FISCAL DECENTRALIZATION AND ECONOMIC GROWTH: SPENDING VERSUS REVENUE DECENTRALIZATION

TLDR

OECD countries are more spending than revenue decentralized, supporting Oates' hypothesis that matching spending and revenue decentralization maximizes efficiency gains. The study investigates whether fiscal decentralization’s efficiency gains boost growth in more decentralized OECD economies using pooled‑mean‑group analysis of 23 countries from 1972–2005. The authors use pooled‑mean‑group techniques on a panel of 23 OECD countries (1972–2005) to assess the relationship between decentralization and growth. Spending decentralization is linked to lower growth, whereas revenue decentralization correlates with higher growth, implying that reducing expenditure decentralization and increasing local financing would enhance growth. JEL codes: E62, H71, H72.

Abstract

This article examines whether the efficiency gains accompanying fiscal decentralization generate higher growth in more decentralized economies, applying pooled‐mean group techniques to a panel dataset of 23 Organization for Economic Co‐operation and Development (OECD) countries, 1972–2005. We find that spending decentralization has tended to be associated with lower economic growth while revenue decentralization has been associated with higher growth. Since OECD countries are substantially more spending than revenue decentralized, this is consistent with Oates' (1972) hypothesis that maximum efficiency gains require a close match between spending and revenue decentralization. It suggests reducing expenditure decentralization, and simultaneously increasing the fraction financed locally, would be growth‐enhancing. (JEL E62, H71, H72 )