Pakistan Institute of Development Economics



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

This study examines the spatial dependence, direct andindirect effects of fiscal decentralisation on the provincial economicgrowth of Pakistan. Due to spatial dependence, spatial econometrictechnique is applied on the augmented growth of Mankiw, et al. (1992) byincorporating the fiscal decentralisation variable in the theoreticalframework. The empirical analysis is based on the spatial panel dataset, which is used from 1990 to 2011 of provinces. Model is selected onbasis of specific to general and general to specific approach, anddecided two-way fixed effects Spatial Durbin model (SDM) is appropriatefor our data. We have estimated the SDM by maximum likelihood (biascorrected and random effect) estimation technique, otherwise, if weapplied OLS and ignore the spillover effect which makes our estimatedparameters biased and inconsistent. Results show that revenuedecentralisation has positive, while expenditure decentralisation hasnegative effect to provincial economic growth. Spillover effects arefound to be significant in case of revenue decentralisation andinsignificant in case of expenditure. Negative and insignificantspillover effect of expenditure decentralisation is due to weakinstitutions, lack of intra governmental competition, and absence ofpolitical vision which may increase the level of corruption and lessaccountability. On the basis of econometric analysis, it may besuggested that federal government should transfer the resources toprovinces as determined in the 18th amendment, and it is theresponsibility of provincial government to train their officials in thearea of professional ethics, technical and administrative skills bydifferent programmes. JEL Classification: C31, C33, H3, H50 Keywords:Fiscal Decentralisation, Spatial Econometrics, Revenue,Expenditure

Qasim Raza,

Hafsa Hina