Impact of Fiscal Decentralization on Economic Growth: Empirical Evidence from Pakistan
Abstract
This study aims to investigate the impact of the fiscal decentralization on economic growth in the context of Pakistan. Focusing on key factors such as revenue decentralization, expenditure decentralization, own-source revenue, and fiscal balance, the study employs empirical analysis to unravel the impact of decentralization mechanisms on the country economic growth. While plugging in the Eviews, the Augmented Dickey-Fuller (ADF) test indicated that, in the beginning, all variables demonstrated non-stationary characteristics at the integrated of order zero (I(0)) level. However, through first differencing (I(1)), the variables became stationary, setting the stage for further analysis. Based on time series data set spanning the years 2000 to 2022, following the Pooled OLS estimation technique, the research reveals a positive correlation between revenue decentralization and economic growth, advocating for a judicious distribution of revenue-raising authority. Similarly, a moderate positive relationship is identified between expenditure decentralization and economic growth, emphasizing the potential benefits of local autonomy in resource allocation. The study underscores the importance of fostering self-sufficiency at the subnational level, as evidenced by the positive correlation with own-source revenue. However, a cautionary note is sounded on the negative relationship between fiscal balance and economic growth, urging policymakers to maintain fiscal discipline. The findings contribute nuanced insights and actionable recommendations for policymakers seeking to navigate the intricate dynamics of fiscal decentralization in Pakistan, providing a foundation for informed decision-making in the pursuit of sustainable economic development.
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