Does Fiscal Decentralisation Matter for Poverty and Income Inequality in Pakistan?

Abstract

This study endeavours to investigate the impact of fiscal decentralisation on the welfare concerns of poverty, and income inequality in Pakistan for the time period 1972 to 2013. In order to capture the multi-dimensional nature of fiscal decentralisation, three indicators are used namely; revenue decentralisation, expenditure decentralisation and composite decentralisation. Further, the role of institutional quality is also incorporated in apprehending the responsiveness of welfare issues towards the process of fiscal decentralisation. The estimation technique of Generalised Method of Moments (GMM) is employed for estimating the impact of fiscal decentralisation on poverty and income inequality. The empirical findings suggest that fiscal decentralisation has discretely resulted in increasing poverty and income inequality in Pakistan, but the presence of better institutional quality along with fiscal decentralisation can promise to mitigate the negative consequences of fiscal decentralisation for poverty and income inequality in Pakistan. Although, the indirect effect of fiscal decentralisation on welfare concerns, through institutional quality exhibits a fluctuating trend over time, but its average marginal effect is lower than the direct effect of fiscal decentralisation on welfare concerns. Hence, it can be perceived that the log-run welfare issues can be tackled effectively in the presence of institutional quality with a rational level of fiscal decentralisation. Also in order to reap the potential benefits of fiscal decentralisation for poverty and income inequality that has remained a catastrophe in case of Pakistan. JEL Classification: I3, 023 H53 Keywords: Fiscal Decentralisation, Welfare

Effectiveness of fiscal federalism for poverty reduction in Nigeria: an analysis of federal and state governments’ expenditures

“…Since the state governments are closer to the masses and more knowledgeable of the need of the people than the federal government, they will as a result carry out expenditures that have positive impact on welfare in both the short and long term. This finding is also in consistent with Francisco and Canare (2018), though contrary to Banwo (2012) and Shahzad and Yasmin (2016). Besides, the fact that the federal government is not closer to the people, a further reason why increases in the proportion of federal government expenditures failed in poverty reduction, is the high level of corruption at the federal or central government and diversion of funds from welfare improving expenditures.…”

“…Using GMM estimate over a data period from 1973 to 2013, Shahzad and Yasmin (2016) found fiscal decentralization (expenditure and revenue decentralization) to be having an increasing impact on poverty in Pakistan in the absence of better institutional quality. The study of Banwo (2012) conducted on Nigeria found different impacts of fiscal decentralization indicators on poverty incidence in Nigeria.…”

Effectiveness of Fiscal Federalism for Poverty Reduction in Nigeria: An Analysis of Federal and State Governments’ Expenditures

“…Since, the state governments are closer to the masses and more knowledgeable of the need of the people than the federal government, they will as a result carry out expenditures that have positive impact on welfare in both the short and long-term. This finding is also in consistent with Francisco and Canare (2018), though Contrary to Banwo (2012) and Shahzad and Yasmin (2016). Beside the federal government not closer to the people, a further reason why increases in the proportion of federal government expenditure fail in poverty reduction is high level of corruption in the federal or central government and diversion of funds from welfare improving expenditures.…”

“…The study argued that this situation arises due to the crowding out effect of private consumption, and a negative wealth effect induced by increased government expenditure. Celikay and Gumus 2017 Using GMM estimate over a data period from 1973 to 2013, Shahzad and Yasmin (2016) found fiscal decentralization to be having an increasing effect on poverty in Pakistan. The study shows that one-unit increase in expenditure decentralization lead to 2.7 percent increase in poverty, whereas for revenue decentralization poverty increases by 0.…”

The Impact of Fiscal Policy on Welfare Improvement in Indonesia: Study of Impact of Premium Assistance Beneficiaries on The National Health Insurance, Physical Special Allocation Fund for Health Sector, Education Sector, and Village Funds to Human Development Index

“…There are several studies fiscal decentralization effect on economic growth, poverty reduction, and income inequality in various contexts, both in developed and developing countries (Oates, 1972;Prud'homme, 1995;Tanzi, 2000;Rodriguez-Pose and Gill, 2004;Arze et al, 2005;Ezcurra and Rodriguez-Pose, 2009;Sepulveda and Martinez-Vazquez, 2011;Tselios et al, 2011;Ali et al, 2012;Gadenne and Singhal, 2014;Cavusoglu and Dincer, 2015;Ostwald et al, 2016;Shahzad and Yasmin, 2016;Dwicaksono and Fox, 2018 ). Fiscal decentralization can improve welfare of the people in the regions through increasing regional income (both from transfer funds and PAD), improving services to the community, building facilities and infrastructure, and providing targeted assistance to the poor (Gadenne and Singhal, 2014).…”