Pakistan Institute of Development Economics



Does Fiscal Decentralisation Matter for Poverty and IncomeInequality in Pakistan?

This study endeavours to investigate the impact of fiscaldecentralisation on the welfare concerns of poverty, and incomeinequality in Pakistan for the time period 1972 to 2013. In order tocapture the multi-dimensional nature of fiscal decentralisation, threeindicators are used namely; revenue decentralisation, expendituredecentralisation and composite decentralisation. Further, the role ofinstitutional quality is also incorporated in apprehending theresponsiveness of welfare issues towards the process of fiscaldecentralisation. The estimation technique of Generalised Method ofMoments (GMM) is employed for estimating the impact of fiscaldecentralisation on poverty and income inequality. The empiricalfindings suggest that fiscal decentralisation has discretely resulted inincreasing poverty and income inequality in Pakistan, but the presenceof better institutional quality along with fiscal decentralisation canpromise to mitigate the negative consequences of fiscal decentralisationfor poverty and income inequality in Pakistan. Although, the indirecteffect of fiscal decentralisation on welfare concerns, throughinstitutional quality exhibits a fluctuating trend over time, but itsaverage marginal effect is lower than the direct effect of fiscaldecentralisation on welfare concerns. Hence, it can be perceived thatthe log-run welfare issues can be tackled effectively in the presence ofinstitutional quality with a rational level of fiscal decentralisation.Also in order to reap the potential benefits of fiscal decentralisationfor poverty and income inequality that has remained a catastrophe incase of Pakistan. JEL Classification: I3, 023 H53 Keywords: FiscalDecentralisation, Welfare

Sehrish Shahzad,

Bushra Yasmin