Does local government fragmentation reduce poverty? Evidence from Bangladesh

The fragmentation of local government units has often been used as a device to
enhance government’s territorial reach in unitary developing countries. Yet it is still unclear what its developmental effects are and, in particular, if it relieves poverty. We contribute to this debate by examining whether an increase in the number of local units has contributed to Bangladesh’s remarkable progress on poverty reduction. Using a new panel dataset on the socioeconomic conditions of Bangladesh’s districts covering the period from 2001 to 2010, we find that spatial fragmentation (the increase in the number of units per land area) has reduced both moderate poverty and, to a lesser extent, extreme poverty. However, the effect is nonlinear, as the magnitude of the marginal effect on poverty is smaller in highly fragmented districts than in relatively consolidated ones. We speculate that this effect may be related to three factors: greater outreach of health and education programmes; the improvement of infrastructure; and the enhancement of the ability of social safety net programmes to reach the poor. Finally, not all types of fragmentation reduce poverty. When using indicators of political fragmentation focusing on the number of units per capita or density, we find no significant impact. The results are robust to introducing a number of controls, to using a range of panel methods accounting for unobserved heterogeneity and to using estimation of instrumental variables.