Fiscal Decentralization and Economic Growth in Central and Eastern Europe
AbstractThe majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having a significantly negative to a significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency.
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Bibliographic InfoPaper provided by European Institute, LSE in its series LEQS – LSE 'Europe in Question' Discussion Paper Series with number 12.
Date of creation: Jan 2010
Date of revision:
Fiscal decentralization; economic growth; efficiency; devolution; Central and Eastern Europe;
Other versions of this item:
- Andrés Rodríguez-Pose & Anne Krøijer, 2009. "Fiscal Decentralization and Economic Growth in Central and Eastern Europe," Growth and Change, Gatton College of Business and Economics, University of Kentucky, vol. 40(3), pages 387-417.
- Andrés Rodríguez-Pose & Anne Krøijer, 2009. "Fiscal decentralization and economic growth in Central and Eastern Europe," LSE Research Online Documents on Economics 53357, London School of Economics and Political Science, LSE Library.
- Andrés Rodríguez-Pose and Anne Krøijer, 2009. "Fiscal Decentralization and Economic Growth in Central and Eastern Europe," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 2, London School of Economics / European Institute.
- Andrés Rodríguez-Pose & Anne Krøijer, 2008. "Fiscal decentralization and economic growth in Central and Eastern Europe," Working Papers 2008-08, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
- H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
- NEP-EEC-2010-03-28 (European Economics)
- NEP-FDG-2010-03-28 (Financial Development & Growth)
- NEP-PBE-2010-03-28 (Public Economics)
- NEP-TRA-2010-03-28 (Transition Economics)
- NEP-URE-2010-03-28 (Urban & Real Estate Economics)
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