The effect of fiscal decentralization on economic growth in sub-national governments of Ethiopia: A two-step system general methods of moments (GMM) approach

  • Received March 21, 2023;
    Accepted July 7, 2023;
    Published August 15, 2023
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/pmf.12(2).2023.03
  • Article Info
    Volume 12 2023, Issue #2, pp. 32-42
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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.

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    • 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
    • Conceptualization
      Million Adafre Bushashe, Yitbarek Takele Bayiley
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