Fiscal decentralization and economic growth: A dilemma between theory and empiricism

Abstract

Abandoning fiscal decision-making, redistributing and dispersing authorities provided by central government in favor of local and regional-level governance bodies is one of the widely discussed issues across the world based on the theory of “fiscal decentralization”. Incumbent theoretical and empiric researches regarding to achieving economic growth in the light of global economic fragilities indicate that managerial allocation of public funds among central and local authorities casts significant attention in terms of optimizing economic efficiency. In the article, it is tried to introduce brief theoretical background and measurement techniques to depict empiric relationship between fiscal decentralization and economic growth. In addition to investigating empiric facts, an effort to reveal the impact of fiscal decentralization on acquiring economic growth is made. Based on the investigations conducted in the framework of the article, it becomes obvious that empirical approaches toward the issue can be differed in several aspects: the selection of different economies, the time period chosen, the economies’ level of development and the estimation methodology. However, there are few empirical studies that analyze the relationship between fiscal decentralization and economic growth, and unfortunately the evidence on this topic is inconclusive.