Decentralisation and Economic Growth - Part 2: The Impact on Economic Activity, Productivity and Investment

This paper analyses the relationship between fiscal decentralisation and economic activity. Like other institutional arrangements, fiscal decentralisation affects firms, households and public entities, and the way they save, invest, spend or innovate. This in turn may have considerable consequences for the long-term growth potential of a country. Based on a set of growth regressions, the results suggest that the relationship between fiscal decentralisation and GDP per capita, productivity or human capital is positive and statistically significant, while the relationship with investment is insignificant. Doubling the sub-central tax or spending share (e.g. moving from a decentralisation ratio of 15 to 30%) is associated with an increase of GDP per capita by 3% on average. Revenue-based decentralisation indicators (e.g. decentralisation of tax revenue or tax autonomy) deliver results both statistically and economically (larger coefficients) more significant than spending-based indicators. The results vary little between federal and unitary countries in general. Intergovernmental transfers tend to be negatively associated with GDP per capita. Finally, the relationship between decentralisation and GDP per capita is non-linear, with results suggesting that returns to decentralisation are decreasing.