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

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Hanif, Imran and Wallace, Sally and Gago de Santos, Pilar (2020) Economic Growth by Means of Fiscal Decentralization: An Empirical Study for Federal Developing Countries. SAGE Open, 10 (4). pp. 1-12. ISSN 2158-2440

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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.


Item Type:Article
Uncontrolled Keywords:Developing federations; Tax revenue decentralization; Expenditure decentralization; Economic growth; Panel data.
Subjects:Social sciences > Economics > Economic development
ID Code:68407
Deposited On:28 Oct 2021 08:57
Last Modified:28 Oct 2021 09:02

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