Fiscal decentralization and economic growth in the OECD

Abstract

What impact, if any, does Fiscal Decentralization (FD) have on economic growth? Further investigations of the inter-relationships between FD and economic growth are timely given that government decentralization remains at the forefront of many Organization for Economic Cooperation and Development (OECD) policy agendas. This study incorporates a range of measures of FD to better account for the direct impact of different levels of subnational fiscal autonomy on economic growth. The analysis also considers the impact of previously omitted public sector decentralization variables that provide further indication of the extent to which Subnational Governments (SNG) are ‘closer to the people’ and potentially better able to account for local preferences in fiscal decision-making. Whilst little evidence of a direct relationship between FD and output growth is found, some evidence is found to suggest that federal systems tend to have lower growth rates than do unitary states, independent of their degree of decentralization, and that countries with more elected tiers of government generally have lower economic growth.

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