Fiscal Decentralisation, Provincial Economic Growth and Spillover Effects: A Spatial Panel Data Analysis

Abstract

This study examines the spatial dependence, direct and indirect effects of fiscal decentralisation on the provincial economic growth of Pakistan. Due to spatial dependence, spatial econometric technique is applied on the augmented growth of Mankiw, et al. (1992) by incorporating the fiscal decentralisation variable in the theoretical framework. The empirical analysis is based on the spatial panel data set, which is used from 1990 to 2011 of provinces. Model is selected on basis of specific to general and general to specific approach, and decided two-way fixed effects Spatial Durbin model (SDM) is appropriate for our data. We have estimated the SDM by maximum likelihood (bias corrected and random effect) estimation technique, otherwise, if we applied OLS and ignore the spillover effect which makes our estimated parameters biased and inconsistent. Results show that revenue decentralisation has positive, while expenditure decentralisation has negative effect to provincial economic growth. Spillover effects are found to be significant in case of revenue decentralisation and insignificant in case of expenditure. Negative and insignificant spillover effect of expenditure decentralisation is due to weak institutions, lack of intra governmental competition, and absence of political vision which may increase the level of corruption and less accountability. On the basis of econometric analysis, it may be suggested that federal government should transfer the resources to provinces as determined in the 18th amendment, and it is the responsibility of provincial government to train their officials in the area of professional ethics, technical and administrative skills by different programmes. JEL Classification: C31, C33, H3, H50 Keywords: Fiscal Decentralisation, Spatial Econometrics, Revenue, Expenditure

Decentralized Tax Revenue, Institutional Complementarity and Economic Growth: A Time Series Analysis of Pakistan

“…The literature exhibited that a lot of work on decentralization was under taken to determine the association of fiscal decentralization and economic growth of developed countries. Most importantly, the studies with reference to Pakistan were addressing the direct impact of fiscal decentralization, the only dimension, on performance of the economy (Raza and Hina, 2016, Iqbal et al, 2013, Khattak et al 2010and Malik et al, 2007. Consequently, the present study will be an additional view of disaggregated tax decentralization in the presence of institutional settings and would be an effort to find the link between decentralization and economic performance of developing country such as Pakistan.…”