When Does Fiscal Decentralization Lead to Inclusive Growth?

Hyojung Kang, Kshitiz Shrestha and Jorge Martinez-Vazquez ()
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Hyojung Kang: International Center for Public Policy, Georgia State University
Kshitiz Shrestha: International Center for Public Policy, Georgia State University

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: In this paper we ask when does fiscal decentralization promote inclusive growth, with this latter defined as sustained increases in average income combined with broad-based access to economic opportunities and reductions in poverty and inequality. To research this question, we use a panel of 69 countries from 1996 to 2017 and construct a composite inclusive growth index capturing both income and non-income dimensions. Fiscal decentralization is measured using the Regional Authority Index (RAI), which captures de-facto subnational autonomy across fiscal and policy dimensions. Our results provide three key insights. First, greater subnational autonomy leads to higher inclusive growth. This finding is robust across alternative identification strategies, including GFI-based IV, lagged decentralization specifications, system GMM, and Lewbel IV estimators, as well as to alternative measures of inclusive growth and fiscal decentralization. Second, institutional quality amplifies these gains: stronger governance translates local discretion into broader opportunity creation and improved income distribution. Third, the effects are non-linear: we find an inverted-U relationship between overall subnational autonomy and IG, indicating that benefits peak at moderate levels and diminish as coordination costs and fragmentation rise. These results point to several important policy implications: degree matters up to some point but design matters more, and thus effective decentralization should prioritize genuine subnational decision rights and institutional capacity, while avoiding over-delegation that has the potential to erode the benefits of scale and effective coordination.

Pages: 46 pages
Date: 2026-03
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Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper2611

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