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The Consequences of Fiscal Decentralization on Poverty and Income Inequality

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Abstract

Many countries around the world are currently pursuing policies for poverty reduction and improving income distribution. Many of these same countries are also aggressively implementing fiscal decentralization reforms. Although fiscal decentralization, poverty and the distribution of income have been the subject of extensive separate theoretical and empirical research, to date we have little understanding of what may be the impact of fiscal decentralization on poverty and inequality. This paper sets out to shed some light on those relationships. After reviewing the literature addressing different aspects of these relationships, the paper describes the possible channels through which fiscal decentralization might affect poverty and income inequalities. We also carry out an empirical analysis with panel data for a large number of countries at different stages of development covering the period 1971-2000. We find that fiscal decentralization may have significant effects on poverty and inequality. In particular, fiscal decentralization appears to reduce poverty as long as the share of sub-national expenditures is not greater than one third of total government expenditures. Fiscal decentralization appears to also help reduce income inequality only if the general government represents a significant share of the economy (twenty percent or more).

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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper1002.

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Length: 61 pages
Date of creation: 01 Feb 2010
Date of revision:
Handle: RePEc:ays:ispwps:paper1002

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Keywords: fiscal decentralization; poverty reduction; income inequality;

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Cited by:
  1. Yasna Cortés Garriga & Dusan Paredes Araya, 2013. "El Fondo Común Municipal: ¿Cuál es el rol en la Convergencia de Ingresos Locales?," Documentos de Trabajo en Economia y Ciencia Regional 45, Universidad Catolica del Norte, Chile, Department of Economics, revised Apr 2013.
  2. Jorge Martinez-Vazquez & Blanca Moreno-Dodson & VIoleta Vulovic, 2012. "The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1225, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Furceri, Davide & Sacchi, Agnese & Salotti, Simone, 2014. "Can fiscal decentralization alleviate government consumption volatility?," MPRA Paper 54513, University Library of Munich, Germany.
  4. Baja Daza, Gover & Villarroel Böhrt, Sergio & Zavaleta Castellón, David, 2012. "Diseño institucional e incentivos implicitos en la descentralización Boliviana (1994-2008)
    [Institutional design and implicit incentives in Bolivia's decentralization model (1994-2008)]
    ," MPRA Paper 48598, University Library of Munich, Germany.
  5. Gustavo Canavire-Bacarreza & Jorge Martinez-Vazquez, 2012. "Reexamining The Determinants Of Fiscal Decentralization: What Is The Role Of Geography?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1211, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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