IDEAS home Printed from https://ideas.repec.org/a/bla/annpce/v92y2021i2p355-373.html
   My bibliography  Save this article

Moderating effects of corruption and informality on the fiscal decentralization—economic growth nexus: Insights from OECD countries

Author

Listed:
  • Cong Minh Huynh
  • Hoai Nam Tran

Abstract

The impact of fiscal decentralization on economic growth has been controversial in the literature, especially when this impact depends on the forms of fiscal decentralization and other moderating factors. This article investigates how expenditure decentralization and tax revenue decentralization affect economic growth, and how these impacts depend on corruption and informality in 23 OECD countries over the period 2002–16. By using estimators of fixed effect (FE), random effect (RE) and the system generalized method of moments (SGMM) for panel data; we find that economic growth is positively affected by both expenditure decentralization and tax revenue decentralization. Furthermore, corruption reduces not only economic growth but also the beneficial impact of expenditure decentralization on economic growth. Likewise, the presence of informality negatively affects not only economic growth but also the advantageous impact of tax revenue decentralization on economic growth. Results imply that unless governments control corruption and informality, the effectiveness of fiscal decentralization will not be attained as expected.

Suggested Citation

  • Cong Minh Huynh & Hoai Nam Tran, 2021. "Moderating effects of corruption and informality on the fiscal decentralization—economic growth nexus: Insights from OECD countries," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 92(2), pages 355-373, June.
    • Handle: RePEc:bla:annpce:v:92:y:2021:i:2:p:355-373
    DOI: 10.1111/apce.12298
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/apce.12298
    Download Restriction: no
    File URL: https://libkey.io/10.1111/apce.12298?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. -, 2018. "CEPAL Review no. 124," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    2. Claudiu T. Albulescu & Matei Tamasila & Ilie M. Taucean, 2016. "Shadow economy, tax policies, institutional weakness and financial stability in selected OECD countries," Economics Bulletin, AccessEcon, vol. 36(3), pages 1868-1875.
    3. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
    4. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
    5. Rafael La Porta & Andrei Shleifer, 2014. "Informality and Development," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 109-126, Summer.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. Andrés Rodríguez-Pose & Roberto Ezcurra, 2011. "Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries," Journal of Economic Geography, Oxford University Press, vol. 11(4), pages 619-643, July.
    8. Aidt, Toke & Dutta, Jayasri & Sena, Vania, 2008. "Governance regimes, corruption and growth: Theory and evidence," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 195-220, June.
    9. Enikolopov, Ruben & Zhuravskaya, Ekaterina, 2007. "Decentralization and political institutions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2261-2290, December.
    10. Jorge Martínez Vázquez & Robert M. McNab, 2006. "Fiscal decentralization, macrostability and growth," Hacienda Pública Española / Review of Public Economics, IEF, vol. 179(4), pages 25-49, September.
    11. Andrés Rodríguez‐Pose & Anne Krøijer, 2009. "Fiscal Decentralization and Economic Growth in Central and Eastern Europe," Growth and Change, Wiley Blackwell, vol. 40(3), pages 387-417, September.
    12. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
    13. Axel Dreher & Friedrich Schneider, 2010. "Corruption and the shadow economy: an empirical analysis," Public Choice, Springer, vol. 144(1), pages 215-238, July.
    14. Bojanic, Antonio N., 2018. "The impact of fiscal decentralization on growth, inflation and inequality in the Americas," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    15. Mo, Pak Hung, 2001. "Corruption and Economic Growth," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 66-79, March.
    16. Norman Gemmell & Richard Kneller & Ismael Sanz, 2013. "Fiscal Decentralization And Economic Growth: Spending Versus Revenue Decentralization," Economic Inquiry, Western Economic Association International, vol. 51(4), pages 1915-1931, October.
    17. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2016. "Fiscal Federalism, Decentralization, And Economic Growth: A Meta-Analysis," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1445-1463, July.
    18. Heller, Patrick & Harilal, K.N. & Chaudhuri, Shubham, 2007. "Building Local Democracy: Evaluating the Impact of Decentralization in Kerala, India," World Development, Elsevier, vol. 35(4), pages 626-648, April.
    19. Su Dinh THANH & Nguyen Phuc CANH, 2020. "Fiscal Decentralization And Economic Growth Of Vietnamese Provinces: The Role Of Local Public Governance," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 91(1), pages 119-149, March.
    20. Hanousek, Jan & Kochanova, Anna, 2016. "Bribery environments and firm performance: Evidence from CEE countries," European Journal of Political Economy, Elsevier, vol. 43(C), pages 14-28.
    21. Fisman, Raymond & Gatti, Roberta, 2002. "Decentralization and Corruption: Evidence from U.S. Federal Transfer Programs," Public Choice, Springer, vol. 113(1-2), pages 25-35, October.
    22. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    23. Wallace E. Oates & Wallace E. Oates, 2004. "Fiscal Decentralization and Economic Development," Chapters, in: Environmental Policy and Fiscal Federalism, chapter 21, pages 377-383, Edward Elgar Publishing.
    24. Whitney Buser, 2011. "The impact of fiscal decentralization on economics performance in high-income OECD nations: an institutional approach," Public Choice, Springer, vol. 149(1), pages 31-48, October.
    25. Göcen, Serdar & Bayhanay, Alp & Göktaş, Nilüfer, 2017. "Fiscal Decentralization and Economic Growth: Theory and Application," MPRA Paper 84523, University Library of Munich, Germany.
    26. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    27. Justin Yifu Lin & Zhiqiang Liu, 2000. "Fiscal Decentralization and Economic Growth in China," Economic Development and Cultural Change, University of Chicago Press, vol. 49(1), pages 1-21.
    28. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
    29. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    30. Gary Woller & Kerk Phillips, 1998. "Fiscal decentralisation and IDC economic growth: An empirical investigation," Journal of Development Studies, Taylor & Francis Journals, vol. 34(4), pages 139-148.
    31. Leandro Medina & Mr. Friedrich Schneider, 2018. "Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?," IMF Working Papers 2018/017, International Monetary Fund.
    32. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
    33. Yener AltunbaÅŸ & John Thornton, 2012. "Fiscal Decentralization and Governance," Public Finance Review, , vol. 40(1), pages 66-85, January.
    34. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
    35. Brueckner, Jan K., 2006. "Fiscal federalism and economic growth," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2107-2120, November.
    36. James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984–2006," Public Finance Review, , vol. 41(5), pages 510-543, September.
    37. Martinez-Vazquez, Jorge & McNab, Robert M., 2003. "Fiscal Decentralization and Economic Growth," World Development, Elsevier, vol. 31(9), pages 1597-1616, September.
    38. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February.
    39. Daniel Treisman, 2006. "Fiscal Decentralization, Governance, And Economic Performance: A Reconsideration," Economics and Politics, Wiley Blackwell, vol. 18(2), pages 219-235, July.
    40. Anisah Alfada, 2019. "Does Fiscal Decentralization Encourage Corruption in Local Governments? Evidence from Indonesia," JRFM, MDPI, vol. 12(3), pages 1-14, July.
    41. Dzhumashev Ratbek, 2016. "The Role of Income Uncertainty in the Corruption–Growth Nexus," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 1169-1201, April.
    42. Xie, Danyang & Zou, Heng-fu & Davoodi, Hamid, 1999. "Fiscal Decentralization and Economic Growth in the United States," Journal of Urban Economics, Elsevier, vol. 45(2), pages 228-239, March.
    43. Andrea Filippetti & Agnese Sacchi, 2016. "Decentralization and economic growth reconsidered: The role of regional authority," Environment and Planning C, , vol. 34(8), pages 1793-1824, December.
    44. James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006," Working Papers 1303, Tulane University, Department of Economics.
    45. Mr. Vito Tanzi & Mr. Hamid R Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 1997/139, International Monetary Fund.
    46. Ulrich Thießen, 2003. "Fiscal Decentralisation and Economic Growth in High-Income OECD Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 237-274, September.
    47. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    48. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
    49. Michael Storper, 2005. "Society, Community and Economic Development," Post-Print hal-03416658, HAL.
    50. Pranab Bardhan & Dilip Mookherjee, 2006. "Decentralisation and Accountability in Infrastructure Delivery in Developing Countries," Economic Journal, Royal Economic Society, vol. 116(508), pages 101-127, January.
    51. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    52. Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
    53. Thushyanthan Baskaran & Lars P. Feld, 2013. "Fiscal Decentralization and Economic Growth in OECD Countries," Public Finance Review, , vol. 41(4), pages 421-445, July.
    54. Dzhumashev, Ratbek, 2014. "Corruption and growth: The role of governance, public spending, and economic development," Economic Modelling, Elsevier, vol. 37(C), pages 202-215.
    55. Schneider, Friedrich, 1994. "Can the Shadow Economy Be Reduced through Major Tax Reforms? An Empirical Investigation for Austria," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 137-152.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nadiia Davydenko & Natalia Wasilewska & Svitlana Boiko & Mirosław Wasilewski, 2022. "Development of Rural Areas in Ukraine in the Context of Decentralization: An Empirical Study," Sustainability, MDPI, vol. 14(11), pages 1-26, May.
    2. Zou, Fei & Huang, Lingyu & Ghaemi Asl, Mahdi & Delnavaz, Mohammad & Tiwari, Sunil, 2023. "Natural resources and green economic recovery in responsible investments: Role of ESG in context of Islamic sustainable investments," Resources Policy, Elsevier, vol. 86(PA).
    3. Pedro Jorge Holanda Figueiredo Alves & Jevuks Matheus Araujo & Ana Karolina Acris Melo, 2023. "Fiscal decentralization and economic growth: evidence from Brazilian states," Public Sector Economics, Institute of Public Finance, vol. 47(2), pages 255-280.
    4. Khairul Amri & Raja Masbar & B. S. Nazamuddin & Hasdi Aimon, 2024. "Does Unemployment Moderate the Effect of Government Expenditure on Poverty? A Cross-Provinces Data Evidence from Indonesia," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 92-113.
    5. Ikhsan Ikhsan & Khairul Amri, 2023. "Sectoral Growth Impacts of Bank Credit Allocation: The Role of COVID-19 Pandemic as Moderating Variable," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 32-50.
    6. Xianpu Xu & Shan Li, 2022. "Neighbor-Companion or Neighbor-Beggar? Estimating the Spatial Spillover Effects of Fiscal Decentralization on China’s Carbon Emissions Based on Spatial Econometric Analysis," Sustainability, MDPI, vol. 14(16), pages 1-26, August.
    7. Kumba Digdowiseiso, 2022. "Is Fiscal Decentralization Growth Enhancing? A Cross-Country Study in Developing Countries over the Period 1990–2014," Economies, MDPI, vol. 10(3), pages 1-17, March.
    8. Ceyhun Elgin & Colin C. Williams & Gamze Oz‐Yalaman & Abdullan Yalaman, 2022. "Fiscal stimulus packages to COVID‐19: The role of informality," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(4), pages 861-879, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Canavire-Bacarreza, Gustavo & Martinez-Vazquez, Jorge & Yedgenov, Bauyrzhan, 2020. "Identifying and disentangling the impact of fiscal decentralization on economic growth," World Development, Elsevier, vol. 127(C).
    2. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    3. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.
    4. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2014. "Fiscal Federalism, Decentralization and Economic Growth: Survey and Meta-Analysis," CESifo Working Paper Series 4985, CESifo.
    5. Burret, Heiko T. & Feld, Lars P. & Schaltegger, Christoph A., 2022. "Fiscal federalism and economic performance new evidence from Switzerland," European Journal of Political Economy, Elsevier, vol. 74(C).
    6. Umaima Arif & Eatzaz Ahmad, 2018. "A Framework For Analyzing The Impact Of Fiscal Decentralization On Macroeconomic Performance, Governance And Economic Growth," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(01), pages 3-39, May.
    7. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2016. "Fiscal Federalism, Decentralization, And Economic Growth: A Meta-Analysis," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1445-1463, July.
    8. Imran Hanif & Sally Wallace & Pilar Gago-de-Santos, 2020. "Economic Growth by Means of Fiscal Decentralization: An Empirical Study for Federal Developing Countries," SAGE Open, , vol. 10(4), pages 21582440209, October.
    9. Asatryan, Zareh & Feld, Lars P., 2015. "Revisiting the link between growth and federalism: A Bayesian model averaging approach," Journal of Comparative Economics, Elsevier, vol. 43(3), pages 772-781.
    10. Manh‐Tien Bui & Thai‐Ha Le & Donghyun Park, 2023. "Impacts of fiscal decentralization on local development in Vietnam: A disaggregated analysis," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(1), pages 3-31, January.
    11. Bojanic, Antonio N., 2018. "The impact of fiscal decentralization on growth, inflation and inequality in the Americas," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    12. Yushkov, Andrey, 2015. "Fiscal decentralization and regional economic growth: Theory, empirics, and the Russian experience," Russian Journal of Economics, Elsevier, vol. 1(4), pages 404-418.
    13. Carlos Usabiaga & E. Macarena Hernández-Salmerón, 2016. "Regional Growth and Convergence in Spain: Is the Decentralization Model Important?," EcoMod2016 9358, EcoMod.
    14. Whitney Buser, 2011. "The impact of fiscal decentralization on economics performance in high-income OECD nations: an institutional approach," Public Choice, Springer, vol. 149(1), pages 31-48, October.
    15. Andrés Rodríguez-Pose & Roberto Ezcurra, 2011. "Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries," Journal of Economic Geography, Oxford University Press, vol. 11(4), pages 619-643, July.
    16. Bartolini, David & Ninka, Eniel & Santolini, Raffaella, 2017. "Tax Decentralisation, Labour productivity and Employment," MPRA Paper 81070, University Library of Munich, Germany.
    17. Septimiu-Rares SZABO, 2017. "The Empirical Relationship Between Fiscal Decentralization And Economic Growth: A Review Of Variables, Models And Results," Management Research and Practice, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 9(2), pages 47-66, June.
    18. Lessmann, Christian & Markwardt, Gunther, 2012. "Aid, Growth and Devolution," World Development, Elsevier, vol. 40(9), pages 1723-1749.
    19. Kayode Olaide & Beatrice D. Simo-Kengne & Josine Uwilingiye, 2022. "Sustainable Development–Fiscal Federalism Nexus: A “Beyond GDP” Approach," Sustainability, MDPI, vol. 14(10), pages 1-37, May.
    20. Lóránd, Balázs & Horváth, Gyula, 2012. "Decentralizáció és gazdasági fejlődés. Az olasz példa [Decentralization and economic development. The case of Italy]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1273-1298.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:annpce:v:92:y:2021:i:2:p:355-373. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1370-4788 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.