Whether rising tide has lifted all the boats? Effect of inter‐governmental transfers on household income inequality in Pakistan

Qurat ul Ain, Yan Jie, Larisa Ivașcu, Syed Ghulam Meran Shah and Tahir Yousaf

International Journal of Finance & Economics, 2023, vol. 28, issue 1, 430-447

Abstract: Though income distribution is mainly the responsibility of the central government but the intergovernmental system can either improve or deteriorate the equity in the redistribution of resources. Income redistribution depends upon how the process of devolution is premeditated and implemented. This study reveals the empirical evidences on the effect of different types of intergovernmental transfers/grants, under NFC awards, on household income inequality using a sample of panel data of provincial units in Pakistan from 1990 to 2015. Empirical underpinnings contemplate that straight transfers and non‐development grants have taken on the greater change in reducing income inequality and thus have made the utmost attempt to guarantee the equal distribution of revenues among the federating units. On contrary, the divisible pool transfers, augment the income inequality. Remarkably, even if devolution could be attractive due to efficiency reasons, it may have uninvited consequences on the income distribution. Further development grants indicate no relation to household income inequality. These results also have obvious policy implications as the normative scheme governs intergovernmental regional transfers in case of divisible pool transfers in Pakistan which must be revised, and focus should be given on implementation, if the objective is to confer the country' greater territorial cohesion.

Date: 2023
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