Pakistan Institute of Development Economics



From Fiscal Decentralisation to Economic Growt The Role ofComplementary Institutions

Decentralisation is theoretically expected to be a platformtowards efficient provision of the local public goods and services. Thisis expected to boost economic growth due to efficient and effectiveutilisation of scarce fiscal resources. Nevertheless, the existingempirical studies present mixed results on this expected positiverelationship among decentralisation and economic growth. Recently, thetheories of fiscal federalism have also pressed upon the enablingenvironment for effective decentralisation; talking explicitly, anenabling institutional setup is required. The current study explores thecomplementarity between fiscal decentralisation and other institutionsfor stimulating growth and the study uses rich crosscountry panel datafor the period 1984 to 2012, covering both the developing and developedcountries of the world. The results suggest that positive relationshipexist between fiscal decentralisation and economic growth for thedeveloped countries while evidence was not found in the case ofdeveloping countries. Further, it was found that fiscal decentralisationand quality institutions are complementary for economic growth. JELClassification: C22, H11, H77, O40 Keywords: Fiscal Decentralisation,Institutions, Economic Growth, Panel Data, unequally spaced paneldata

Iftikhar Ahmad,

Muhammad Zeeshan Arif,

Mahmood Khalid