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

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

World Development, 2024, vol. 173, issue C

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.

Keywords: Intergovernmental transfer; Income; Poverty; Instrumental variable; The Philippines (search for similar items in EconPapers)
JEL-codes: C26 H71 H72 H75 I32 O15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:173:y:2024:i:c:s0305750x23002383

DOI: 10.1016/j.worlddev.2023.106420

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