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Fiscal Decentralisation and Economic Growth: Role of Democratic Institutions

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  • Nasir Iqbal

    (Pakistan Institute of Development Economics, Islamabad)

  • Musleh ud Din

    (Pakistan Institute of Development Economics, Islamabad)

  • Ejaz Ghani

    (Pakistan Institute of Development Economics, Islamabad)

Abstract

This study attempts to analyse the impact of fiscal decentralisation on economic growth. It also examines the complementarity between fiscal decentralisation and democratic institutions in promoting growth. The modelling framework is the endogenous growth model augmented with the measures of fiscal decentralisation and democratic institutions. To capture the multidimensionality, three different measures of fiscal decentralisation are used. The overall analysis shows that revenue decentralisation promotes economic growth while expenditure decentralisation retards economic growth. Composite decentralisation positively influences economic growth implying that simultaneous decentralisation reinforces each other to promote economic growth. Analysis also shows that democratic institutions play a significant role in realising the benefits of fiscal decentralisation. Various policy implications emerge from this study.

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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2013:89.

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Length: 32 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:pid:wpaper:2013:89

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Keywords: Fiscal Decentralisation; Democracy; Economic Growth; Pakistan;

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  1. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
  2. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  3. Abbas, Qaisar & Foreman-Peck, James, 2007. "The Mincer Human Capital Model in Pakistan: Implications for Education Policy," Cardiff Economics Working Papers E2007/24, Cardiff University, Cardiff Business School, Economics Section.
  4. Josep Lluís Carrion-i-Silvestre & Marta Espasa & Toni Mora, 2008. "Fiscal Decentralization and Economic Growth in Spain," Public Finance Review, , vol. 36(2), pages 194-218, March.
  5. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
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  7. Thushyanthan Baskaran & Lars P. Feld, 2009. "Fiscal Decentralization and Economic Growth in OECD Countries: Is there a Relationship?," CESifo Working Paper Series 2721, CESifo Group Munich.
  8. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
  9. Feltenstein, Andrew & Iwata, Shigeru, 2005. "Decentralization and macroeconomic performance in China: regional autonomy has its costs," Journal of Development Economics, Elsevier, Elsevier, vol. 76(2), pages 481-501, April.
  10. Qaisar Abbas, 2001. "Endogenous Growth and Human Capital: A Comparative Study of Pakistan and Sri Lanka," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 40(4), pages 987-1007.
  11. Akai, Nobuo & Sakata, Masayo, 2002. "Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States," Journal of Urban Economics, Elsevier, vol. 52(1), pages 93-108, July.
  12. 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.
  13. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  14. Musleh-Ud Din & Ejaz Ghani & Omer Siddique, 2003. "Openness and Economic Growth in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 42(4), pages 795-807.
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