The nexus between revenue decentralization reforms and economic growth

Abstract

Revenue decentralization represents a framework that facilitates enhanced fiscal autonomy for subnational governments, thereby enabling the tailoring of services to meet local needs and potentially fostering economic growth. In Kenya, the ratification of the 2010 constitutional formalized novel revenue frameworks aimed at supporting the operations, management, and sustainability of devolved county governments. However, there remains a paucity of empirical analysis examining the relationship between the revenue decentralization reforms and county‐level economic growth. We begin by identifying the main sources of county revenues within the decentralization frameworks, then investigate the dynamic interrelation with county economic growth. Through panel vector autoregression estimation techniques, our analysis reveals a positive and statistically significant association between own‐source revenue and conditional grants with county‐level economic growth. We discuss the implications of our findings and call for policymakers to reassess the fiscal instruments with the aim of strengthening the roles and responsibilities of counties.