The political economy of fiscal transfers: The case of Ethiopia

Abstract This article examines the political economy of fiscal transfers in Ethiopia. Utilising an original data set spanning 1995–2020, as well as interviews and document analyses, the article illustrates how different factors interact to shape the distribution of grants. Statistical analysis indicates that population size is critical in determining regional grant shares. However, the analyses reveal a pattern of ethno‐regional favouritism in grant distributions during the early stages of Ethiopian federalism. During that period, opaque and centralised decision‐making processes, coupled with the dominant influence of the Tigray People's Liberation Front in the federal government, resulted in grant distribution deviating from principles of fiscal equity. Over time, this evolved into more fluid forms of negotiation influenced by intra‐party competition, dynamics of bargaining between the central and regional authorities, and regional assertiveness, collectively shaping the allocation of grants alongside the grant formula. The analysis highlights how economically and politically marginalised regions are disadvantaged, especially when their population is small. The absence of an independent grant agency means that political considerations continue to affect seemingly formula‐driven allocations. The Ethiopian case underscores how intra‐party bargaining and alignment along ethnic and regional lines undermine the effectiveness of formula‐based grant allocations in the absence of an independent and empowered grant agency.