Economic Growth by Means of Fiscal Decentralization: An Empirical Study for Federal Developing Countries

Abstract

The impact of fiscal federalism on economic performance has largely been studied in the developed world since the seminal work of Oates. In this article, we focus on a particular set of developing countries considered to be federal (Forum of Federations), to examine how fiscal decentralization has impacted their economic growth. In this context, we study the impact of tax revenue and expenditure decentralization on economic growth in developing federations. For this purpose, a panel data of 15 developing federations from 2000 to 2015 are analyzed by using a two-step system Generalized Method of Moments (GMM) estimation method. The results show that in federal developing countries, both tax revenue and expenditure decentralization have a significant, positive impact on economic growth. What is more, our findings show that the impact of fiscal decentralization on economic growth depends upon the level of perceived corruption and on the quality of the country’s institutions. Thus, empirical evidence depicts that the positive effect of fiscal decentralization on economic growth is tempered if the country is plagued with corruption, if it has weak institutions, and/or if it suffers from political instability. By contrast, a relatively corruption-free country featuring healthy institutions and a stable political environment could take fuller advantage of the effects of fiscal decentralization to improve economic growth.

Decentralization and Its Impact on Growth in India

“…We ran two separate regressions for decentralization: model 1 for ED and model 2 for RD (see Table 2). In keeping with earlier contributions (Akai & Sakata, 2002; Hanif et al, 2020; Yushkov, 2015), we decided to run separate models with ED and RD, as the covariates had a significant correlation between them (the correlation coefficient value was 0.72). The correlation between the fiscal variables CapitalExp and SocialExp, on the other hand, was found to be low (correlation coefficient value was 0.11).…”

Fiscal decentralization practices in developing countries

“…On the contrary, the centre and the municipalities have common interests for the benefit of society and relevant coordinated strategic actions in economic and political priorities. Hanif et al (2020) indicates that the positive impact of fiscal decentralization on economic growth is weakened if the country is corrupt and has weak institutions and/or suffers from political instability. According to researchers, a relatively corruption-free country with sound institutions and a stable political environment could make more use of the benefits of fiscal decentralization to accelerate economic growth.…”

Can Corruption Facilitate Industrial Structure Upgrade in China? The Moderating Role of Government-Business Relationships

“…However, the associated institutional environment is also inevitably improved. The growing level of corruption therefore reduces the efficiency of resource allocation, conflicts with the advanced socio-economic system, and has an inhibitory effect on an industrial structure upgrade (Emerson, 2002; Hanif et al, 2020; Jain, 2001; Lui, 1996). Nevertheless, corruption still has some tendency to provide benefits to some extent, as the majority of these moderating factors representing local institutional quality have to reach a certain level to turn the effect of corruption to be negative.…”