Analyzing the Effectiveness of Fiscal Decentralization in Economic Growth: The Role of Institutions

Decentralization is expected, theoretically, to be a route to efficient provision of the local public services. This efficient utilization of scarce resources is further expected to boost economic growth. Despite solid theoretical footings, the existing empirical literature presents mixed results for the presumed positive relationship between decentralization and economic growth. It is important to note here that the second-generation theories of fiscal federalism talk about the enabling environment for decentralization to yield positive results; talking explicitly, an enabling institutional setup is required. Therefore, the current study examines the complementarity between fiscal decentralization and institutions stimulating growth. A sumptuous cross-country panel data from 1990 to 2018 is used for analysis. Results suggest that fiscal decentralization and institutions both are instrumental in economic growth, and there is complementarity between the two. However, over-exposure of local representatives seems to divert their attention from service provision to countering opponents’ strategies.