FISCAL DECENTRALIZATION: AN EFFECTIVE TOOL FOR GOVERNMENT REFORM?

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Abstract

The theory of fiscal federalism asserts that fiscal decentralization increases government effectiveness, reduces government budgets, and reduces corruption when used as a means of government reform. However, counter-arguments have been made that such an approach has diverging effects according to the level of national development. We have attempted herein to carry out an empirical analysis to examine these theories. Data from 17 developed and 17 developing states were obtained in order to conduct a regression analysis of various indicators. The results revealed that fiscal decentralization reduced government effectiveness in developed countries. Important determinants for government effectiveness were the quality of regulation and the rule of law. When responsibility for expenditure and revenue were devolved, budgets expanded in both developed and developing countries. Fiscal decentralization deterred corruption in advanced states, whereas greater autonomy in spending increased malfeasance in the developing world.

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