Mahmood Khalid

From Fiscal Decentralisation to Economic Growth: The Role of Complementary Institutions

Decentralisation is theoretically expected to be a platform towards efficient provision of the local public goods and services. This is expected to boost economic growth due to efficient and effective utilisation of scarce fiscal resources. Nevertheless, the existing empirical studies present mixed results on this expected positive relationship among decentralisation and economic growth. Recently, the theories of fiscal federalism have also pressed upon the enabling environment for effective decentralisation; talking explicitly, an enabling institutional setup is required. The current study explores the complementarity between fiscal decentralisation and other institutions for stimulating growth and the study uses rich cross-country panel data for the period 1984 to 2012, covering both the developing and developed countries of the world. The results suggest that positive relationship exist between fiscal decentralisation and economic growth for the developed countries while evidence was not found in the case of developing countries. Further, it was found that fiscal decentralisation and quality institutions are complementary for economic growth.