The effect of fiscal decentralization on economic growth in sub-national governments of Ethiopia: A two-step system general methods of moments (GMM) approach
-
Author(s)Million Adafre BushasheLink to ORCID Index: https://orcid.org/0000-0001-6133-5590
,
Yitbarek Takele BayileyLink to ORCID Index: https://orcid.org/0000-0003-0523-0924
-
DOIhttp://dx.doi.org/10.21511/pmf.12(2).2023.03
-
Article InfoVolume 12 2023, Issue #2, pp. 32-42
- Cited by
- 443 Views
-
237 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The study examines the impact of fiscal decentralization on Ethiopia’s Subnational (Regional) economic growth. The study followed a quantitative research procedure employing data from 2008 to 2021. The units of analysis in the study are Ethiopia’s sub-national governments (SNGs). The study used the two-step System General Method of Moments (GMM) of dynamic panel estimation because it resolves concerns such as endogeneity and heteroscedasticity. The study’s findings revealed that expenditure, revenue, and composite decentralization have a statistically significant negative effect on regional economic growth. Moreover, among the control variables, inflation and government size have a statistically significant detrimental effect on regional economic growth. However, human capital has no significant effect. Ethiopia’s fiscal decentralization contradicts the goals and theoretical underpinnings of fiscal federalism. This may be because fiscal decentralization and economic activities function within an ethnically based federalism framework. The primary implication is that the federal government needs to reevaluate the transfer of fiscal authority to SNGs. Transforming tax policy into a robust institutional mechanism for economic growth is vital. The revenue and spending sides of intergovernmental relations also need to be closely related. As opposed to prior studies, which utilized one or two fiscal decentralization indicators, this study used multiple indicators, making the study more thorough and closing the knowledge gap.
- Keywords
-
JEL Classification (Paper profile tab)О18, Е62, С12
-
References42
-
Tables7
-
Figures0
-
- Table 1. Research variables
- Table 2. Descriptive statistics
- Table 3. The effect of expenditure decentralization on economic growth
- Table 4. The effect of revenue decentralization on economic growth
- Table 5. The effect of composite decentralization on economic growth
- Table A1. Test of normality
- Table A2. Test of multicollinearity. Matrix of correlations
-
- Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297.
- Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
- Barro, R. J. (1990). Human capital and growth: Theory and evidence. Carnegie-Rochester Conference Series on Public Policy, 32, 287-291.
- Baskaran, T., & Feld, L. P. (2012). Fiscal decentralization and economic growth in OECD countries. Public Finance Review, 41(4), 421-445.
- Blöchliger, H., Égert, B., & Fredriksen, K. (2013). Fiscal Federalism and its Impact on Economic Activity, Public Investment and the Performance of Educational Systems (OECD Working Papers No. 1051). OECD Publishing.
- Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
- Blundell, R., & Bond, S. (2000). GMM estimation with persistent panel data: An application to production functions. Econometric Reviews, 19(3), 321-340.
- Boadway, R. (2005). The Vertical Fiscal Gap: Conceptions and misconceptions. In H. Lazar (Ed.), Canadian Fiscal Arrangements: What Works, what might work Better (pp. 51-80). Montreal and Kingston: McGill-Queen’s Press.
- Boadway, R., & Tremblay, J. (2012). Reassessment of the Tiebout model. Journal of Public Economics, 96(11-12), 1063-1078.
- Brennan, G., & Buchanan, J. (1980). Power to Tax: Analytical Foundations of a Fiscal Constitution. New York: Cambridge University Press.
- Davoodi, H., & Zou, H. (1998). Fiscal decentralization and economic growth: A cross-country study. Journal of Urban Economics, 43(2), 244-257.
- Ghebrehiwet, T. (2015). The Practice of Fiscal Federalism in Ethiopia: A Critical Assessment 1991–2012. An Institutional Approach (Doctoral Thesis). University of Fribourg, Switzerland.
- Iimi, A. (2005). Decentralization and economic growth revisited: An empirical note. Journal of Urban Economics, 57(3), 449-461.
- Iqbal, N., Musleh Ud Din, M. U., & Ghani, E. (2012). Fiscal decentralization and economic growth: Role of democratic institutions. The Pakistan Development Review, 51(3), 173-195.
- Jin, J., & Zou, H. (2002). How does fiscal decentralization affect aggregate, national, and subnational government size? Journal of Urban Economics, 52(2), 270-293.
- Lee, J.-S. (2013). The Process of Decentralization in Ethiopia since 1991: Issues on Improving Efficiency. Korea Review of International Studies, 16, 3-16.
- Lin, J., & Liu, Z. (2000). Fiscal decentralization and economic growth in China. Economic Development and Cultural Change, 49(1), 1-21.
- Liu, L. C. (2017). Fiscal Decentralization, Public Governance, and Economic Performance Examination of Two PLS-SEM Models. Taiwan Journal of Democracy, 13(2), 55-72.
- Loizides, J., & Vamvoukas, G. (2005). Government expenditure and economic growth: Evidence from Trivariate causality testing. Journal of Applied Economics, 8(1), 125-152.
- Makreshanska-Mladenovska, S., & Petrevski, G. (2019). Fiscal decentralization and government size: Evidence from a panel of European countries. Revista Hacienda Pública Española, 229(2), 33-58.
- Malik, S., Hassan, M., & Hussain, S. (2006). Fiscal decentralization and economic growth in Pakistan. The Pakistan Development Review, 45(4), 845-854.
- Martinez-Vazquez, J., & Timofeev, A. (2010). Choosing between centralized and decentralized models of tax administration. International Journal of Public Administration, 33(12-13), 601-619.
- Musgrave, R. A., & Musgrave, P. B. (1989). Public Finance in Theory and Practice (5th ed.). Singapore: McGraw-Hill.
- Naumets, I. (2003). Fiscal Decentralization and Local Public Sector Efficiency (Master’s Thesis). National University of Kyiv, Ukraine.
- Nguyen, P. D., Vo, D. H., Ho, C. M., & Vo, A. T. (2019). Fiscal decentralization and economic growth across provinces: new evidence from Vietnam using a novel measurement and approach. Journal of Risk and Financial Management, 12(3), 143.
- Oates, W. E. (1972). Fiscal Decentralization. New York: Harcourt Brace Jovanovich, Inc.
- Oates, W. E. (2005). Toward a second-generation theory of fiscal federalism. International Tax and Public Finance, 12(4), 349-373.
- Philip, A. T., & Isah, S. (2012). An Analysis of the Effect of Fiscal Decentralization on Economic Growth in Nigeria. International Journal of Humanities and Social Science, 2(8), 141-149.
- Qian, Y., & Wingiest, B. R. (1997). Federalism is a commitment to preserving market incentives. Journal of Economic Perspectives, 11(4), 83-92.
- Rodriguez-Pose, A., & Ezcurra, R. (2011). Is fiscal decentralization harmful to economic growth? Evidence from the OECD countries. Journal of Economic Geography, 11(4), 619-643.
- Rodríguez-Pose, A., & Krøijer, A. (2009). Fiscal Decentralization and Economic Growth in Central and Eastern Europe. Growth and Change, 40(3), 387-417.
- Roodman, D. (2009). How to do Xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal: Promoting communications on statistics and Stata, 9(1), 86-136.
- Schneider, A. (2003). Who Gets What from Whom? The Impact of Decentralization on Tax Capacity and Pro-Poor Spending (IDS Working Paper No. 179). Brighton: IDS.
- Shah, A. (2006). A practitioner’s guide to intergovernmental fiscal transfers (Policy Research Working Papers).
- Smoke, P. (2001). Fiscal Decentralization in Developing Countries. A Review of Current Concepts and Practice. Geneva, UNRISD.
- Smoke, P. (2003). Decentralization in Africa: Goals, dimensions, myths, and challenges. Public Administration and Development, 23(1), 7-16.
- Su, D.T., Hoai, B.T., & Lam, D. M. (2014). The nexus between fiscal policy and sustained economic growth. Vietnamese Journal of Economic Development, 280, 2-21.
- Tarigan, M. S. (2003). Fiscal Decentralization and Economic Development: A Cross-Country Empirical Study. Forum of International Development Studies, 8(24), 845-271.
- Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64(5), 416-424.
- Weingast, B. R. (2009). Second generation fiscal federalism: The implications of fiscal incentives. Journal of Urban Economics, 65(3), 279-293.
- Zhang, T., & Zou, H. (1998). Fiscal decentralization, public spending, and economic growth in China. Journal of Public Economics, 67(2), 221-240.
- Zhang, T., & Zou, H. (2001). The growth impact of the intersectoral and intergovernmental allocation of public expenditure. China Economic Review, 12(1), 58-81.
-
Impact on poverty and income inequality in Malaysia’s economic growth
Rabiul Islam 
,
Ahmad Bashawir Abdul Ghani ,
Irwanshah Zainal Abidin ,
Jeya Malar Rayaiappan
doi: http://dx.doi.org/10.21511/ppm.15(1).2017.05
Problems and Perspectives in Management Volume 15, 2017 Issue #1 pp. 55-62 Views: 12036 Downloads: 5744 TO CITE АНОТАЦІЯPoverty and income inequality are extreme issues that still exist in Malaysia. Any rise in poverty and income inequality definitely affect economic growth. There are many great efforts taken by the government of Malaysia to eradicate poverty and to reduce the gap of income inequality which occurs since 1970’s. The incidence of poverty and income inequality is higher in rural areas compared to urban areas. This paper is mainly to study the level of poverty and income inequality in Malaysia together with government intervention to develop Malaysia’s economic growth. The research is focused among the working people at Ipoh, Perak. In this paper, questionnaire forms are being distributed to get information regarding the issue of poverty and income inequality. It also looks into the strategies taken by the government of Malaysia to eradicate poverty and income inequality. Few recommendations are given in terms of education policy, financial aid and assistance from government and non-government organization (NGO) to upgrade the standard and quality of living among the poor and lower-income group of people.
-
Impact of inflation on economic growth: evidence from Nigeria
Anthony Olugbenga Adaramola ,
Oluwabunmi Dada
doi: http://dx.doi.org/10.21511/imfi.17(2).2020.01
Investment Management and Financial Innovations Volume 17, 2020 Issue #2 pp. 1-13 Views: 9346 Downloads: 5624 TO CITE АНОТАЦІЯIn an attempt to examine the influence of inflation on the growth prospects of the Nigerian economy, the study employs the autoregressive distributed lag on the selected variables, i.e. real gross domestic product (GDP), inflation rate, interest rate, exchange rate, degree of economy`s openness, money supply, and government consumption expenditures for the period 1980–2018. The study findings indicate that inflation and real exchange rate exert a significant negative impact on economic growth, while interest rate and money supply indicate a positive and significant impact on economic growth. Other variables in the model depict no influence on the economic growth of Nigeria. The causality result shows the unidirectional relationships between interest rate, exchange rate, government consumption expenditures and gross domestic product. However, inflation and the degree of openness show no causal relationship with gross domestic product. As a result, the study recommends that a more pragmatic effort is needed by the monetary authorities to target the inflation vigorously to prevent its adverse effect by ensuring a tolerable rate that would stimulate the economic growth of Nigeria.
-
Formalization of the impact of imbalances in the movement of financial resources on economic growth of countries in Central and Eastern Europe
Serhiy Kozmenko ,
Maxim Korneyev
doi: http://dx.doi.org/10.21511/afc.01(1).2017.06
Accounting and Financial Control Volume 1, 2017 Issue #1 pp. 48-58 Views: 7973 Downloads: 1381 TO CITEThe article deals with the impact of financialization on economic growth in countries of Central and Eastern Europe. It determinesthe impact of imbalances in the movement of financial resources caused by financialization on economic growth of these countries. It proves that the implementation of measures aimed at increasing the openness of the economy and maintaining solvent demand have a positive impact on economic growth of the surveyed countries in the long run. It also proves the importance of developing a set of measures of strategic nature regulating imbalances in the movement of financial resources caused by financialization.
