Fiscal decentralisation and economic growth: Role of democratic institutions

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. © Pakistan Institute of Development Economics, 2013.