Identifying and disentangling the impact of fiscal decentralization on economic growth

Arbeitspapier

This paper revisits the relationship between fiscal decentralization and economic growth by addressing the endogeneity issue stemming from reverse causality and unobserved factors that has plagued previous extensive literature on this subject. In our approach, we use the Geographic Fragmentation Index (GFI) and country size as instrumental variables, which we argue are strong and consistent instruments for fiscal decentralization. Empirically, we find that indeed both instruments are strong and valid in the first stage of estimation and that on average, a 10 percent increase in subnational expenditure or revenue shares - the conventional measures of decentralization - will increase GDP per capita growth by approximately 0.4 percentage points; however, the results differ for developed versus developing countries.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IDB Working Paper Series ; No. IDB-WP-1037

Classification and Topics

• Classification: Wirtschaft ; Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence ; Intergovernmental Relations; Federalism; Secession ; Fiscal Policy
• Subject: Fiscal Decentralization ; Geography ; Geographic Fragmentation Index ; Economic Growth

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Canavire-Bacarreza, Gustavo ; Martinez-Vazquez, Jorge ; Yedgenov, Bauyrzhan
• Event: Veröffentlichung
• (who): Inter-American Development Bank (IDB)
• (where): Washington, DC
• (when): 2019

Further information

• DOI: doi:10.18235/0001899
• Handle: http://hdl.handle.net/10419/208190
• Last update: 10.03.2025, 11:45 AM CET