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Effect of intergovernmental transfers on income and poverty rates: Evidence from the Philippines

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  • Tang, Cheng-Tao
  • Wong, Chun Yee
  • Alas, Orelie Bathan Delas

Abstract

Despite that subnational governments are key actors in the provision of public services, there are concerns about whether providing additional funding to them in developing countries can raise the living standards of local communities. This study investigates the impact of intergovernmental transfers on development outcomes at municipality and city levels in the Philippines from 1994 to 2015. Since the revenue-sharing mechanism between central and local governments in the Philippines follows a pre-determined formula, we leverage this feature and apply the instrumental variable (IV) method for estimation. Our results suggest that the household disposable income per capita increases by 9.6% in the long run due to extra transfers of 1,000 pesos per capita in the Philippine local governments. The poverty rate has also decreased by approximately five percentage points in the long run. The improvement of development outcomes mainly occurs in small and less-developed local governments. Finally, we examine the effect of intergovernmental transfers on local expenditure and taxation; then we discuss how the results of local finance behavior can explain the observed developmental impact.

Suggested Citation

  • Tang, Cheng-Tao & Wong, Chun Yee & Alas, Orelie Bathan Delas, 2024. "Effect of intergovernmental transfers on income and poverty rates: Evidence from the Philippines," World Development, Elsevier, vol. 173(C).
    • Handle: RePEc:eee:wdevel:v:173:y:2024:i:c:s0305750x23002383
    DOI: 10.1016/j.worlddev.2023.106420
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    Keywords

    Intergovernmental transfer; Income; Poverty; Instrumental variable; The Philippines;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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