Fiscal decentralisation and economic growth in transition economies

• Main Author: Gjika, Aida
• Published: Staffordshire University 2018
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.759400

Since the collapse of the communist system, transition economies (TEs) have witnessed significant growth in fiscal decentralisation (FD). In order to meet the needs of the new decentralised system and adapt to new political changes such as the EU accession, these countries started to reform their governance system by devolving greater power to subnational governments. The ongoing intergovernmental fiscal relations and territorial reforms during these twenty-eight years of transition have demonstrated that decentralisation in general, and FD in particular, is an ongoing process, continually evolving and contributing to democracy, economic efficiency and ultimately economic development (Bird, 1993; Bird et al., 1995). Given the variation in FD during transition and the attention it has received especially amongst developed TEs, this dissertation aims to assess the relationship between FD and economic growth in the context of the transition process. First, it contributes to the current theoretical literature by critically reviewing the existing theories on this relationship and exploring new potential (direct and indirect) channels of transmission from FD to economic performance. Also, this thesis contributes to the current empirical literature on FD by providing an empirical investigation of the impact of FD on economic growth for selected transition economies, taking into account the relevance of important factors such as the level of analysis (national vs subnational levels), the stage of economic transition, the geographical location and the size of countries - factors that have not been sufficiently investigated in previous studies. The previous empirical studies were unable to provide conclusive evidence concerning the impact of FD on economic performance. By shedding light on the factors that contribute to the FDeconomic growth relationship and using statistical methods that are appropriate to the analysis of this relationship, this thesis provides some explanation for the inconclusive nature of previous studies. Using data for TEs in Europe and the former Soviet Union, the empirical results suggest that the economic effects of FD are sensitive to the FD measures used and, more importantly, to the economic and institutional reforms implemented in these countries. The thesis shows that while FD may have an insignificant effect on countries in early stages of transition, it can be employed with beneficial effects by countries at relatively advanced stages of transition. In this sense, this thesis confirms the theoretical claim, ignored up to now, that FD is a “normal good”. Exploring the FD-economic growth relationship on a more homogenous dataset and at subnational level, this thesis concludes that the economic effect of FD is more visible at regional level, while being moderated by the country size and other characteristics of countries involved. The empirical evidence has potentially useful policy implications for the ongoing decentralisation reforms in transition economies.