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Fiscal Decentralisation in Pakistan

Naeem ur rehman Khattak (), Iftikhar Ahmad and Jangraiz Khan ()

The Pakistan Development Review, 2010, vol. 49, issue 4, 419–436

Abstract: Fiscal decentralisation is considered to be an important policy weapon to achieve economic efficiency and to ensure effective governance through financial autonomy of provincial governments. It helps the smaller units of federation to take part in the economic development of country and provide opportunities to the central government to complete the national level tasks more efficiently. In Pakistan, resource distribution is done through the National Finance Commission (NFC) Award. All the provinces are given their share according the NFC award and the provinces distribute it through the Provincial Finance Commission (PFC). The aim of the present study is to identify the strengths and weaknesses of the current fiscal resource distribution system in Pakistan through a compilation of its historical trends. In addition, the study also intends to investigate the effects of current resource distribution policies on the economic growth of the country. For this purpose, time series data for 36 years has been used, covering the period 1974-2009. The econometric technique ARDL has been used for estimation. The results show a long-run relationship between fiscal decentralisation and economic growth of Pakistan. The FD mechanism adopted in Pakistan during the period has failed to produce optimum results. Poor provincial capacities to efficiently generate own resources as well as provincial dependence on federal transfers have negatively affected the long-run economic growth of Pakistan. Thus, the uni-criterion resource distribution mechanism failed to affect economic growth of Pakistan positively in the long run. It is therefore suggested to consider, evaluate, and choose from a range of other indicators of development and fiscal needs. The important variables, infrastructure, poverty, backwardness, revenue generation capacity, efficiency aspects, and inverse population density, likewise, should be reviewed, and the most appropriate of these should be taken into account to deal with the economic discrepancies of provinces through adequate resource transfer.

Keywords: Fiscal Decentralisation; Economic Growth; ECM; Pakistan (search for similar items in EconPapers)
JEL-codes: C22 H71 H77 O53 (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:pid:journl:v:49:y:2010:i:4:p:419-436