support and fostering local revenue autonomy. Reducing conditions attached to central transfers or designing incentives for improved local tax mobilization could empower local governments to act more independently. Enhanced transparency and participatory budgeting frameworks may further enhance accountability and mitigate fiscal complacency.
From a theoretical vantage, the study enriches our understanding of the flypaper effect’s operational mechanisms. By applying rigorous dynamic panel data methodologies and presenting clear empirical evidence, it substantiates claims that central transfers have an outsized and persistent effect on local expenditure patterns. These results prompt reconsideration of decentralisation as a linear progression and advocate for more nuanced models acknowledging the cyclical interplay between intergovernmental grants, local revenue efforts, and political incentive structures.
Ultimately, the research provides compelling evidence that Ghana’s decentralisation experiment remains challenged by structural dependencies. For true local empowerment to materialize, both institutional and fiscal reforms are indispensable. Only by fostering genuine revenue autonomy and minimizing overreliance on central transfers can local governments meet constituent demands effectively while strengthening democratic governance foundations.
This study also gestures toward the potentially deleterious political economy consequences of the flypaper effect. When central transfers dominate local finances, they become instruments of political bargaining, with allocations contingent upon loyalty or compliance. Such mechanisms may entrench patronage networks and weaken the responsiveness of local officials to their communities, further diluting the accountability mechanisms fundamental to decentralised governance.
As Ghana’s local governments navigate complex fiscal landscapes, insights from this study offer valuable guidance for navigating the tension between financial dependency and independence. Embracing a fiscal federalism framework that recognizes these dynamics can unlock more sustainable, equitable, and responsive governance architectures. The lessons gleaned here may well serve other decentralising countries grappling with similar fiscal and political challenges.
In conclusion, the rich empirical findings documented reveal that fiscal transfers from the central government wield a more dominant influence on local government expenditures relative to internally generated revenues, thereby empirically confirming the flypaper effect in Ghana’s Central Region. While these transfers are vital for funding local public services, their dominance may inhibit the growth of local fiscal capacity and undermine decentralisation objectives. As Ghana and comparable developing nations chart the path forward, tailored, context-sensitive reforms must ensure decentralisation delivers on its promises for improved governance, service delivery, and democratic engagement.
Subject of Research: Fiscal federalism, intergovernmental transfers, local government revenue, and the flypaper effect in Ghana’s Central Region.
Article Title: Central transfers and incentives to collect local revenue among the Central Region of Ghana’s local government officials: analysing the flypaper effect.
Article References:
Dick-Sagoe, C., Tingum, E.N., Asare-Nuamah, P. et al. Central transfers and incentives to collect local revenue among the Central Region of Ghana’s local government officials: analysing the flypaper effect. Humanit Soc Sci Commun 12, 1075 (2025). https://doi.org/10.1057/s41599-025-05463-x
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