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Identifying and disentangling the impact of fiscal decentralization on economic growth

Gustavo Canavire-Bacarreza (), Jorge Martinez-Vazquez () and Bauyrzhan Yedgenov

World Development, 2020, vol. 127, issue C

Abstract: This paper revisits the relationship between fiscal decentralization and economic growth by addressing the endogeneity issue stemming from reverse causality and unobserved factors that has plagued previous extensive literature on this subject. In our approach, we use the Geographic Fragmentation Index (GFI) and country size as instrumental variables, which we argue are strong and consistent instruments for fiscal decentralization. Empirically, we find that indeed both instruments are strong and valid in the first stage of estimation and that on average, a 10 percent increase in subnational expenditure or revenue shares—the conventional measures of decentralization—will increase GDP per capita growth by approximately 0.82 and 0.57 percentage points, respectively.

Keywords: Fiscal decentralization; Geography; Geographic fragmentation index; Economic growth (search for similar items in EconPapers)
JEL-codes: O47 H77 E62 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Identifying and Disentangling the Impact of Fiscal Decentralization on Economic Growth (2020) Downloads
Working Paper: Identifying and Disentangling the Impact of Fiscal Decentralization on Economic Growth (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:127:y:2020:i:c:s0305750x19303912

DOI: 10.1016/j.worlddev.2019.104742

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