Fiscal Decentralisation and Economic Growth: Role of Democratic Institutions

Abstract

This study attempts to analyse the impact of fiscal
decentralisation on economic growth. It also examines the
complementarity between fiscal decentralisation and democratic
institutions in promoting growth. The modelling framework is the
endogenous growth model augmented with measures of fiscal
decentralisation through democratic institutions. To capture the
multidimensionality, three different measures of fiscal decentralisation
are used. The overall analysis shows that revenue decentralisation
promotes economic growth while expenditure decentralisation retards
economic growth. Composite decentralisation positively influences
economic growth implying that simultaneous decentralisation of revenue
and expenditure reinforce each other to promote economic growth.
Analysis also shows that democratic institutions play a significant role
in realising the benefits of fiscal decentralisation. Various policy
implications emerge from this study. JEL Classification: C26, E02, H11,
H72, O11 Keywords: Fiscal Decentralisation, Democracy, Economic Growth,
Pakistan