Fiscal Decentralization and Economic Growth in Central and Eastern Europe

Abstract

The majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having a significantly negative to a significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency.

Fiscal decentralization and local economic growth in Serbia

“…The also agreed that "the standard approach to measuring the fiscal decentralization is to make use of accounting measures such as revenue or expenditure" [1, p. 95]. Similar conclusions are given by Rodríguez-Pose and Krøijer [32], and by Thornton [40]. All of those studies used both revenues and expenditures indicators for fiscal decentralization level.…”

“…Rodríguez-Pose and Krøijera [32] analyze the relationship between levels of fiscal decentralization and economic growth in 16 countries of Central and Eastern Europe over the period from 1990 to 2004. They use GDP per capita PPP as a dependent variable, and three independent fiscal decentralization variables: 1) subnational expenditures, as a percentage of total expenditures, 2) tax revenue as a percentage of total subnational revenues and grants and 3) transfers to subnational governments from other levels of government as a percentage of total subnational revenues and grants [32, p. 18].…”

Yardstick competition in a federation: Theory and evidence from China

“…As expected, on the contrary, public spending interactions are reduced by "…scal centralization". Indeed, central government transfers have a positive e¤ect 4 9 In particular, Huther and Shah (1998), Barenstein andde Mello (2001), Fisman andGatti (2002), Arikan (2004), Rodríguez-Pose and Krøijer (2008) or Enikolopov and Zhuravskaya (2007) in their studies of the e¤ects of …scal decentralization on governance, corruption, growth and political institutions.…”

Distribution of Financial Resources Within the Budget System of the Russian Federation and Regions’ Economic Growth

“…Так, например, капитальные расходы могут быть продуктивнее текущих, поскольку являются инвестициями в общественные блага. Аналогичные результаты получены в исследовании [10] по странам Центральной и Вос-точной Европы. Связь между экономическим ростом российских регионов и степенью фискальной децентрализации рассмотрена в работе [11].…”