Fiscal decentralization and local economic growth in Serbia

Abstract

In this paper we examine, using a panel data approach with fixed effects, the relationship between the level of fiscal decentralization and economic growth across Serbian local self-governments over the 2002-2011 period. Our results suggest that there is a modest positive impact of fiscal decentralization on local economic growth in that period in Serbia. One of the two observed parameters (employment rates in local self-governments and local self-government investments) was positive in terms of the impact on the increased degree of fiscal decentralization. The substantial increase of local self-government own revenues was predominantly used to increase the number of employees and wages in local administrations, while, at the same time, the number of employees in the private sector dropped. At the same time, own revenue growth had only a slight impact on increase of investments. Based on an empirical analysis, out of approximately 100 million RSD of average annual increase of revenue per local self-government unit in the observed period, only 27,000 RSD on an average was directed towards increase of investments. The issue of the optimal level of fiscal decentralization, as well as the possibilities for increasing own revenues within the current legislative framework, were also discussed.