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Fiscal decentralization and economic growth in Central and Eastern Europe

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  • Andrés Rodríguez-Pose

    ()
    (IMDEA Social Sciences Institute)

  • Anne Krøijer

    (London School of Economics)

Abstract

The 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 significantly negative to 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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Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2008-08.

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Date of creation: 10 Oct 2008
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Publication status: Published in Growth and Change 40(3), September 2009: 387-417
Handle: RePEc:imd:wpaper:wp2008-08

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Keywords: fiscal decentralization; economic growth; efficiency; devolution; Central and Eastern Europe;

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Cited by:
  1. Anping Chen & Nicolaas Groenewold, 2013. "The national and regional effects of fiscal decentralisation in China," The Annals of Regional Science, Springer, vol. 51(3), pages 731-760, December.
  2. Anping Chen & Nicolaas Groenewold, 2011. "The National and Regional Effects of Fiscal Decentralisation in China," Economics Discussion / Working Papers 11-18, The University of Western Australia, Department of Economics.

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